ETA Expert Insights: An Integrated Software Vendor (ISV) Strategy for the Future of Merchant Acquiring

An ETA Payment Sales & Strategy Committee White Paper
By Naomi Mastera, Business Development Manager-ISV, NMI • George Smith, Head of Sales, Clerkie • Pat Ward, Head of ISV Partnerships, DishOut

Integrated software vendors (ISVs) are service providers whose technology delivers both business management tools and payment processing as an “integrated” feature.

ISVs are undoubtedly changing the landscape of merchant acquiring. A recent survey from the global management consulting firm McKinsey & Company found that 50 percent of small businesses now use ISVs as payment providers, and 15 percent are in the process of transitioning to an ISV provider.

While some may consider the advent of ISVs an existential threat to traditional merchant service providers, the reality is, this is simply another chapter in the ongoing evolution of the acquiring industry. Core merchant services, from acquiring, funding, settlement, and more, are not going anywhere anytime soon, and industry veterans liken the rise of the ISV model to a myriad of other change-inducing inflection points. All that is required to thrive in this new reality is a well-defined strategy.

The purpose of this paper is to provide a high-level overview and understanding of the world of ISVs, define the approaches and considerations for incorporating (or enhancing) ISVs into your current go-to-market strategy.

THE MARKET LANDSCAPE
Increasingly, payment processing is becoming inextricably linked to value-added software that not only manages payments, but also provides tools, features, and functionality to optimize other core business functions. Before thinking about your target segment or the opportunities inherent in your portfolio, consider first what these tools represent to your business today: Do you use a customer relationship management (CRM)? What are the systems or tools you rely upon to run your business? Think about the ways in which payments connect into or supplement those tools. Understanding the way software helps you run your business is an important mechanism for conceiving of your broader ISV strategy.

STRATEGIC CONSIDERATIONS
Define your objectives. Every strategy has to start with clearly articulated goals. Generic objectives, such as increasing market share, expanding into new verticals, or increasing the stickiness of your services are all relevant to developing an ISV strategy, but they require specification. The more you understand about your target vertical, the TAM, and the value propositions of the leading players, the better positioned you will be to execute your strategy.

MARKET ANALYSIS
The best starting point for developing or enhancing your ISV strategy requires an awareness and understanding of your key vertical market(s). What is your core market today? Where are you adding the most value for your merchant base? As you look into this (or these) market segments, identify the software as a service (SaaS) providers that are enabling the merchants in that market to run their businesses. “Vertical SaaS” platforms are designed and deployed into a specific business market (Salesforce and Hubspot, conversely, are “horizontal SaaS” tools in the sense that they are leveraged by business operators in many different and distinct vertical markets). Identifying the vertical SaaS platforms that are most applicable in your target markets is the first step in considering how to develop your ISV strategy.

THE PAYMENTS ANGLE
Of the software tools inherent in your market, conduct research to identify which are marketing payments as part of their tech stack. Develop an understanding of how payments operate in conjunction with those software tools, and ask the age-old question of how to compete with these systems: Should you build, buy, or partner with the vertical SaaS platforms in your key target market(s)?

PARTNERSHIP CRITERION
Let’s start with the process of partnership, as building or buying into a software solution can be both cost-prohibitive and a departure from core strength and value. After conducting a cursory review of the SaaS platforms in your target vertical, how many are marketing payments as a part of their tech stack? How many are offering payments through partnership compared to a more proprietary or engrained solution?

ISVs with existing payment solutions:

• Pro: They understand payments systems and rev-share models, and may be looking for additional managed service provider (MSP) partners.
• Con: Already working with others or may have an existing or preferred financial institution relationship.

ISVs without existing payment solutions:

• Pro: Potential for exclusivity; Opportunity to convert their users to your processing/funding/settlement/gateway services etc.
• Con: Business operators do not understand payments systems or models.

THE POWER AND PERIL OF MUTUAL REFERRALS
While it may seem that many ISVs are selling payment processing as a core part of their service offering, it is also true that payment processors are selling integrated services (through ISV partners) to their existing and prospective merchant base. This represents both an opportunity to open/expand new revenue streams, but it can also serve as a threat to business in the form of a distraction or detraction from what the business has done to date to differentiate in the market.

One area in which MSPs are distinct from ISVs is reach: Many MSPs leverage ISO/Agent models to expand their footprint and open new channels for growth. This model represents an opportunity for processors and MSPs to extend that advantage to ISVs as a new and distinct sales channel. MSPs and ISOs can leverage this strategy to recruit new ISV partners (e.g., ‘we have xx merchants in our portfolio whom we feel would benefit from your SaaS product; let’s structure an ISV partnership and go to market together…’).

Like all things in business and entrepreneurship, new strategies involve risk: From partner selection to market analysis to execution, the more intentional an ISO/MSP is in thinking about each stage of the strategic process, the more likely the chance of success in launching or enhancing an ISV strategy.

THE STRATEGIC ADVANTAGE OF MONETIZING PAYMENTS FOR ISVs
In today’s competitive software landscape, Independent Software Vendors (ISVs) are increasingly recognizing the value of integrating and monetizing payment solutions within their platforms. The shift toward a seamless checkout experience is more than a trend—it’s a necessity. According to recent studies, *83% of buyers* cite a smooth payment process as a top priority, with many abandoning their purchases if the experience is subpar. This presents a critical opportunity for ISVs to differentiate themselves by offering an optimized and frictionless payment journey.

EMBEDDED PAYMENTS: BEYOND INTEGRATION
Embedded payments are not created equal. ISVs must carefully evaluate their payment solutions, considering factors such as ease of integration, user experience, scalability, and perhaps most importantly, **monetization potential**. While many software vendors have yet to fully capitalize on this opportunity, those that do can unlock significant new revenue streams. By turning payments into a profit center, ISVs not only enhance their service offering but also build a more sustainable business model.

SCALABILITY AND BUSINESS GROWTH
The complexity of building a payment solution varies, but the rewards are clear. A well-executed payment integration allows ISVs to offer diverse payment methods, catering to the varying needs of their customer base. Moreover, ISVs can scale their operations and potentially monetize transactions beyond their immediate customer base, tapping into the payments of their customers’ customers, depending on their business model.

INFRASTRUCTURE AND ENTERPRISE READINESS
For ISVs looking to partner with large enterprises, having a robust and modular payment infrastructure is non-negotiable. Enterprises often require sophisticated payment capabilities, and ISVs that can deliver these solutions are well-positioned to secure large contracts and expand their market reach.

SIMPLIFIED COMPLIANCE THROUGH STRATEGIC PARTNERSHIPS
Navigating the complexities of PCI compliance and industry-specific regulations can be a significant burden for ISVs. However, by partnering with the right payment providers, ISVs can offload much of this responsibility, ensuring that they remain compliant across different industries without diverting focus from their core business objectives.

CROSS-BORDER CAPABILITIES AND GLOBAL EXPANSION
As ISVs scale globally, having the right payment solution in place is crucial. Embedded payment solutions that offer multi-currency support, dynamic currency conversion, and robust fraud prevention are indispensable. A single point of integration can significantly streamline these processes, opening new opportunities for ISVs to expand their global footprint.

IMPACT ON VALUATION AND FUNDRAISING
The way an ISV monetizes payments can have a direct impact on its valuation, particularly during fundraising rounds. Investors and stakeholders are increasingly looking for companies that have clear, scalable revenue models. By effectively monetizing payments, ISVs can demonstrate long-term value, attracting more investment and driving higher valuations.

In conclusion, the monetization of payments is not just an operational consideration for ISVs—it’s a strategic imperative. By embracing this opportunity, ISVs can not only enhance their product offerings but also unlock new revenue streams, drive business growth, and significantly increase their market valuation.