Competition for merchant payment and POS business has never been more fierce. With decreased consumer spending activity, merchants are suffering, and some will not survive. For ISOs, competing for an ever-decreasing pool of merchants is challenging. Many are examining their business strategies, looking for new ways to grow their businesses and retain the merchants they already have. This soul-searching has many ISOs realizing the opportunity in small businesses. Small businesses are the backbone of the U.S. economy but are often underserved by payment professionals who look for the "big bucks" with larger retailers. There is a growing awareness among today's ISOs that this segment of the retail payments market holds significant opportunity.
Why pay attention to small businesses? For starters, there are a lot of them. There are almost 26 million small businesses in the U.S., defined as those with fewer than 100 employees. These privately owned corporations, partnerships or sole proprietorships account for $350 billion in financial services and product revenue annually. 87% have fewer than 5 employees and many have developed an online presence to compete with larger businesses. Clearly, small businesses play a huge role in the economy, but how can an ISO tap into this market?
Small Business Strategy: Address the Pain Points
ISOs that are successful in pursuing small merchants understand and address their unique pain points. For those looking to enter this market, the following issues are key to small merchants:
Easing the Burden of PCI Compliance
While the most highly publicized breaches of cardholder data involve larger retailers with huge breaches of data, small merchants are considered by the industry to be risky from a security standpoint. Visa says that 85% of reported compromises come from level 4 (low transaction volume) merchants and less than 10% of merchants in this category have validated compliance with PCI DSS. Why are smaller merchants so vulnerable? Outdated POS technology and the cost of upgrading it are the most common cause of cardholder data security breaches among this group. Small merchants have small budgets and it is a hard sell to upgrade POS systems that seem to work well. In addition, the "moms and pops" do not have knowledgeable IT staff to turn to in understanding PCI and how to maintain secure payments.
ISOs can address this critical issue for small merchants by helping them understand the risks they face and offering them cost-effective and simple ways to address them. Many small merchants continue to use payment software that stores cardholder data, running afoul of PCI DSS rules. Indeed, POS software is believed to be responsible for 67% of data breaches. Smaller merchants, focused on their core business tasks, also tend to make mistakes such as retaining vendor-set default passwords, putting their customer's data at risk. The ISO's job is to make a case for software and POS systems that will secure their data. For many of these merchants, replacing perfectly functional electronic cash registers (ECRs), PCs or payment terminals seems counter-intuitive. Solutions like OpenBravo, an open source cash register software that runs on a PC, can be a viable option for these merchants. This application integrates easily with secure, PA-DSS validated "payment engine" software transforming the merchant's existing PC into a PCI compliant payment solution. ECRs, too, can become more sophisticated "integrated" payment systems with a router-based payment engine software that secures credit card transactions from a magstripe reader. Options like these do not require the merchant to replace POS equipment, allowing the small merchant to extend the functional life of reliable POS devices.
Delivering Simple, Cost-Effective Support
Unlike larger merchants, small businesses don't have access to an I.T. department or any technical expertise. What's more, their support issues are typically difficult to resolve, as POS set-ups often cobble together a range of legacy hardware and software, making it difficult to pinpoint the source of problems when they occur. Downtime is longer when there are problems, as the merchant is faced with contacting several vendors to resolve the issue. This downtime means critical lost business for small merchants. This situation cries out for a "one-stop shop" approach to support.
ISOs have several options when it comes to delivering better support to merchants. Those who arm themselves with the best tools can offer 24/7 support, without significantly increasing their own costs or knowledge base. The key here is remote management tools. Router-based integrated payment engine software offers ISOs the ability to access transaction data from the POS device from a remote location. This capability means that the ISO has data available 24/7 to pinpoint the merchant's problem. For many ISOs, particularly smaller ones, the weak link in support is hardware, where equipment resellers have typically provided support. By partnering with a reseller, the ISO can access a greater pool of smaller merchants, handling the sales and payment processing, while the reseller handles the hardware support piece. Like ISOs, resellers are also feeling the pinch of margin depletion and competition, so these partnerships hold strong potential for both parties.
Reducing the Merchant's Costs
For the small merchant tasked with the burdens of PCI compliance and growing competition with larger retailers, transaction fees and equipment upgrade costs are significant. With smaller transaction volumes, they simply don't have the negotiating power that larger merchants exercise with processors. In many cases, small merchants are also stuck with one processor and cannot easily change processors without significant fees and difficulty. Many are reluctant to upgrade from reliable ECRs or terminals to newer, "PCI friendly" POS systems because of the up-front cost.
A PA-DSS validated payment engine application, particularly when paired with a payment router, can address both issues. First, transaction fees are lowered, as transactions can be routed directly to the processor of choice, bypassing gateways. Second, transactions can be routed to multiple processors, offering the merchant greater power when negotiating rates. Finally, payment engine applications are designed to work with existing systems, whether an ECR or an IP terminal. The merchant retains a functional POS machine, while gaining the benefits of a PA-DSS validated solution that might cost thousands to purchase new. Some in the industry are extolling the virtues of Linux-based POS systems that require less memory and less server power — with no software licenses required. This interest has prompted some POS vendors to add Linux support to their systems to provide a cost-effective alternative to Windows-based systems.
Small merchants are a viable market for ISOs that take the time to understand and address their needs. The good news is that the sales cycle for a small merchant is typically shorter, as you are often dealing with the owner or decision maker from the first phone call. So get out there and show them how you can address
their pain.
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