The most discussed topic in the POS channel during Q4 2017 has been prominent software developers being acquired by payment processors. These conversations were sparked in September when Harbortouch scooped up Future POS, ASI, and Positouch to form Lighthouse Network. Those acquisitions were preceded by Heartland Commerce taking over Digital Dining, Xpient, Liquor POS, Dinerware, and PC America in 2015.
In the hopes of cutting through the rampant speculation to better understand how these moves impact our channel, Vantiv’s PaymentsEdge Advisory Services conducted a survey of 27 reputable resellers who resold or still resell Digital Dining, Dinerware, and PC America. We figured their actual experiences over the past two-plus years would be more insightful than extrapolating “what if” scenarios. A total of 13 reseller executives responded anonymously to our survey and a few others reached out to me through email.
This Special Report on ISV Acquisitions will be divided into three sections: numerical survey data, excerpts of reseller comments, and my analysis of the situation. I’m presenting it that way – facts first, opinion last – because I’m sure some skeptics might suspect that Vantiv, who competes with Heartland and Harbortouch and hasn’t acquired any ISVs, would skew these results in their favor. You have my personal word that the data below hasn’t been altered or massaged. Of course in this piece I didn’t include every reseller comment submitted (only the most compelling), and comments have been edited for length and grammar, but I stayed true to the intent of each reseller’s feedback.
Most Resellers Surveyed Say ISV Acquisitions Have Weakened Relationships, Harmed POS Channel Model
We asked, “Is your relationship with the acquired POS software provider today stronger, weaker, or the same compared with before the acquisition?”
- Stronger: 17%
- The same: 17%
- Weaker: 67%
“Has tech support from the acquired POS software provider improved, declined, or is it the same?”
- Improved: 23%
- No change: 62%
- Declined: 15%
“Has the pace of innovation related to the acquired POS software provider accelerated, decelerated, or is it the same?”
- Accelerated: 23%
- No change: 38%
- Decelerated: 38%
“Are you more satisfied with the acquired POS software provider, less satisfied, or no difference in satisfaction?”
- More satisfied: 15%
- No change: 23%
- Less satisfied: 62%
“On a scale of 0-10 (with 0 being extremely unhappy and 10 being perfectly happy), how happy are you with the acquisition of your ISV by a payment processor?”
- Composite average: 4.38
- 0-3: 46%
- 4-6: 23%
- 7-8: 23%
- 9-10: 8%
“Overall, do you think these acquisitions have improved or harmed the POS channel model?”
- Improved the POS channel model: 15%
- No difference: 31%
- Harmed the POS channel model: 54%
Many Dealers “Will Be Irreparably Harmed Over The Next Few Years”
Our first open-ended survey question asked, “From your perspective, what is the overall effect on the POS channel ecosystem when a payment processor buys a POS software ISV?” Responses included:
- From my experience, the interests of the payment processor are not as closely aligned with the resellers of the specific product. For the channel of other products, I think it provides some competitive advantage for them to differentiate themselves in a way that is perceived positively in the eyes of the end users. … I believe one of the concepts in acquiring a technology product is to introduce capital and resources to accelerate the growth of the product/company ... I don't think we have seen any of the acquisitions do that successfully.
- It moves the channel to the inevitable conclusion faster.
- Just like most M&A problems, margins shrink for the ISV/dealer; communication fails in the channel, and existing culture is curtailed quickly. It leads to animosity, but even more so in these channels, since the ISV/dealer folks generally feel that they "own" the customer relationship. The new software owners generally feel much differently about where stakeholders live in the relationship.
- It makes traditional ISV-VAR relationships less stable due to the uncertainty.
- It shifts more power to the payment processor, obviously. It devalues the role of the VAR, as well as empowers the payment processor to "own" the relationship.
- Disruption and threat to traditional POS reseller business models.
- If they have good “carrots” and they offset the “sticks,” there is a potential for additional credit card processing revenue to the purchaser.
- It changes the focus from pure POS operations improvement to revenue maximization of the processing business. It’s too hard to focus on the POS when so much money can be made from processing.
- Some payment processors understand resellers, our customer relationships, and some don't have a clue.
- Historically it appears that the processors are more interested in the client acquisition than developing a strong software application. However, I imagine a few will understand the importance of quality software for their customers.
“What has been the impact of these acquisitions on your reseller business?”
- Short-term disruption, long-term opportunity. I consider them overall positive for my business.
- Reduced relationships.
- We have sourced new products, begun to invest in our own products, and fought vigorously with our new "parents" to maintain margins and demand respect and fairness.
- We are less likely to use the acquired ISV because there's always the threat that the ISV kills all third-party integrations.
- A software ISV was acquired by a non-partner payment processor. In turn, the dynamic with the clients changed, as did the rules of engagement.
- Radical re-thinking of sales and product and service strategy.
- We are searching out an independent processing option.
- Unnecessary chaos.
- In one case it broadened our geographical territory. In another it removed us. It varies.
For resellers who said the senior management team at the acquired ISV significantly changed, we asked, “What has been the impact of those changes on your reseller business?”
- Disruption ... but motivated us to pivot to a different direction that we believe is a net positive. (Basically, thanks for kicking us in the butt and forcing us to make some strategic decisions we might have been lax to make before.)
- It has removed any relationship we had prior to acquisition, and therefore diminished the relationship.
- The personnel changes mean that we have never met most people that we deal with. Many emails come to us with no name, and we're expected to deal with a call center rather than a specific person. In the cases where we do have a specific contact, that contact is only capable of one thing and is unable to take ownership of situations and get us to the right people.
- We have less of a direct line to management.
- The loss of long-standing relationships has not been replaced or renewed with the new management team.
- We no longer sell that product and I don't believe anyone at the company noticed or cared.
- In most cases the senior team disappeared. Development of the application seems to erode and stagnate. It seems as though the acquirer treats the product as a commodity.
Our last question asked, “Do you have any other comments, questions, or concerns?” In this section I’ll also include the comments I received via email:
- The current buying frenzy by certain processors and their VC partners will put at risk the very independence of the POS dealers. … When vendors offer a total solution and special pricing based on the reseller only selling all components to the end user, it reduces the ability of the reseller to choose what they think is best for their customer. It reduces the customer’s ability to make a logical choice or think long-term. If the end user decides to change, they might find that new high “gateway fees” block that option. Perhaps most important is once the vendor builds their client networks they may decide to eliminate the reseller who is not living up to their sales or other expectations. They can do that easily now because the vendors have all the end users’ business and processing information. It is conceivable that only master resellers will survive in this brave new world. … This is a nightmare scenario which attacks the very independence of the independent reseller.
- We have seen NCR purchase an ISV and certainly that caused churn for the Radiant/Aloha Resellers. IBM selling to Toshiba, Micros to Oracle, etc. have been similar. But this one is different in the sense that we are seeing lines get very blurred now. These aren’t big POS companies buying more POS. This is acquirers buying ISVs and maybe more importantly buying (acquiring through incentives and threat) resellers. You have hardware, software, and payments all merged into one. If done right that may be a great thing for the resellers and merchants. If done wrong it could be brutal.
- We have two vendors who were acquired by an ISV. One has been fairly neutral with some growing pains, and one has been negative as they have all but eliminated dealers. If an ISV has complimentary solutions that enhance the POS, an acquisition has the potential to be positive.
- Ultimately, the bundled pricing approach is winning in the marketplace – and the faster software providers are gobbled up by the payment processors – the better.
- Processors are acquiring software brands solely for the payment portfolio. They recognize that cloud-based systems are the solution going forward, so the legacy systems purchased will dissolve at some point (even if it's 5-10 years out). Based on that, they're focusing their efforts on converting acquired merchants and consolidating the softwares acquired so that new cloud-entrants can be easily converted to. That's expected and a fine business model, except no one is actually saying it. Instead, dealers are being led to believe that they're cared for, and many who don't have any other choice but to stay the course (lack of technical prowess, lack of funds, etc.) will be irreparably harmed over the next few years. Fortunately, for the channel folks that see the future, the pond will be deep, fully stocked, and very, very few other fishermen will be there.
- With the inevitable consolidation based upon current trends, the POS channel has to embrace a new type of dynamic in relationships that will still have to work seamlessly for the merchants/end users. This new model has yet to "shake out." If the goal of the processors is to eliminate the VAR from the relationship, or minimize VAR control from the development of the payments residual stream, then the disruption in the channel will be significant.
- It's too early to analyze the overall effect, but current indications are positive.
- There is no single answer to most of the above questions. In some cases the processor improved the relationship and in some harmed the relationship. Some continued development and some essentially killed development except bug fixes. As a whole, I feel it has been detrimental to the industry.
Who Will Fail And Who Will Prevail In Reshaped POS Channel?
Thanks again to the reseller executives who shared their perspectives in our survey. Everyone reading this report is a beneficiary of you being so generous with your time.
The survey data point that first jumped off the page at me was the composite average of 4.38 out of 10 when resellers were asked, “How happy are you with the acquisition of your ISV by a payment processer?” If you asked your spouse how happy they were with you, and they responded with a number between a four and five, it might be time for you to secure a divorce attorney – or at the very least seek professional counseling. To be closer to 0 than to 10 on this scale shows that the acquiring payment processers have quite a mountain to climb in both perceived and actual value provided to the resellers and merchants.
The other statistic I found alarming was two-thirds of survey respondents (67%) saying their relationship with their ISV today is weaker than before the acquisition. For many years I’ve counseled vendors new to the POS channel (usually first-time exhibitors at RSPA’s RetailNOW) that while relationships are important in every industry, they’re especially significant in ours. Many of the important retail IT players – both big and small – have worked in this space for generations, and they’re suspect of new players and unusual ideas because they’ve seen so many of them crash and burn. Building a strong relationship is hard work; turning around a damaged relationship is even more difficult. But …
… Would you invest significant time rebuilding a relationship if you were planning to break up in the not-too-distant future? One of the most interesting reseller takes was the assertion that processors see the future in cloud-based systems so they acquired these ISVs only to convert their merchants when legacy systems are phased out. That reseller makes reference to a channel with “very, very few other fishermen” while another VAR says it’s “conceivable that only master resellers will survive in this brave new world.” No wonder the majority of reseller respondents said they feel these acquisitions have harmed the POS channel model.
We also saw in the reseller feedback the word “parents,” references to the payment processor now “owning” the merchant relationship, and the loss of independence by resellers. POS VARs come in all shapes, sizes, and areas of expertise, but one viewpoint they have in common is pride in their independence. That’s why most of them decided to work for themselves in the first place, right? As a surveyed VAR explained, with one vendor controlling the hardware, software, and processing, resellers are essentially at that vendor’s mercy. I’ve heard through my conversations with channel executives that many resellers – some of them with healthy, growing businesses – now feel trapped by their new “owner.” Instead of doing what they feel is in the best interest of their organization and their merchants, these resellers feel they need to fall in line with their new overlord or risk having their ISV reseller agreement revoked and their merchants pulled out from underneath them.
If you made a word cloud out of this survey feedback, you’d see some positives like “opportunity” and “potential.” But they’d be drowned out by “disruption”, “threat”, and “chaos.” Just like you, I’m not sure exactly what’s around the corner in our ever-changing industry, but I do know there’s something all of us can do about it. For guidance, I turned to Jim Collins who has studied the rise and decline of businesses in his books How The Mighty Fall and Built To Last (yes, he wrote more than just Good To Great). While some of what Collins says is appropriately alarming – such as “not all companies deserve to last” – his studies show that you can shape your own future. “Whether you prevail or fail, endure or die, depends more on what you do to yourself than on what the world does to you.”