A new study of independent sales organizations that generate Visa transactions sheds light on just how few players dominate the merchant-acquiring industry behind the scenes even though more than 1,000 ISOs have agents selling acceptance of payment services.
That the merchant-acquiring industry is concentrated is nothing new, but the study by Linthicum, Md.-based First Annapolis Consulting Inc. using information from Visa Inc. backs up perceptions with hard numbers. First Annapolis pulled data from Visa’s merchant Web site that lists Visa-registered ISOs, the types of transactions they handle, and their sponsor banks.
In all, the Visa Web site includes 1,776 registered ISOs and so-called encryption-support organizations. Many companies provide more than one service. Visa classifies 1,253 companies as "merchant ISOs" that sign retailers, restaurants, and other merchants for acceptance of Visa-branded credit and debit cards. Some 254 ISOs enable merchants to accept PIN-debit transactions on Visa’s Interlink point-of-sale network, and 338 link customers to the Visa-owned Plus ATM network. Visa says 108 ISOs solicit merchants, governmental units and other businesses to sell, activate or load prepaid cards on behalf of an issuer. Another 160 are registered as "cardholder" ISOs that provide solicitation services, application processing and customer support. The 286 registered ESOs perform services such as cryptographic key management, secure key injection and loading of encryption keys into ATMs or point-of-sale PIN-Entry devices and encrypting PIN pads, according to Visa. First Annapolis does not have comparative data since the study is its first research project of the kind.
Visa and MasterCard Inc. require transactions to enter their networks through banks, which means that as non-bank entities, ISOs must find at least one sponsor bank. Many use two or more. First Annapolis found that 42% of the merchant ISOs disclosed their sponsor bank on their Web site, 24% did not disclose, and 34% had no site. (Visa requires sponsorship identification on solicitation materials, according to First Annapolis.)
Wells Fargo & Co. is by far the biggest bank sponsor, cited as a sponsoring bank by 46% of ISOs that name their sponsor banks on their Web site. Next are HSBC, 14%; U.S. Bancorp and First National Bank of Omaha, both 6%; and Harris Bank and Merrick Bank, both 5%. About 35 other banks claim the remaining 18%.
“There’s a pretty small number of banks sponsoring the ISOs in comparison with the overall banking industry,” notes First Annapolis senior consultant Lacy Kridler. The U.S. has about 8,000 commercial banks.
The relationships between sponsor banks and third-party processors typically determine how many ISO sponsorships a bank has, according to Kridler. Usually the processors deal directly with ISOs, and big processors such as First Data Corp. and Global Payments Inc. work with numerous ISOs, many quite large. Wells and First Data have a longstanding partnership as does HSBC with Global. Thus, those banks’ dominance as sponsors “is likely driven by arrangements they have with First Data and Global Payments, respectively,” says Kridler.
Other banks have corporate ties with merchant processors that also work with ISOs but may not have the same name as the bank. Moneris Solutions, for example, is owned by two big Canadian banking companies, RBC Financial Group (Royal Bank of Canada) and BMO Financial Group (Bank of Montreal), the latter of which owns Harris. U.S. Bancorp owns Atlanta-based Elavon, an international acquirer.
The dominance of the big ISOs is further exemplified when revenues are considered. First Annapolis used public sources, mainly the Hoover’s Inc. corporate information service, to estimate revenues for 43% of the merchant ISOs and divided the results into five categories. Only 31 companies have annual revenues in the highest category of more than $20 million and account for 94% of all revenues in the entire group, according to Kridler. Some 131 ISOs have estimated revenues of $1 million to $19 million and account for 5.1% of revenues. The other three categories with the number of ISOs and percentage of total revenues are: $500,000 to $999,000, 64, 0.4%; $100,000 to $499,000, 176, 0.4%; and less than $100,000, 131, 0.1%.