As the pace of change quickens in the payments industry, ISOs and processors have to match that speed or risk falling behind.
What’s more, a tendency for processors to become acquirers is squeezing the ISO business model, and new players are threatening all of the established companies.
For every faction – ISOs ,processors and the tech companies entering the business -- staying relevant requires offering new services that go beyond processing, focusing on technology and viewing consumers as powerful and influential.
Making those changes has fueled competition, and the atmosphere of cooperation that has long prevailed is turning dog-eat-dog.
"The large players used to cooperate with each other -- now it's not so clear that remains as much in place," says Bob Baldwin, vice chairman of Heartland Payment Systems Inc. "Some have said, 'I'm not playing with that other guy' for various reasons."
In one example, Verizon Wireless balked at working with Google Inc. on its mobile wallet. Instead, Verizon joined the Isis consortium, which is dedicated to creating its own wallet, Baldwin says.
"The whole business model is changing for processors because they are also acquirers now," says Brian Riley, senior research director and analyst with Needham, Mass.-based CEB TowerGroup. "Ultimately, they are now establishing those direct relationships with merchants."
Moving into merchant acquiring represents a major shift for processors because it requires developing new products while also making sure day-to-day functions opperate properly, Riley says.
"It makes for a bigger sense of urgency because you are dealing with a complicated market on an individual basis," Riley maintains.
Richard Oglesby, senior analyst and mobile pay expert with Boston-based Aite Group, says the industry has been changing ever since Visa Inc. and MasterCard Inc. became public companies rather than associations. The shifts have set off a "land grab," he asserts.
"Previously, all of the companies participated in a fairly orderly industry," Oglesby says. "But now the definition of traditional roles is dissolving, and there is a lot less clarity because everyone is competing with everyone else."
In the past, the card networks established parameters and "everyone would play by those rules," Oglesby says. "Now there is more opportunity for players to disrupt and shake up the whole game."
PayPal was not a payments network originally, but it evolved into one because the landscape of mobile payments opened doors for new players, Oglesby says.
But processors can't sit back and bemoan the potential end of a brotherhood of payments because of infiltration from fast-moving technology companies.
"Processors view themselves as nice incumbent vendors with an incumbent infrastructure, and it is their market share to lose," says Andrew Jeffrey, an analyst for Atlanta-based SunTrust Robinson Humphrey.
Proactive processors are offering new services, including advanced data security, mobile payments and loyalty programs.
"I'm not sure if any of the changes they make will be successful, but it keeps the processors one step ahead of the marketplace," Jeffrey says.
It all adds up to "a very exciting time to be in the payments space," says Mark Herrington, executive vice president of global product management and innovation at First Data Corp.
Herrington says his company is "acutely aware of the changes and new players" and understands it is an industry that is likely to undergo "more change in the next 3 to 5 years than took place in the past 25 combined."
The processing business previously ran on a model of growth through acquisition, but will now pursue "growth through product development," Herrington says.
Heartland's Baldwin agrees. "Trying to do business as you have always done it puts you at risk, and you have to understand how to play in this evolving world," he says.
"I can't predict what will happen in the future, but more than ever, consumers will decide," Baldwin says.
Offering consumers a choice of value propositions, and placing less importance on the payment type, has become the critical ingredient that increases competition for market share.
Herrington says processors are keenly aware of consumers' newfound power.
"The consumer is in a much more influential and empowered position than in the past," Herrington says. "No matter what happens in the wallet wars or the future of plastic, we know the consumer will have interaction with the merchant at the point of sale."
The role of the consumer reached loftier status when players such as Square Inc. and PayPal became eager participants in the payments business with new consumer-facing products.
"It's been a straight-forward business service in which all of the processing companies were alike in the fairly simple process of signing up retailers [to accept cards]," says Gil Luria, analyst with Los Angeles-based Wedbush Securities.