With more than 40% of Americans no longer using cash for any purchases, accepting credit card payments is a must-do for modern businesses. Fortunately, companies have a range of options available as payment processing partners. Many merchants work directly with large banks to access merchant accounts; however, this isn't always the best option. Independent sales organizations (ISOs) also provide direct access to payment processing, and many of them offer better processing fees, more accessible access to customer support, and other benefits.
So, is an ISO the best option for your business's payment processing? This guide explores a complete picture of ISOs, how they work, how they compare to other payment stakeholders, how to become one, and other related topics. Whether you're a business owner considering an ISO for payment processing services or an entrepreneur wanting to start an ISO, this guide is for you!
So, what's an ISO? An independent sales organization (ISO) is a business that distributes or resells payment processing services to merchants. ISOs are like payment processing matchmakers, forging connections between merchants seeking payment processing solutions and the financial institutions that provide them. An ISO undergoes an approval process to ensure it is suitable to resell payment processing services. Once approved, it can negotiate agreements with payment processors to market its services.
While some payment processors act both as ISOs and payment processors, most ISOs don't handle any of the backend protocols involved in settling transactions. Instead, they market payment processing services, attain merchants, onboard merchants, open merchant accounts, and provide ongoing support. Many ISOs also offer hardware and software, such as payment terminals and POS software, to help merchants increase their payment capabilities.
In exchange for their services, ISOs usually receive a percentage of the future transactions processed by the payment processor. This means many ISOs benefit from recurring revenue.
The role ISOs play in the payment ecosystem varies depending on each ISO. As long as they meet basic requirements, they have autonomy in how they conduct relationships with their merchants. However, generally speaking, most ISOs work in the following manner:
Before an ISO can begin distributing or reselling payment processing, it must gain approval from a sponsoring bank and card network. To gain approval, an ISO must first set up a formal business entity, such as an LLC. Next, it must find a sponsoring bank — this sponsoring bank underwrites the ISO's payments and is therefore liable for any risks associated with its payments. Once a sponsoring bank is obtained, the ISO must register with the major card networks (Visa, Mastercard, American Express, etc.). Registering with card networks usually requires an ISO to undergo suitability and financial checks, as well as pay a registration fee.
Once an ISO has approval to operate, it's time to begin negotiating with payment processors to distribute their services. This involves negotiating agreements for payment processing rates and other service contingencies. Many ISOs work with multiple payment processors.
Once an ISO has agreements in place with payment processors, it can begin selling merchant services to businesses. This process varies depending on the ISO. Many use paid advertising, cold outreach, and other sales tactics to target new merchants.
Once an ISO signs an agreement with a merchant, it's time for onboarding. The first step will involve opening a merchant account for the merchant. Successful ISOs also provide their merchants with extensive training to ensure they can use their new payment system effectively. Likewise, many ISOs provide access to payment terminals, card readers, virtual terminals, POS software, payment gateways, and other payment acceptance tools.
Lastly, the ISO's role is to provide ongoing support to merchants. This usually involves troubleshooting technical issues, answering questions about payment processing services, and performing other general support functions. Considering that 96% of customers say customer support is important in helping determine loyalty to a brand, providing robust merchant support is a key element in an ISO's success.
As a merchant accepting credit card transactions, it's critical to understand how an ISO relates to your business. If you partner with an ISO for payment processing, the ISO is your primary connection to the world of electronic transactions. The ISO itself has relationships with acquiring banks, who handle the technical elements of the processing arrangements. Essentially, the ISO distributes the acquiring banks' services and provides support to your business. Let's dive deeper into how ISOs relate to MSPs and payment processors:
If you're searching for ISOs, you might be wondering: What is an MSP? An MSP refers to a Member Service Provider. Essentially, an MSP is the same entity as an ISO; it's just the term used by Mastercard (Visa uses ISO). So, if you ever hear these terms used interchangeably, it's because they refer to the same type of organization.
However, the acronym "MSP" is sometimes used to refer to a "merchant service provider." A merchant service provider is any business or individual providing merchant services, such as payment processing, to merchants. Essentially, all ISOs are merchant service providers, but many other entities (payment processors, POS providers, payment gateway providers, etc.) are also considered merchant service providers.
A payment processor is responsible for the backend processes involved in settling payments. It authorizes and settles funds when a customer uses a credit card to purchase goods or services from a merchant. On the other hand, an ISO resells or distributes a payment processor's services. In effect, an ISO is an independent salesperson for the payment processor: it markets payment processing services and communicates with potential clients. Likewise, ISOs provide ongoing merchant support to merchants who sign up for their payment processing agreements.
As mentioned previously, some payment processors also act as ISOs (they market their own services and provide ongoing support). However, most ISOs do not occupy the role of a payment processor or acquiring bank.
If you're a merchant seeking a payment processing partner, you may consider an ISO. While it's tempting to work directly with a bank to process payments, there are many reasons to choose an ISO instead. Let's explore the key advantages:
Banks aren't known for their flexibility. If your business partners with a bank to process payments, don't expect industry-specific tools, custom pricing plans, or any other similar benefits. The large banks in the payment processing world have millions of consumer and commercial relationships, and your business's needs won't be at the forefront of their priorities.
When you partner with an ISO, you benefit from a closer relationship with your payment processor. While flexibility varies depending on the ISO you partner with, many go above and beyond banks in terms of features, technology access, payment options, and more. For example, some ISOs work with specific industries, allowing them to provide custom payment features, industry-specific hardware, and other benefits. This includes high-risk industries, which many banks won't partner with directly.
ISOs have stronger negotiating power than individual businesses because they offer banks access to multiple merchants. This means the best ISOs often receive preferable processing rates, making it easy to pass savings onto merchants.
However, this isn't to say that all ISOs are good value. Many don't provide transparent pricing structures, making it easier for them to hide huge markups and other fees. Always compare multiple ISO payment processing fees before deciding which is best for your business.
One of an ISO's core responsibilities is providing support to merchants. Large financial institutions are notoriously slow to respond to customer requests, so working with an ISO can be a huge advantage for merchants. Many ISOs offer around-the-clock customer service to ensure their merchants always have technical support if something goes wrong. Likewise, as many ISOs specialize within specific sectors, they can provide industry-specific support to help merchants resolve issues quickly.
ISOs also offer an advantage over traditional banks in onboarding and training. You're much more likely to receive personalized onboarding if you don't work with a large bank.
The factors to consider when choosing an ISO vary depending on whether you're a business owner searching for processing or an agent looking to sell merchant services to businesses:
If you're a merchant searching for an ISO to process your payments, it's critical to prioritize the following features:
To become an independent sales agent (ISA), you need to find an ISO to work under. In most cases, ISAs are independent contractors, but it's still critical to work with a reputable ISO to ensure success. Let's explore the factors to consider when deciding which ISO to choose:
ISOs open around 80% of the merchant accounts in the United States, making them an integral and profitable element in the payment ecosystem. With so many ISOs generating great returns, you might wonder: How do businesses qualify to be an ISO?
First, register your new business — you must have a legal business entity before becoming an ISO. Next, approach sponsoring banks to ask if they will sponsor your new ISO. You need a sponsoring bank to underwrite transactions; otherwise, you won't be able to resell payment processing services. Once you obtain a sponsoring bank, you must undergo a certification process from the major card brands (such as Visa and Mastercard). This process involves checking your financial and personal suitability. You must also pay registration fees to each card brand.
Once you gain approval from a sponsoring bank and the major card networks, you can begin reselling payment processing services. However, it's also essential to build a robust merchant support infrastructure. Your ISO must be able to continue supporting its merchants. Building the sales and support systems required to be a full-scale ISO can take significant time.
An ISO agent, also known as an independent sales agent (ISA), is a payment processing salesperson who works as an independent contractor to an ISO. To become an ISA, you need to find an ISO to work under. The ISO may require you to undergo training or certifications before you can contact merchants. Once you're an approved ISA, you can sell payment processing services to merchants for a commission. As ISAs operate under the ISO's registration and approvals, there's no need to make any direct agreements with sponsoring banks or card networks. This means it's easier to become an ISA than to start your own ISO.