Historically, the US payments market has been characterized by the Independent Sales Organization (ISO) model, which took care of different processes in the payment value chain such as processing, liabilities, risk management, underwriting and all services which in Europe are done primarily by acquiring banks. At the same time, in Europe the traditional payment service provider (PSP) model functioned as a gateway and was focused on bringing together many domestic payment options in a single gateway, with one service platform and one reconciliation. Those two models co-existed, since until now Europe has mainly been an alternative payment market and the US more of a card payment one. In the new ecommerce landscape, however, the evolution of these two business models, ISO and PSP, becomes clearer and clearer.
The increasing tendency of consumers to shop globally, the possibility of searching online for a wider range of products and services, special deals, or just to compare the price, quality or availability of different products in different countries, has prompted merchants to start looking beyond their borders and expand their business internationally. Hence, cross-border ecommerce is helping PSPs, ISOs, acquiring banks and merchants around the world benefit from the endless opportunities offered by the rise of ecommerce. This, implicitly, led to a shift in the payments market: domestic processing lost its importance as a sole solution and became integrated as part of a bigger, combined and globally oriented payment processing solution.
Therefore, we can see a shift between PSP and ISO models. The US’s ISOs will “borrow” more and more features of the PSP model, by offering more alternative payment methods, while the European payments market is becoming a market in which cards are more important. The payment services providers, compliant with the Payment Services Directive (PSD), have found more opportunities in the card processing sector which will actually allow them to take over the work previously considered the banks’ domain, such as underwriting, processing and even membership in card schemes like VISA and MasterCard, allowing them to behave like acquirers, to issue or acquire a card transaction performed within the scheme.
The main tendency I would like to highlight here is that the European PSP model is now shifting towards the ISO model and vice versa, the American ISO is becoming more of a PSP model by offering different kinds of alternative payments methods.
Also, recently, due to increased competition and price compression, many ISOs have decided to tailor their business model, focus on a few industries and create customized products and solutions that will help merchants solve operational challenges and attain a deeper understanding of their own industry. This is another growing trend worth reading about and it revolves around the specialization of the ISOs.