To understand what type of merchant services suits your startup or business, you must be familiar with the various payment service providers, such as banks, acquirers, merchant services providers (MSPs), independent agents, independent sales organizations, or ISO.

This guide explores Independent Sales Organizations (ISOs), explaining their functions, importance, and how they can benefit your business. Learn the essentials of working with ISO to optimize your payment processes effectively.

What Is an Independent Sales Organization in Merchant Services?

Independent Sales Organizations (ISOs) are third-party companies that work with acquiring banks to offer merchant services, such as processing debit and credit card transactions. ISOs are not directly connected with card networks like Visa or MasterCard, but they are important in payment processing. These organizations serve as go-betweens for merchants and banks, providing services like establishing merchant accounts, supplying point-of-sale (POS) equipment, and offering customer support. ISOs enable businesses to process card payments through their partnerships with acquiring banks, which is vital for contemporary commerce.

ISOs are equipped with their own technologies and sales teams and often operate independently. They determine their processing fees and offer various merchant services. They earn revenue by selling and leasing hardware and software and through a share of transaction fees.

ISOs can deliver comprehensive services because they form necessary partnerships, particularly with acquiring banks. Acquiring banks are authorized to set up merchant accounts for businesses to accept and receive funds from credit card transactions. While some third-party processors use shared merchant accounts, having a dedicated account is often crucial.

The main benefits of working with ISOs include their high-quality service, advanced technology, and competitive pricing.

How Does an ISO Fit Into the Payment Processing?

Understanding the role of an ISO in the payment process involves recognizing how these entities interact with other payment system participants. Here’s a more detailed look at these interactions:

Card Associations

Card associations such as Visa, Mastercard, Discover, and American Express are responsible for setting interchange fees, providing infrastructure for issuing cards, and facilitating communication with acquiring banks. ISOs must secure approval from these associations to provide payment processing services to merchants.

Member Banks

Acquiring banks, also known as member banks, are financial institutions authorized to process credit card transactions via specific card associations. ISOs collaborate with these banks to market payment services on the bank’s behalf.

Merchants

Merchants need a merchant account, usually established with an acquiring bank, to process credit card payments. This account facilitates the transfer of funds from cardholders to the merchant’s account.

In short, ISOs utilize their relationships with banks, processors, and card brands to streamline the merchant onboarding process to their payment systems.

Who Can Become an ISO?

To become a registered ISO, an organization must complete a detailed vetting process to meet industry standards and regulations. Here are the general steps involved:

• Establish a Legal Business Entity: Create a formal business structure, such as a corporation or limited liability company (LLC), and obtain the required licenses and permits to operate within the law.
• Secure a Sponsoring Bank: Partner with an acquiring bank affiliated with major credit card networks like Visa or Mastercard. The sponsoring bank will support the ISO’s activities and take responsibility for the processed transactions.
• Register with Card Associations: Undergo the registration process with credit card networks, which requires demonstrating financial stability and regulatory compliance. This stage often involves paying registration fees and following specific guidelines.
• Implement Compliance Measures: Comply with necessary regulations, including the Payment Card Industry Data Security Standard (PCI DSS), and set up strong security protocols to safeguard sensitive information.
• Develop Customer Support and Technical Infrastructure: Establish systems to support merchant clients, including employing staff or engaging third-party service providers.

Not all ISOs operate in the same capacity. A registered ISO has completed the required registration and sponsorship steps by acquiring banks and card associations, which enables them to operate independently and recruit sub-agents. On the other hand, an unregistered ISO typically works as a subcontractor for a registered entity and cannot recruit sub-agents.

MSP vs. ISO: Clarifying the Thin Line Between Them

In the payment processing industry, the ISO and Member Service Provider (MSP) are often used interchangeably, as they refer to the same type of entity, though major credit card networks use the terms differently.

Visa refers to its authorized merchant services account providers as ISOs. Mastercard, on the other hand, labels them as MSPs. Despite these differing labels, both MSPs and ISOs serve the same role: they act as intermediaries between merchants and acquiring banks, helping handle payment transactions.

Why Consider Working with an ISO?

You might wonder why you should work with an ISO instead of dealing directly with a bank. It might seem more straightforward to bypass intermediaries, but there are significant advantages to using an ISO.

• Streamlined Payment Processing

ISOs simplify the payment process by working with providers to manage details like setting up payment gateways, configuring software, and ensuring security and compliance. This delegation allows businesses to concentrate on their main activities instead of the complexities of payment systems management.

• Faster Account Setup

Setting up a merchant account through an ISO can be quicker than doing so directly with a bank. This speed is particularly beneficial for new companies that need to accept electronic payments quickly and for established companies that want to change their payment processors without delay.

• Greater Flexibility

ISOs often work with various acquirers or payment processors, which lets businesses accept a wider array of payment methods such as credit and debit cards, mobile payments, and digital wallets like PayPal and Apple Pay. This ability to offer multiple payment options can help attract customers who have specific preferences.

• Better Pricing

ISOs can negotiate lower rates for payment processing services, which may help reduce costs and increase business profit margins.

• More Available Support

ISOs usually provide more responsive and personal customer support than larger financial institutions. Because of their smaller size, ISOs can deliver dedicated help, fostering stronger relationships and providing timely assistance for payment processing issues. This support helps merchants maintain effective payment systems and troubleshoot problems quickly.

When Does Collaboration with an ISO Fall Short?

When considering ISO payments for your business, it’s important to be aware of several potential disadvantages:

• Limited Control

ISOs operate as middlemen between merchants and payment processors, leading to reduced control over payment processing activities. This setup often causes delays in resolving issues and offers fewer customization options than direct partnerships with processors.

• Increased Costs

ISOs generally derive their income from commissions or fees per transaction. Although they might provide competitive pricing, the additional intermediary can increase overall costs, particularly for businesses with large transaction volumes. It is important to determine if the services offered by the ISO are worth these potential extra costs.

• Dependence on Third Parties

Because ISOs depend on external payment processors, problems at the processor level can adversely affect business operations. This reliance can restrict the ISO’s ability to handle issues swiftly, which might influence transaction processing and customer satisfaction.

• Potential for Hidden Fees

There is also a risk of encountering hidden fees with some ISOs. These could include setup fees, monthly minimums, or cancellation fees, adding to the overall cost of the service. It is vital to carefully examine and understand all fees related to an ISO before committing to a contract.

• Variable Service Quality

The quality of customer service from ISOs can be inconsistent. While some provide excellent support, others may not be as effective or knowledgeable. Poor support can extend downtime during technical issues, negatively affecting your business operations.

How to Evaluate an ISO for Your Business?

When evaluating an ISO for your business, it’s essential to consider several key factors to ensure a beneficial partnership:

• Industry Relationships: An ISO with established connections to acquiring banks and payment processors can offer competitive rates and a broader range of services. These relationships often translate to better support and more efficient transaction processing.
• Technology Capabilities: Assess the ISO’s technological infrastructure. A provider with advanced, secure, and scalable technology can handle your current payment processing needs and adapt to future growth. This includes compatibility with various payment methods and integration with your existing systems.
• Service and Support: Reliable customer service is crucial. Ensure the ISO offers prompt and knowledgeable support to address any issues that may arise, minimizing potential disruptions to your business operations.
• Compliance and Security: Verify that the ISO adheres to industry standards and regulations, such as PCI DSS compliance, to protect sensitive payment information and maintain the integrity of your transactions.
• Pricing and Fees: Understand the fee structure, including transaction fees, setup costs, and any additional charges. Transparent pricing helps you assess the overall cost-effectiveness of the services provided.
• Reputation and Track Record: Research the ISO’s history and reputation in the industry. Client testimonials and reviews can provide insight into their reliability and performance.

Conclusion

ISOs play a vital role in the payment processing industry, offering businesses a practical way to manage electronic transactions. By acting as intermediaries between merchants, acquiring banks, and card networks, ISOs simplify the complexities of payment systems and provide flexible, scalable solutions tailored to various business needs.

However, selecting the right ISO requires careful evaluation. Consider factors like service quality, pricing transparency, technological capabilities, compliance measures, and industry relationships. While ISOs offer significant benefits such as streamlined account setup, diverse payment options, and responsive customer support, weighing these advantages against potential downsides, including increased costs and reliance on third parties, is essential.

Understanding how ISOs fit into the payment ecosystem and assessing their value to your business can lead to more informed decisions, ultimately helping optimize your payment processes and support your business’s growth.

Frequently Asked Questions