Integrated software vendors (ISVs) have become significant players in shaping the future of payments and commerce. They are increasingly popular among small and medium-size enterprises (SMEs) in the United States, where adoption of ISV solutions exceeds 90 percent.1 As merchants increasingly rely on software-driven solutions to manage operations, the ISV channel has evolved from a niche distribution layer into a core piece of the payments industry: ISVs are transforming their business models, expanding into new functional domains, and redefining their relationships with acquirers and banks.
This article introduces a new lens for understanding how the ISV market evolves in three stages. Each stage of ISV maturity reflects a distinct stage in terms of adoption, vertical focus, and ecosystem integration:
- Stage 1: Early adoption. ISVs emerge and establish their initial market fit. This stage typically involves up to 10 percent adoption in one to two verticals.2
- Stage 2: Scaling and segmentation. ISVs gain traction, specialize by vertical, and expand their reach. Typically, adoption reaches 10 to 30 percent, and strategic go-to-market partnerships are established.3
- Stage 3: Consolidation and maturity. ISVs support core infrastructure, power growth, streamline operations, and link merchants, partners, and payments providers. Adoption exceeds 30 percent, and some ISVs operate as payments facilitators.4
Using this framework, which quantifies adoption rates, margin shifts, and the reusability of infrastructure in different markets, industry players can assess their markets and identify when—and how—to accelerate growth. For instance, our analysis shows that the US market has entered stage 3 approximately six to eight years ahead of Europe.
The size of the ISV market, defined by the acquiring and processing revenue generated from transactions flowing through ISVs’ software solutions, has expanded significantly in recent years. In the United States, payment-processing revenue through ISVs has grown at 20 percent a year for the last five years. At this pace, revenue is projected to reach $16 billion in 2025, up from $6.5 billion in 2020, representing about 60 percent of the total acquiring payments revenue available from SMEs.5 In Europe, ISV revenues have grown at a similar rate from a smaller base and are expected to reach $3 billion in 2025, which would account for 30 percent of the available SME acquiring payments revenue.6 McKinsey research shows that the ISV channel is growing three times as fast as traditional channels.7
To assess the extent to which SMEs—defined as those with annual revenues of less than $10 million—have adopted ISVs, McKinsey in 2025 conducted a survey of more than 1,500 SMEs in the United States and select European markets (France, Italy, Spain, and the United Kingdom).8 The findings reveal a stark difference in uptake: Roughly 90 percent of US merchants report using an ISV solution for payments or business management, up from 48 percent in 2022, whereas the average across the European countries is just 23 percent (Exhibit 1).9 Among the European markets, adoption is higher in the United Kingdom and France, than in Italy and Spain.
Smaller merchants are far more likely than larger ones to adopt ISV platforms. For instance, in the United Kingdom, about 45 percent of small merchants (those with an annual revenue below £750,000) use ISVs, compared with less than 15 percent of larger merchants.10
The market expansion has coincided with a steady evolution in the sophistication of ISVs’ products. Early ISVs offered core payments acceptance along with related software modules like basic reconciliation, reporting, and simple bookkeeping. Over time, however, ISVs have shifted to a commerce enablement proposition. In this model, an ISV acts as a comprehensive, all-in-one business platform, allowing merchants to manage nearly all aspects of their operations through a single integrated solution. These expanded capabilities make ISV solutions more essential, increasing merchant loyalty and significantly enlarging their market for monetization.
Key trends in the ISV market
ISVs continue to shape the payments industry as they expand into more regions and sectors, integrate financial and back-office services, and increasingly adopt the payment facilitator (PayFac) model to capture a larger share of payments revenue.
The expanding ISV market
Facing an increasingly crowded competitive environment in their core verticals, ISVs are pursuing several expansion strategies to sustain growth and defend their market position. These strategies may involve serving new verticals, new geographies, or larger merchants.
Vertical expansion
Vertical expansion involves entering new or adjacent industry niches. In less developed markets, such as in Europe, suitable niches might be underserved by leading ISVs or incumbents. For example, fintech ISV adoption in European consumer health and healthcare is 20 percent (Exhibit 2). Most providers still rely on incumbents or basic card terminals, and many small clinics and wellness practitioners lack integrated scheduling, patient intake, invoicing, or recurring-billing tools. In more mature markets such as the United States, there are opportunities in sectors served by generalist ISVs with limited vertical-specific features. For instance, US liquor stores frequently use general POS systems that lack compliance workflows, age-verification tools, and detailed SKU management.11 Success requires providing additional vertical-specific features, as well as value-added services like embedded financing, analytics, and CFO integrations. Timing is key; early movers can secure a long-term advantage by establishing themselves quickly in an untapped or underserved vertical.
Branching into new verticals is challenging and requires deep domain knowledge. Leading ISVs focus on the largest segments, so expansion-minded providers must contend with entrenched, specialist competitors in many niches. Success hinges on being selective and targeting middle-ground verticals—those large enough for growth but small enough to avoid attracting major incumbent attention. In the United States, for example, sectors such as hospitality and entertainment, professional services like law or accounting, and lifestyle businesses like spas, salons, and gyms are often attractive candidates. To compete with existing solutions requires clearly differentiating features or services, such as easier access to capital. Stronger distribution can also be a winning factor for players that have deep local coverage.
Geographic expansion
Many ISVs are trying to expand beyond their local markets but find it challenging. Countries have unique payment systems, such as local card schemes and popular alternative payment methods. They also vary in their preferred distribution channels (direct sales, bank partnerships, or independent sales organizations), as well as in language, cultural norms, and regulatory requirements. Often, ISVs can reuse only part of their platform—say, 60 to 70 percent—in a new country.12 The remainder must be adapted or built for local needs—for instance, to integrate with domestic payment networks, comply with data and security laws, or align with local business practices.
So far, even top US ISVs have experienced limited international success. Most concentrate on markets such as Canada, the United Kingdom, and Western Europe, where they compete against established local players.13 ISVs need a go-to-market strategy for each location, which may include partnering with local banks or distributors. Developing brand recognition and establishing distribution channels is expensive and often entails slow growth and a lengthy path to profitability.
Segment expansion
Another key growth strategy for ISVs is moving upmarket to serve larger merchants and chain enterprises. Many are actively targeting midsize chains. Square, for example, increased its share of merchants with over $500,000 in annual payments volume from 37 percent to 40 percent between the fourth quarter of 2021 and the fourth quarter of 2023.14 Such an approach enables ISVs to expand on existing platforms by adding advanced features required by larger operations, such as application programming interface (API) integrations with enterprise resource planning systems, omnichannel order management, and financial reporting tools.
Serving larger clients involves trade-offs. Bigger merchants require more customized solutions, and their greater bargaining power results in thinner margins. These companies often prefer to use their own acquiring contracts, bypassing the ISV’s standard percentage-based payment revenue. Additionally, they often avoid ancillary financial services like merchant cash advances or loyalty programs by securing capital and services more cheaply from banks. The net result is that, although onboarding enterprise clients greatly increases total payment volume, the much lower revenue per client reduces an ISV’s overall profitability.
Therefore, ISVs must weigh the growth and prestige of the upmarket segment against the potential drag on profitability. A common strategy is to pursue a balanced approach: maintaining a focus on the higher-margin SME base while selectively adding larger customers with tailored pricing and separate reporting segments.
Along every expansion path, success hinges on strategic focus and timing. These strategies—vertical, geographic, and segment expansion—require more planning and implementation effort than many players initially anticipate. Therefore, many ISVs supplement organic efforts with M&A to expand into verticals or acquire new capabilities.
Entry of ISVs into financial management
ISVs are expanding from point-of-sale (POS) systems into the back office, where they are offering value-added services (Exhibit 3). Originally, ISVs added value by integrating payments into core operational tools for specific industries, such as restaurant software for table management, ordering, and inventory. Although this was effective, ISVs now have a greater opportunity to support their merchants’ broader business and financial processes. Leading ISVs are embedding advanced financial and administrative tools, including automation of accounts payable and receivable, SME lending, invoice and tax management, payroll, corporate cards, and CFO-like reporting. Tasks that previously required specialized stand-alone software are increasingly available inside the ISV platform, often through API integration or white-label partnerships with fintech providers.
This expands the ISV’s revenue potential and broadens its value proposition to merchants. At $120 billion, the market for SME financial management services in the United States is far greater than the traditional transaction income from acquiring providers.15 Therefore, this strategic move enhances ISVs’ value proposition to merchants and increases their own revenue potential.
Also, back-office services dramatically increase customer lifetime value and loyalty. As a result, ISVs are evolving from POS vendors to providers of central hubs for their clients' commerce and financial management.
Accelerating the shift to the PayFac model
Another structural change is redefining how ISVs interact with the traditional payments value chain. Larger ISVs are increasingly opting to become payment facilitators (PayFacs). As PayFacs, ISVs can directly onboard merchants and manage payment processing, compliance, and other steps in the value chain. This fundamentally alters the ISV’s relationship with merchant acquirers to increase revenue and take more control of the merchant experience.
The model’s appeal lies in its superior economics and autonomy. Traditional partnerships restrict ISVs to 30 to 50 percent of processing revenue; a PayFac’s share is 70 to 90 percent.16 The ISV moves up the value chain by capturing the acquirer’s margin (after wholesale processing and network costs). This status also provides flexibility in pricing, onboarding, and user experience (UX) design. ISVs can customize pricing tiers, simplify the entire sign-up and underwriting process, and create a more seamless product with fewer partner handoffs.
However, the full PayFac model entails increased operational activities and risks and is not suitable for all ISVs. The choice depends on payment volume, regulatory complexity, and vertical economics. Many prefer a “PayFac lite” model, where they handle some tasks, such as onboarding, while a partner remains the merchant of record. Meanwhile, PayFac-as-a-service (PFaaS) platforms are reducing entry barriers. These providers charge fees or take revenue shares, giving midsize ISVs a way to improve their economics without costly in-house development.
For acquirers, this trend is a double-edged sword. A PayFac-bound ISV shifts from partner to competitor, keeping more revenue. Acquirers without a clear ISV strategy risk disintermediation and margin erosion. Adaptive acquirers, however, can stay relevant and gain share in the SME segment by taking on new roles: as infrastructure providers, PFaaS enablers, or developers of proprietary ISV solutions.
By shifting from a pure referral model to a PayFac model, a platform can gain greater visibility and control over merchant relationships and data, own a larger share of the merchant experience, tailor its products and pricing, and capture a larger share of the revenue.
Implications for payments players
The implications of these trends vary widely among geographies because ISV markets around the world are at different stages of maturity, ranging from nascent to highly evolved (Exhibit 4). To craft the right strategy, participants must first assess the market using three key indicators of market maturity:
- ISV share of SME volumes. The proportion of small and medium-size businesses’ total payments volume or revenues supported by ISV solutions shows how extensively ISVs have integrated into the merchant base and become part of daily operations. A high ISV share of SME volume or revenue indicates a more mature market.
- Vertical concentration of ISVs. Early on, ISV adoption tends to be concentrated in a few sectors, such as food service and hospitality. As the market matures, ISVs expand into a broader range of sectors.
- Depth of bank–PSP partnerships. The extent of partnerships between ISVs and major banks or payment service providers (PSPs) changes as the market matures. In the initial stages, ISVs operate with little or no involvement from incumbents. Deep, well-established alliances, such as distribution deals or white-label arrangements with banks, are a sign of a mature ecosystem.
Using these indicators, we can diagnose the stage of a given market (Exhibit 4). For instance, a market with 5 percent payments volume penetration and high vertical concentration is likely in stage 1, while a market with 30 percent penetration and emerging bank alliances points to stage 2.
Exhibit 4
Categorizing ISV markets into three stages can guide strategies for incumbents and challengers.
| Maturity metric | Stage 1 (eg, much of Continental Europe) | Stage 2 (eg, Nordics, UK) | Stage 3 (eg, Canada, US) |
| ISV adoption | Low (<10% of SME volume) | Meaningful (10–30% of SME volume) | High (>30% of SME volume) |
| Vertical focus | High concentration in 1–2 verticals | Expanding into 4+ key verticals | Broad-based, sector-specific leaders |
| Bank partnerships | None/nascent, often adversarial | Emerging strategic go-to-market partnerships | Deeply integrated, infrastructure based |
| ISV strategy focus | Market education and building MVP | Vertical leadership and scaling partnerships | Consolidation, maximizing lifetime value, PayFac |
The United States has entered stage 3 and is approximately six to eight years ahead of other countries.17 ISV penetration rates are high, there is broad adoption in many merchant verticals, and ISVs have established strong partnerships with banks and other industry players. A typical small merchant in the United States today is likely to be using one or more ISV-provided systems for core operations. ISVs are an integral part of the SME payments and business infrastructure, and a few big players are scaling up and maximizing the value per customer through expanded services and PayFac models.
Europe presents a more mixed picture. Some European markets remain in stage 1, where ISVs have low overall penetration, and spend much of their effort on educating merchants, building awareness, and proving the model’s value. Other parts of Europe, such as the Nordics and the United Kingdom, have advanced to stage 2. In these regions, ISVs have gained traction in specific verticals—for example, point of sale in UK retail and hospitality SMEs. In stage 2, ISVs are also beginning to scale up through deeper partnerships with acquiring banks and local payment channels. However, sizable segments still rely primarily on legacy solutions.
The three-stage maturity model applies worldwide, with varying degrees of acceleration and leapfrogging. In high-growth countries in South America and South Asia, the ISV market is often in an accelerated stage 1 or early stage 2, marked by high mobile adoption and the widespread use of embedded finance, which has frequently bypassed traditional POS systems altogether. Meanwhile, other regions in Asia are experiencing a highly digital stage 3, where payment systems are driven not just by ISVs but also by super apps that set a new standard for commerce enablement and financial integration.18 Knowing a market’s stage of development is critical for crafting the right strategy.
Implications for first-stage markets
Early-stage markets, such as continental Europe, present a unique opportunity for ISVs to define merchant expectations from the outset. The strategy requires establishing a beachhead by focusing on a single, underserved vertical, building scalable, cloud-native infrastructure that supports rapid lateral expansion. By embedding payments, finance, and operational modules from day one, ISVs can leapfrog the incremental evolution seen in the United States, provided they adapt swiftly to local payment methods, regulations, and go-to-market channels.
For traditional acquirers, early-stage markets are about locking in volume. They can secure processing by establishing referral models with ISVs and becoming the default ISV enabler. This gives them the benefits of being an early mover while allowing them to offer turnkey PayFac infrastructure and integration support. Alternatively, they can build or acquire their own ISV solutions to lock in economics before third parties scale up. Crucially, early engagement allows acquirers to influence technical standards, commercial models, and market segmentation.
Banks face the risk of disintermediation from SME relationships in the medium to long term. Preserving relevance requires partnering with ISVs to integrate financial services—such as lending, deposits, reconciliation, and treasury—directly into software platforms. By integrating early, banks remain the backbone of SME financial flows while allowing ISVs to own the user experience.
Implications for second-stage markets
Stage 2 markets, like the Nordics and the United Kingdom, present significant upside but demand focused sequencing. ISVs must first double down on core verticals to establish clear leadership, perfecting product-market fit and deeply embedding payments. With the core secured, they can expand into adjacent verticals, such as from restaurants to bars, or to similar markets in other geographies. Key growth levers include smarter use of transaction data, scalable digital sales and onboarding, and strategic partnerships with banks or large distributors.
For legacy acquirers, these markets offer a critical window to shape future outcomes. Acquirers can partner early with promising ISVs—offering best-in-class APIs, white-label solutions, and go-to-market support—to become the preferred processor and jointly invest in marketing and go-to-market programs to accelerate adoption. Simultaneously, they can pursue hybrid strategies, partnering in some segments while building or acquiring proprietary solutions in others. Delay is costly; once ISVs secure the merchant relationship, acquirer influence rapidly diminishes.
Implications for third-stage markets
In mature markets like the United States, ISVs should prioritize profitable, sustainable growth over expansion. As industry consolidation continues, leading players can use M&A strategically, focusing on complementary vertical capabilities or tuck-ins that enhance functionality. When organic growth slows, they can invest capital in defensible strategies such as vertical expansion and platform improvements rather than speculative ventures. With pricing pressure rising, efficiency and monetization of existing customers are crucial levers. Cross-selling value-added services—such as automation of accounts payable and receivable, payroll, and tax tools—is a powerful way to generate additional high-margin revenue.
For larger ISVs, transitioning entirely to the PayFac model to manage pricing and the merchant relationship can allow them to maintain margins and develop distinct, full-stack platforms.
Meanwhile, legacy SME acquiring models face structural pressure that may lead to consolidation and M&A among processors and ISV aggregators. To prevent margin erosion, acquirers must redefine their role by offering value-added services such as advanced data and analytics, loyalty programs, and omnichannel capabilities, distributed through ISVs. They also need to provide enabling infrastructure, such as PayFac-as-a-service or shared-risk models, to allow ISVs to handle the front end while maintaining their back-end role.
Additionally, acquirers should rethink their partnerships, shifting away from independent sales organizations and referral models toward joint propositions that combine ISV distribution with their scale. Those that continue selling stand-alone acquiring will steadily lose share to software-led bundles.
In every market, the evolution of ISVs is a disruptive force and an opportunity. Mature markets will likely experience more consolidation among ISV players and a shift to models where ISVs control more of the payments value chain. Midstage markets will go through a period of rapid growth, with ISVs expanding and forming strategic partnerships with incumbents or peers to expand their reach. Early-stage markets can leapfrog by utilizing modern cloud infrastructure and embedded finance from the beginning to quickly align with global best practices.
Success for all players—ISVs, acquirers, and banks—will depend on understanding which stage their market is in and adjusting strategies accordingly. Those that anticipate the next stage of maturity and proactively align their business models early will be best positioned to capture value and shape the next era of commerce. In contrast, those that react late or cling to legacy approaches risk losing relevance in the rapidly changing SME segment.
