In the world of merchant services, an Independent Sales Organization (ISO) plays a crucial role in helping businesses accept payments. An ISO acts as a third-party intermediary between merchants and acquiring banks, facilitating payment processing services without being a bank itself. By partnering with member banks, payment processors, and payment gateways, ISOs enable businesses to process credit and debit card transactions efficiently and securely. Understanding the function and benefits of working with an ISO is essential for any business looking to optimize its payment processing solutions.
What is an ISO?
An ISO (Independent Sales Organization) in payment processing is a third-party entity authorized by an acquiring bank to sell merchant services. ISOs typically have "buy-rates" from acquirers, meaning they can offer merchants competitive rates while still ensuring some margin for themselves. Although the costs can be low, ISOs are essentially distributors, with a minimum cost structure baked into their services. One of the key advantages of working with an ISO is the array of value-added services they provide, including proprietary software, integrations into existing platforms, payment method acceptance, and built-in security features to protect transactions.
However, a major factor to consider when choosing an ISO is customer support. Support from their ISO is often the biggest complaint among merchants. When evaluating an ISO, it’s crucial to ask whether you’ll have to call a 1-800 number and potentially wait for hours to resolve a simple issue, or if you’ll have access to a white-glove service where a dedicated Account Manager handles all your needs. This can be a game changer. Always ask to speak to an existing customer and inquire about average response times and service levels. The quality and accessibility of customer support can be the major differentiator that impacts your business long-term.
The Role of the ISO in Payment Processing
ISOs work closely with acquiring banks to facilitate payment processing for merchants. They typically negotiate rates and fees with merchants above their costs, offer various payment solutions (such as point-of-sale systems, online payment gateways, and mobile payment options), and may provide value-added services like fraud prevention tools, reporting, and analytics. ISOs earn revenue through a share of the fees charged to merchants for payment processing services.
Understanding the Payment Processing Ecosystem
To fully grasp the role of an ISO, it's essential to understand the broader payment processing ecosystem and the other key players involved:
What is an Acquiring Bank?
- Acquiring banks (also known as merchant banks) are financial institutions that partner with ISOs, payment processors, and merchants to facilitate the acceptance of credit and debit card transactions. They process transactions on behalf of the merchant and ensure that funds are transferred from the cardholder's bank to the merchant's account.
What is a Card Network?
- Card networks (e.g., Visa, Mastercard, American Express) are the organizations that operate the global networks through which card transactions are processed. They establish the rules for transaction processing, facilitate the transfer of information between acquiring banks and issuing banks, and manage the settlement of funds.
What is an Issuing Bank?
- Issuing banks are the financial institutions that issue credit and debit cards to consumers. When a cardholder makes a purchase, the issuing bank verifies the transaction, authorizes payment, and eventually bills the cardholder for the amount spent.
What is a Payment Processor?
- Payment processors are companies that manage the technical aspects of processing card transactions. They provide the infrastructure and technology that enable merchants to accept card payments, including the transmission of transaction data, authorization, settlement, and reporting. Some processors work directly with acquiring banks, while others partner with ISOs to offer their services to merchants.
What is a Payments Agent?
- Agents are individual sales representatives or small businesses that work under the umbrella of an ISO. They help recruit and sign up merchants for payment processing services, often earning commissions on the accounts they bring in.
What is an Independent Software Vendors?
- ISVs develop and sell software applications that include integrated payment processing functionality. They partner with payment processors and ISOs to offer merchants seamless payment solutions within their software products, such as accounting software with built-in invoicing and payment capabilities.
What is a Merchant of Record?
- The merchant of record is the entity responsible for processing transactions and managing the funds from customer payments. In many cases, this is the business itself, but in some models (like marketplaces or subscription platforms), it might be a payment facilitator or another entity that manages payments on behalf of multiple sub-merchants.
What is a Payment Facilitator?
- PayFacs simplify the payment process by allowing sub-merchants to accept payments without needing their own merchant account. PayFacs take on the responsibilities of underwriting, onboarding, and managing sub-merchants, while providing them with access to payment processing services. This model is often used in platforms that serve multiple small businesses, like e-commerce marketplaces.
What is a Merchant Services Referral Partner?
- Referral partners are individuals or organizations that refer merchants to ISOs or payment processors. They earn a referral fee or commission for each merchant they successfully refer that signs up for payment processing services.
What is a Payment Processing Partner?
- Partners in the payment processing ecosystem can include a wide range of entities, such as technology providers, financial institutions, and service providers that collaborate with ISOs, payment processors, and merchants to enhance the overall payment experience. They may offer complementary services like fraud detection, data analytics, or customer support.
Understanding Independent Sales Organizations (ISOs)
An Independent Sales Organization (ISO) is a third-party company that refers merchants to payment service providers, helping them accept credit cards and other electronic payments. ISOs operate independently but maintain relationships with acquiring banks and payment gateways. These organizations, whether companies or individuals, use their partnerships with acquirers and gateways to offer various services, including setting up and maintaining a merchant's payment processing system.
Once an ISO signs your business up to accept credit cards on behalf of acquiring banks, the ISO typically earns a commission. They may also charge your business a percentage of each transaction or a monthly service fee. While ISOs are not acquiring banks themselves, they play a vital role in ensuring that the payment processing system runs smoothly.
Is an ISO a Payment Processor?
While structured differently, ISOs can work with multiple payment processors and may offer additional services. In terms of payment processing, the end result for your business is similar to working with a direct payment processor. ISOs handle credit card processing and other payment functions for many businesses, making them an integral part of the payment processing ecosystem.
It’s important not to confuse ISOs with ISO 20022, a messaging standard for financial communication, which is unrelated to business payment processing.
ISO vs. PayFac: What’s the Difference?
An ISO is a third-party company that refers merchants to acquiring banks or payment service providers. They typically work with a variety of acquiring banks, using those relationships to "resell" merchant accounts to merchants. Some ISOs also take an active role in facilitating payments.
A PayFac (Payment Facilitator), on the other hand, has a single account with an acquiring bank and assumes the liability for the merchants processing under that account. Unlike ISOs, which act as intermediaries, PayFacs function more like mini payment processors, offering sub-merchant accounts to businesses and taking on greater risk, including managing disputes and chargebacks.
The primary advantage of using a PayFac over an ISO is that the PayFac takes on the associated risks and losses, offering a more streamlined and faster onboarding process for merchants.
ISO vs. MSP: Are They the Same?
ISOs and MSPs (Member Service Providers) are often discussed together because they are very similar entities. The main difference is that Visa refers to its approved merchant account providers as ISOs, while Mastercard prefers the term MSP. However, in practice, ISOs and MSPs function similarly, and the terms are often used interchangeably.
ISO vs. Agent: Understanding the Differences
In the payment processing ecosystem, both ISOs and agents play crucial roles in helping businesses accept payments, but their responsibilities and structures are distinct. Understanding the difference between an ISO and a payment processing agent can help you make more informed decisions about your payment processing needs.
What is a Payment Processing Agent?
A payment processing agent, also known as a sales agent or independent sales agent, is an individual or a small team that works on behalf of an ISO to market and sell payment processing services to merchants. These agents act as intermediaries between the ISO and the merchant, helping businesses find the right payment solutions to meet their needs.
Payment processing agents are typically responsible for:
- Merchant Acquisition: Agents identify and reach out to potential merchants, educating them about payment processing options, and guiding them through the process of selecting a payment provider.
- Account Setup: Once a merchant agrees to work with the ISO, the agent assists in setting up the merchant account, ensuring that all necessary paperwork and processes are completed smoothly.
- Ongoing Support: Agents often provide ongoing customer support, acting as the first point of contact for merchants who have questions or need assistance with their payment processing services.
ISO vs. Agent: How They Work Together
While ISOs are larger organizations that have direct relationships with acquiring banks and payment processors, agents are more focused on sales and customer interaction. Here's how they differ:
- Role and Responsibility: ISOs are responsible for managing the relationships with banks, negotiating processing rates, and ensuring compliance with industry regulations. Agents, on the other hand, are focused on merchant acquisition and customer support, working to expand the ISO’s merchant base.
- Relationship with Banks: ISOs have formal agreements with acquiring banks, allowing them to offer payment processing services to merchants. Agents do not have these direct relationships; instead, they leverage the partnerships established by the ISO to bring in new business.
- Revenue Structure: Both ISOs and agents typically earn revenue through commissions. ISOs earn a commission on the transactions processed by the merchants they sign up, and agents earn a portion of this commission for each merchant they bring to the ISO. In some cases, agents may also earn a recurring monthly fee based on the merchants’ transaction volume.
- Independence: Agents are usually independent contractors who work under the umbrella of an ISO but operate their own businesses. This independence allows agents to work with multiple ISOs if they choose, though many prefer to establish a long-term relationship with a single ISO.
The Value of Agents for Merchants Using USB Drives
For merchants, working with a payment processing agent can offer several advantages:
- Personalized Service: Agents often provide a more personalized approach, taking the time to understand the specific needs of the merchant and recommending tailored payment solutions.
- Local Presence: Many agents operate within specific regions or communities, giving them a better understanding of local market conditions and customer preferences.
- Quick Response: Because agents are often the first point of contact, they can provide quick responses to questions and issues, helping merchants resolve problems more efficiently.
Conclusion: Choosing Between an ISO and an Agent
When deciding whether to work directly with an ISO or through a payment processing agent, consider the level of service and support your business needs. If you value a more personalized, hands-on approach, working with an agent may be beneficial. However, if you prefer to handle everything directly with a larger organization, working with an ISO might be the right choice.
Regardless of the path you choose, both ISOs and agents play vital roles in ensuring your business can process payments effectively and securely.
Benefits of Working with an ISO for Installation Files
There are several reasons why your business might consider partnering with an ISO:
- Simplified Payment Processing: ISOs handle the complexities of payment processing, eliminating the need for merchants to manage various tasks themselves. They assist with setting up payment gateways, configuring software, and ensuring compliance with payment-related security requirements.
- Speedy Setup: ISOs can set up merchant accounts more quickly than applying directly with a payment service provider, making them ideal for startups and businesses looking to switch processors seamlessly.
- Greater Flexibility: By partnering with multiple acquirers or processors, ISOs offer businesses the flexibility to accept a broader range of payment methods, attracting more customers.
- Competitive Pricing: ISOs often negotiate better pricing on payment processing services, helping businesses reduce costs and increase profit margins.
- Increased Security and Compliance: ISOs ensure that payment processing services are secure and compliant with industry regulations, protecting customer payment information and reducing the risk of fraud.
Drawbacks of ISOs for Bootable Discs
While there are many benefits, there are also some potential drawbacks to consider:
- Less Control: ISOs do not handle payment processing themselves, which might result in less control over your merchant account compared to working directly with a payment service provider.
- Potential Increase in Costs: ISOs charge for their services, usually taking a commission on each transaction. Depending on your business, this could result in higher costs compared to direct relationships with acquirers.
Learning More About ISO Operations in Operating Systems
ISOs/MSPs can also recruit sales agents to help sign new merchants. Additionally, ISOs can sign other ISOs under themselves. These agents must introduce themselves as representatives of their ISO/MSP and are not allowed to advertise their own business names as service providers.
This structure allows each organization to focus on its strengths, ensuring customers receive the best possible service.
Swipesum helps businesses find the best payment solutions. Our experts consider price, service quality, and your unique business needs. We help eliminate credit card processing fees, negotiate contracts, monitor fees, and optimize payment workflows.
