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working directly with independent software developers cy's 2022 merchant acquiring survey now use ISVs for pay-
and value-added resellers to integrate payment process- ment processing; 15 percent said they are in the process of
ing with those company's software and platforms. making that transition.
Today Bold, formerly Priority Integrated Solutions, works And which ISVs are they using? "Across all industry ver-
with 225 ISVs and VARs serving over 220,000 merchants, ticals, the ISVs used most by small businesses are Square
which combined process about $60 billion a year in card and Clover, our survey revealed," McKinsey reported.
payments. "We're a preferred provider to these compa- "Toast is a close second in the food and beverage industry,
nies," Liu said. "ISOs and acquirers should really be think- where overall ISV adoption stands at about 65 percent."
ing about these kinds of opportunities."
Credit Suisse, in a 2021 report, estimated that software-led
Sondhi agreed. "What we're seeing is the verticalization of payments accounted for 16 percent of payment processing
software," he said. "There's a myriad of software solutions volume in the United States and that these payments are
for every type of business. Payments companies have to growing at two-times industry averages. Credit Suisse ex-
follow that lead." pects that by 2023, software-led payments will account for
20 percent of U.S. payment processing volume.
"ISOs need to identify verticals they really understand,
then find an ISV that serves that market," Avery added. Companies that provide both software and payment pro-
Key verticals include: healthcare, nonprofit, restaurant cessing see lower attrition rates—generally under 10 per-
and hospitality, gym and fitness, field services, property cent, Credit Suisse estimated. This compares to an acquir-
management, and shopping cart platforms. ing industry average of 15 percent. It's easy to see why:
once businesses are tied into an underlying software en-
Many of these also have sub-verticals. The healthcare sec- vironment they are not inclined to swap it out, unless ser-
tor, for example, includes doctors, dentists, medical device vice is really bad, several experts noted.
providers and hospitals, and several ISVs serve each of
these sub-verticals. The large legacy payment companies have seen the writ-
ing on the wall. "Everyone is going after this," Sondhi said.
The consultancy McKinsey & Co., in a recent report, re- First Data owns Clover, which morphed from a hardware
iterated how these sub-verticals create opportunities for company to an ISV, while other acquirers have been buy-
new ISVs, and by extension, payments companies. "The ing ISVs outright. Global Payments has purchased thou-
same formula that allowed Square to displace incumbents sands of ISV; its pending acquisition of EVO is expected to
is now letting newer companies penetrate underserved add over 1,000 more to that total, according to an analysis
sub-verticals," the consultancy stated. by The Strawhecker Group.

Bain & Co. has described the trend toward bundling soft- "There are so many verticalized software companies out
ware and payments as a "better together" value proposi- there to partner with. And it's a really high-margin oppor-
tion. "The 'better together' logic can unlock an enormous tunity for payments companies. We have one ISV that has
profit pool, especially for ISVs serving smaller businesses, boarded 200 merchants with us this month, and the refer-
complementing SaaS revenue and raising customer life- ring ISO did nothing" except collect residuals, Avery said.
time value," the consultancy wrote in a recent report com-
missioned by Stripe. "In fact, payments revenue can out- James Shepherd, president of the sales training firm CC
strip the platform's core SaaS revenue." Sales Pro, added, "Keep in mind that the majority of prof-
its from payments processing will go to the software com-
Just ask the folks at Shopify. In 2021, the ecommerce plat- pany, but don't let that discourage you, because the poten-
form company generated $3 billion, more than two-thirds tial volume from these deals is huge."
of its total revenue, from merchant services, primarily card
processing and currency conversion, according to Bain. Quick to market
Similarly, 80 percent of Toast's revenues last year came Tilled works with more than 80 ISOs and agents that bring
from payments and other financial services, not software ISV referrals to the company. These ISOs take a cut of the
and equipment leases. residuals on every account boarded through ISV referrals.

The march is on They can also earn referral fees for any accounts brought
to the ISV. "It's like putting your portfolio on autopilot,"
The United States is home to over 10,000 ISVs, the web- Avery said. "That's the exciting thing about this opportu-
site Statista reported. Each of these ISVs has a roster of nity."
companies that use its software to manage business. And
increasingly, that includes payment processing. "I have a Avery estimates that Tilled has a close ratio of over 50 per-
sales team that does nothing but call on ISVs and VARs," cent on qualified ISV leads delivered by its ISO partners.
Liu said. In its report, McKinsey detailed just how big the Unlike traditional referral partnerships, there are no paper
shift has been to software-led payments. Nearly half of the applications or onboarding routines in this payfac-as-a-
over 800 small businesses participating in the consultan- service model—everything is pretty much digitized. Pric-

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