Being successful with technology is a bit like a horse race: pick a winner, and the payoff is huge. Back the wrong horse and you stand to lose a lot. Perhaps this inherent risk is what scares many merchants and their ISOs, causing them to embrace the status quo of legacy terminals, dial-based infrastructure and other similarly ‘aged’ technologies. But despite the risks, innovation is not a bad word. Technology companies perennially struggle with the right balance between innovation for tomorrow and sales for today. Perhaps there is a lesson for ISOs here in how to select the right technologies, at the right time, to drive new business models.

    My Own Company’s Experience

   Back in 1999, Precidia was founded to develop adapters, which would help merchants migrate their dial payment terminals onto an IP infrastructure. Before long, the recession of 2001/2002 changed things. Every business was impacted by the downturn that took place and retailers were no exception, making it more difficult to penetrate this market. Like many in the industry, we reviewed our strategy in light of changing business conditions. We took 2 lessons from this experience: first, we needed to diversify our business to more easily weather industry ups and downs, and second, the importance of a business model that coupled a longer-term view of product development, with a near-term objective of driving revenue.
   In the end, we built a balanced business model that marketed off-the-shelf serial IP adapters, while continuing to focus development efforts on the U.S. point-of-sale market. This model allowed us to achieve good time-to-market with our products, while also maintaining a steady revenue stream. Perhaps the most important lesson is that companies need to position themselves for recovery during a recession and not lose sight of the importance of innovation.

    The Lesson: Innovation and Business Models

   Now in the midst of another recession, we can compare the current state of the payment industry with our own experience in 2002. The changes in the payment industry since this most recent economic downturn began only highlight issues that have been developing over the last few years. ISOs have seen residuals declining at a rate of 10% each year, due to several forces: increased competition from new players such as VARs and telecoms; saturation in the POS terminal leasing market; business closures. While increased competition is a threat to ISOs, many are recognizing their strengths and seeking to capitalize on them. The challenge for these ISOs is to identify a new business model that will provide a sustainable future, ready to deliver a steady revenue stream as the current model of terminal leasing loses steam. Technology, for many, is at the heart of this decision.

    The Technology Factor

Most in today’s payment industry recognize that the payment terminal as we know it today is a dying model, with integrated payments the emerging replacement. Where does the ISO fit in this model, and how will the ISO benefit? Often, technology adoption is a matter of timing. IP-based payment processing is a good example of this. Early IP terminals were ahead of their time when they were first introduced. The earliest IP terminals featured bells and whistles few in the industry understood or needed. It took several years for this technology to truly take hold in a ‘practical’ way, because the technology was ahead of the broadband infrastructure needed to support it. During the period that it took for IP-based payment processing to become mainstream, there was much development in the adoption of broadband, with availability expanding and the price gradually decreasing. Eventually, as the infrastructure became more attractive, IP terminals became more relevant, and terminal manufacturers could now introduce systems geared to current needs and technology. In this case, being an early adopter may not have been lucrative for an ISO, but picking the right time meant sales growth.
   Mobile payments is a similarly hot topic in today’s payment industry. Considered by many to be the next big thing, we are at the cusp of this technology and only time will tell if, or when, this technology will become mainstream. Like IP terminals, there may be some pieces of the infrastructure puzzle that have to be in place before mobile payments can successfully take hold.
   As ISOs contemplate their next move, they should continue to focus on their strengths. Recognizing their role as the merchant’s trusted advisor, ISOs should understand PCI DSS and help their merchants navigate its requirements. Next month, we’ll talk about technology trends and how to determine the best course of action when it comes to technology adoption.

Deepak Wanner is President and CEO of Precidia Technologies Inc. Deepak works with ISOs and Dealers to find innovative
technology-based solutions to common payment networking challenges. Visit Precidia at www.precidia.com