Payment processors vs. ISOs explained | Stripe (2024)

As the digital economy continues to expand, with 70% of customers stating they prefer digital payments, businesses need to ensure that their payment systems are as efficient and secure as possible. A variety of entities, including independent sales organizations (ISOs) and payment processors, play important roles in building and operating modern payment systems.

The right payment processing partner can facilitate seamless transactions and minimize costly errors. Payment processors can affect the speed of transaction processing, the breadth of payment options available to customers, and even the level of customer service support. And partnering with an ISO or a payment processor is not just about processing payments; they can help businesses strengthen security, improve operational efficiency, and enhance the customer experience. Below, we’ll compare these two options, enabling businesses to make an informed decision.

What’s in this article?

• What is a payment processor?
  
• What is an ISO?
  
• Payment processor vs. ISO: Differences and similarities
  
• Do ISOs and payment processors work together?
  
• Payment processor vs. ISO: Pros and cons for businesses
  

What is a payment processor?

A payment processor is a third-party company that acts as an intermediary between a business and the financial institutions involved in a transaction. It facilitates transaction authorizations and the transfer of funds from customers’ accounts to businesses’ accounts. This process often includes communicating with the cardholder’s issuing bank to ensure the payment is valid.

What is an ISO?

An ISO is a third-party company that is authorized to sell or lease payment processing services to businesses—ISOs are the intermediaries between businesses and the financial institutions that provide payment processing services. ISOs provide a range of services, including setting up merchant accounts, supplying payment processing equipment and software, working closely with payment processors, and offering customized solutions to businesses based on their specific needs. ISOs are usually paid through a commission or fee structure for the customers they bring to the payment processor or bank.

Payment processor vs. ISO: Differences and similarities

Payment processors and ISOs often work together to manage electronic transactions, but their roles are different. It’s important to understand the similarities and differences to choose the right partners for your business.

Both payment processors and ISOs play important roles in facilitating electronic payments, and their services often complement each other. They both aim for smooth, fraud-resistant transactions between businesses and their customers. And both entities must comply with the regulations set forth by the major credit card networks and financial institutions.

The two differ in their primary roles: while payment processors focus on the technical aspect of transferring and authorizing payments, ISOs are more customer-facing, working directly with businesses to set up and manage the services provided by the processors.

Payment processors are the technical intermediaries between a business, the customer’s card issuer, and the business’s bank. They handle the transaction process, including the transfer of payment information and the authorization of funds. They ensure that payments are processed securely and quickly, working behind the scenes to transfer data and funds between the customer’s bank and the business’s bank.

On the other hand, ISOs are the sales force for the payment industry. They are authorized to sell or lease the payment processing services provided by the processors to businesses. ISOs have direct relationships with businesses and often provide a range of other services, such as setting up merchant accounts, supplying payment processing equipment and software, and providing customer service.

Here’s a summary of the key similarities and differences:

Similarities

Both ISOs and payment processors:

• Play important roles in facilitating electronic payments for businesses
  
• Strive for secure, efficient transactions between businesses and their customers
  
• Must adhere to regulations set forth by major credit card networks and financial institutions
  
• Work together to provide a complete solution for a business’s payment processing needs
  

Differences

Payment processors:

• Are the technical intermediaries in the transaction process
  
• Handle the transfer of payment information and the authorization of funds between the customer’s bank and the business’s bank
  
• Mainly have a backend role, focusing on the technical aspect of transferring and authorizing payments
  

ISOs:

• Serve as the sales force in the payment industry
  
• Are third-party companies that sell or lease the payment processing services provided by the processors to businesses
  
• Work directly with businesses, providing services such as setting up merchant accounts, supplying payment processing equipment and software, and providing customer service
  
• Have a more customer-facing role, setting up and managing services for businesses
  

Do ISOs and payment processors work together?

Yes, ISOs and payment processors often work closely together, even though they have distinct roles.

ISOs are typically responsible for acquiring new business customers, setting them up with the necessary systems and equipment to accept credit and debit card payments, and providing ongoing customer service.

Once the ISO sets up a business, the payment processor handles the technical side of processing transactions. This includes transferring payment information, obtaining authorization for transactions, and ensuring the secure and efficient transfer of funds from the customer’s account to the business’s account.

In many cases, the payment processor and the ISO have a contractual relationship. The ISO acts as a reseller of the processor’s services and might receive a commission or fee for each business they bring on board.

Payment processor vs. ISO: Pros and cons for businesses

When deciding between an ISO and a payment processor for your business, it’s helpful to understand the pros and cons of each option. Here’s an overview of what each entity offers:

ISOs

Pros

• Personalized service
  ISOs are often known for providing more personalized customer service and support. They work directly with businesses and are usually able to provide customized solutions for each business’s unique needs.

• Versatility
  Since ISOs often maintain relationships with multiple payment processors, they can offer businesses a wider variety of solutions to fit their specific needs.

Cons

• Cost
  Depending on the arrangement, partnering with an ISO can sometimes be more expensive than working directly with a payment processor. The additional costs are for the value-added services they provide, such as customer support.

• Dependence on processors
  Despite their versatility, ISOs still rely on payment processors to handle transactions. If there’s an issue at the processing level, the ISO might be limited in how it can help.

Payment processors

Pros

• Cost-effectiveness
  In some cases, working directly with a payment processor can be less expensive, since you’re removing the intermediary. You may have more negotiating power in terms of pricing.

• Direct control
  Dealing directly with a payment processor allows your business to have more control over its payment processing. This could lead to faster resolution of technical issues, since you’re working directly with the source.

Cons

• Customer service
  Payment processors are typically larger companies and may not be able to provide the same level of personalized customer service that an ISO can.

• Limited options
  Payment processors may not offer the same range of services or customization options that an ISO can offer, potentially limiting a business’s flexibility to adapt its payment processing strategy to changing needs.

The decision of whether to work with an ISO or a payment processor should be based on a business’s specific needs and circ*mstances. Consider factors such as business size, business type, transaction volume, the need for personalized customer service, and budget constraints. Businesses might favor ISOs for their personalized service and versatility, especially if they require customized payment solutions. On the other hand, payment processors might be more appealing for their direct control and potentially lower costs. Ultimately, the choice should align with the business’s objectives, operational needs, and customer expectations.