In part one of this series, we highlighted the foundational knowledge independent software vendors (ISVs) need before entering the payments space as merchant service providers. In this article, we’ll focus on the market and break down the current competitive landscape, the risks and challenges ISVs face and the future of merchant services.

The payments industry is rapidly changing. New entrants emerge every year, all hoping to claim part of the market. Within specific verticals, like credit card payments, there has been an explosion of players competing for market share. However, while increased competition can be challenging for new entrants, oversaturation has opened the door for innovative companies to disrupt the narrative and make a name for themselves.

Evolving consumer and merchant preferences mean that software providers and developers enjoy a significant advantage over most legacy competitors. That advantage makes payments a valuable, high-growth revenue source for software companies that know how to compete in today’s market.

The Competitive Landscape in Payments

There are trillions of dollars to be earned in payments. However, with market growth comes competition. From traditional payment companies to high-tech startups to behemoths like Apple, succeeding in the industry requires knowledge of:

  • Who the competition is

  • How various players provide value

  • Why ISVs and software providers are better positioned to succeed in digital payments

Luckily, software providers willing to deliver high-value payment services will enter a market already tipping in their favor as merchants look to streamline operations and automate payment processing.

A Rapidly Growing Industry

Cashless payments are the future of commerce. According to McKinsey, by 2026, global payments industry revenue will hit $3 trillion. By 2030, the total number of cashless transactions will also hit 3 trillion — triple the total volume from 2020.

The rapid growth in cashless payments is driven by digitalization— a trend that accelerated during the global pandemic. In the first few months of the pandemic, ecommerce saw 10 years worth of growth. When the dust settled in 2022, consumers returned to brick-and-mortar stores at higher rates than expected, but payments didn’t return to the old “normal.”

Cash use fell from a 26% share of all payments in 2019 to 20% at the height of the pandemic. In post-pandemic 2022, it went down again to 18%.

Consumers continue to bypass cash in favor of more convenient digital options. Thankfully, this preference for digital payments means that software providers have more opportunities to embed payments into their applications and generate new sources of revenue.

Who Are the Main Players in Merchant Recruiting?

We can divide the competitive players in merchant recruiting into five main groups: ISOs, platforms, ISVs, Big Tech and disruptors. These five groups actively and directly target merchants.

ISOs: Independent sales organizations (ISOs) are the most traditional players in recruiting. ISOs recruit merchants on behalf of acquiring banks or large payment processors. Although many ISOs offer value-added services, they primarily focus on card payment processing.

While some ISOs have modernized, they are the legacy channel. This makes them the most likely to lose market share as new alternatives to traditional card payments emerge. However, ISOs still own a large portion of the market and should not be overlooked by newer, tech-savvy entrants.

Third-Party Platforms: Third-party platforms like PayPal and Stripe are among the largest payment industry players. PayPal alone has 75% penetration among the top 1,500 ecommerce retailers in Europe and North America. These large platforms often charge merchants more than providers like ISOs, but they offer two things most traditional providers can’t — simplicity and a near-frictionless, instantaneous sign-up process. Their success demonstrates how important convenience is to today’s merchants.

ISVs: Software companies have quietly become a key player in the payments space. ISVs compete directly with ISOs and third-party platforms by integrating payments into the software systems businesses use every day. By embedding payment processing into an already familiar platform, software-driven payments provide value by eliminating the complexity of payments. They also allow business owners to get everything from a central ISV partner rather than juggling multiple relationships. This frees up bandwidth and minimizes stress for merchants.

Big Tech: Companies like Apple and X have entered the consumer financial space to tap into the revenue potential of their enormous user bases. For years, Big Tech companies have provided users with digital wallets like Apple Pay, Google Pay and Amazon Pay. The launch of products like Apple Pay Later — a buy now, pay later (BNPL) offering — marks Big Tech’s entrance into broader payment services. Big Tech represents a formidable competitive force, not only because of its scale and existing users but also because of its resources and ability to price aggressively.

Disruptors: The final category of competitors is Fintech disruptors — companies (and payment methods) that enable digital payments without the need for traditional cards or, in some cases, even a bank account. Cryptocurrencies and peer-to-peer (P2P) payments are two examples of disruptors. The latter is globally popular but has seen lagging adoption in the United States. However, P2P now has the U.S. Federal Reserve backing its adoption with the 2023 release of the FedNow direct payment rail — a big step towards bringing the U.S. in line with Europe and Asia.

Why Now Is the Ideal Time for ISVs To Enter the Payments Game

Merchant preference has shifted heavily towards convenience, and software-driven payments are often the most seamless. ISVs have quietly captured market share over the past half-decade. Today, over 50% of merchants get their payments solutions from a software vendor. Moreover, 84% of card-accepting merchants currently use one or more ISV platforms.

Even at 50% penetration, there is a gap between the number of merchants currently using software-driven payments and the number of merchants that will in the future. That’s because businesses increasingly expect payment capabilities from their software. Developers who push their platforms to market without seamlessly integrated payment processing will be at a disadvantage to competitors with frictionless payment experiences.

Embedding payments into applications or software solutions enables ISVs to:

  • Open up new revenue streams

  • Give business users more choice and flexibility

  • Improve usability

  • Enhance the customer experience

Risks and Challenges for Merchant Service Providers

ISVs looking to seize the opportunity of embedded payments must understand the risks and challenges accompanying them. Entering payments comes with the standard business risks associated with competition, growth and entry into a new market. However, payments-specific risk centers mainly around two areas: fraud and consumer protections.

Fraud and Chargebacks

Payments are a prime target for fraudsters; that means software providers entering the payments space need a plan to tackle fraud. Unfortunately, even as overall fraud rates drop, electronic payments fraud is rising. Commercial credit card fraud rose a staggering 38% between 2021 and 2022. However, there are tools in place to help even the greenest ISVs keep fraudsters at bay.

Merchant-Facing Fraud Protection: While great underwriting can protect ISVs from merchant-side fraud, most payments fraud targets merchants — either through stolen credit cards or illegitimate abuse of the chargeback process. Anything that hurts merchants hurts their service providers.

To minimize risk, software providers should offer merchant-facing anti-fraud tools like chargeback monitoring, card spinning detectors and advanced AI-powered fraud screening systems like Kount. ISVs can even provide these features as value-added services that generate additional revenue while walling off bad actors.


The Payment Card Industry Data Security Standard (PCI-DSS) is the set of security protocols laid out by the card networks to protect consumer data. All companies that interact with, transmit or store credit card data are responsible for maintaining compliance with the PCI-DSS.

Software providers already integrating third-party payment systems are familiar with PCI compliance and how complex it can be. Failure to maintain compliance raises the chance of cyber attacks and expensive data breaches and can result in huge fines from the card networks.

The easiest way to avoid complexity is to choose a payment processing partner with built-in compliance and a team of highly experienced experts. The right partner minimizes the overall compliance burden and ensures ISVs have a trusted advisor to guide their internal team.

Local, Regional and National Regulations

Payment regulations are not homogeneous. For instance, the United States imposes looser regulations on payment processing than the United Kingdom or the European Union. Within the U.S., the rules and laws change on a state-by-state basis.

Payment regulations aim to protect consumers, so it’s important to offer each merchant a payments experience that complies with all necessary regulations wherever they do business.

For instance, a software provider serving only merchants in the U.S. should consider building its solutions to comply with the European Union’s more stringent laws as well. This allows ISVs to streamline expansion into new markets when the time comes.

The Future of Merchant Servicing

Cash and credit cards dominated payments for decades. Now, things are changing. When integrating payments into a software service or application, it’s important to keep consumer preferences, emerging technologies and tightening regulations in mind.

Changing Consumer Preferences Will Push Merchants To Evolve

The consumer is central to payments. Changes in consumer behaviors, sentiments and preferences drive change across the entire industry. Today, speed and convenience shape consumer preferences.

Consumers want faster, easier ways to pay. To keep up with demand, merchants should continually update their checkout and payment experiences (which requires them to think more about payments).

Most merchants will want to offload that burden. After all, they want to focus on their business — not payments. The more payment options and value-added services a merchant can get from a single vendor, the happier they’ll be. That makes the long-term market outlook extremely bright for embedded ISVs. In fact, Bain estimates software providers could eventually handle $35 trillion in payments.

Emerging Payment Rails and the Fintech Revolution Will Put Pressure on Legacy Players

New payment systems are emerging, and the space is progressing beyond the current dominance of credit cards, debit cards and cash. Technology companies are naturally better suited to developing new systems than banks or traditional payment companies, which puts ISVs in an ideal position to pioneer the next generation of payments.

At the same time, service providers are having to provide more for their merchants, putting more pressure on legacy players who only process payments. The weakening value proposition of today’s core competition will make it easier for software providers offering payments to get ahead.

Regulatory Changes Will Make One-Stop and “Value-Added” Payments More Important

Lawmakers continue to tighten their grip on payments in the name of protecting consumers. There are ongoing changes to the European Union’s General Data Protection Regulation (GDPR), the impending Credit Card Competition Act (CCCA) and emerging digital asset and currency regulations.

With these changes, traditional merchant recruiting could become more expensive. Unfortunately, it may become harder for payment companies with narrow revenue sources to operate profitably. Conversely, companies with diverse revenue streams — like software providers offering payments — can continue delivering a desirable payment experience, even if fees tighten or regulatory requirements become less friendly.

Strategies for Successful Entry and Long-Term Success in the Payments Market

While becoming a payment provider isn’t the right choice for every software company, the opportunity for ISVs in payments is at an all-time high. ISVs that want to enter payments should do so quickly to ensure they have a strong foothold as market trends push the space toward software-led solutions.

In the third and final part of our ISV Merchant Services 101 series, we’ll discuss the strategies ISVs can adopt to ensure success, both as they enter the market today and as they offer payment solutions to merchants in years to come.

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