To the average outsider looking in, the payments industry can seem opaque. The opacity can act as a barrier to entry to entrepreneurial-minded people looking to seize on the opportunity card payments represent in today’s increasingly digital world. Independent sales organizations are arguably the easiest path into the industry for both outsiders looking to break in and insiders looking to strike out on their own. If you’re a would-be ISO looking to begin selling payment processing, learning the ins-and-outs of the revenue-side of the game is a great place to start. With that in mind, the following is a brief crash course outlining the role ISOs play in the world of payments and how they earn money for performing it. 

 

Where ISOs Fit Into the Payments Ecosystem

Before we can get into the details of how ISOs generate revenue, we need to understand exactly what they do and where they fit into the overall payments ecosystem. ISOs make money in a number of different ways, but first and foremost, ISOs are middlemen that sell services to merchants on behalf of payment processors. 

Simply put, there are millions and millions of merchants across the globe, and a much smaller number of payment processors. It would be impossible for the processors to recruit or serve all of their merchants directly, so ISOs take up the slack and spread the load. ISOs and their independent agents find and recruit new merchants and then “onboard” those merchants to one of their payment processing partners. The processor then handles the risk assessment on each merchant (normally) and the infrastructure that enables the secure transmission of payment data.  The ISO often maintains responsibility for ongoing customer support, but in some cases, even that is passed on. 

In addition to selling processing services, many ISOs also provide value-added products and services designed to help their merchants do business more effectively, including the hardware and software necessary to facilitate the actual entry of card payments online and in-store. 

 

How ISOs Get Paid

The vast majority of ISOs make money in three primary ways: residuals on transaction fees, software and service resale, and payment hardware leasing. There are other value-added services some ISOs offer to generate novel revenue streams, but those three are where most average ISOs make their money. Each offers a recurring monthly revenue source that, taken sale-by-sale, may seem insignificant. But, added up across an ISO’s entire portfolio of hundreds or potentially even thousands of merchants, the numbers compound quickly, making payment processing a potentially extremely lucrative industry. 

 

Residuals on Transaction Fees

The primary source of revenue for most ISOs is the residuals they earn on their merchants’ transactions. Every time a card payment is processed online or in-store, a transaction fee is charged. The transaction fee starts at the card companies, who charge what’s known as the “interchange rate” – the floor fee for any given transaction, set by merchant industry and card type. On top of that floor, every other player involved in the transaction charges a small markup, from the payment processor all the way through to the ISO, and potentially even the merchant. 

When a card payment is made, the processor charges the total fee and pays out the ISO their tiny slice of the pie – their residual. And, in this case, tiny means tiny – the ISO’s share of each transaction is generally well under 1%. Making a fraction of a dollar on every hundred dollars of merchant sales might not sound like a great business model. But the tiny fraction is applied across dozens, hundreds, or thousands of merchants each doing thousands, hundreds of thousands, or even millions of dollars in business each year. Whenever an ISO signs a new merchant, they own the residual for the lifetime of that merchant’s sales with the processor, making those tiny fractions of each transaction extremely valuable over the long run. 

 

Payment Hardware Leasing

Merchants doing business in-store need hardware to enable their customers’ card payments, and many ISOs provide it as a value-added service. Merchants can purchase their hardware outright, with the ISO acting almost as a retailer. In many cases, hardware is leased to both minimize upfront costs and allow for easy upgrades as payment technology changes. 

At the very least, merchants need a payment terminal to enable card payments. Modern EMV standards require those terminals to accept chip insertion, and contactless tap payments are now the norm especially in the wake of COVID-19. Merchants operating in certain industries – like hospitality – and merchants operating larger stores generally also need a full point-of-sale system to manage their inventory and a high-volume of transactions. Some ISOs provide that hardware “free” and roll the costs into the merchant’s fees, and some include hardware fees as a separate line item on merchant statements for improved transparency. 

 

Software and Service Resale

Some forward-thinking ISOs now also resell the software and add-on services necessary for merchants doing business online as an additional source of monthly revenue. Specifically, merchants selling on the web need an online payment gateway to facilitate eCommerce transactions. Traditionally, merchants would get their payment processing from their ISO and their gateway software directly from the provider. Today, more and more ISOs are seizing on the opportunity to bring those gateway services into their own sales process as resellers, opening up a new revenue stream and increasing convenience for the merchant by offering them one-stop shopping. 

Common resale services include the basic gateway itself, secure gateway-side customer data storage, invoicing tools, fraud protection, improved encryption, and more. Each service can be tacked on to the merchant’s monthly bill at a nominal fee, and one-time setup fees are often collected, as well. 

 

Regardless of how an ISO makes money, the one commonality across the industry is that profit margins are slim and high volume is key. The most successful ISOs are often the ones best able to streamline their operations, eliminate wasted time, and cut costs to a minimum. There is no better way to accomplish those goals than the use of an ISO customer resource management platform. 

A payments CRM automates and streamlines all of the most critical and time-consuming aspects of merchant services, including lead management, account management, residuals calculations and payouts, merchant onboarding, and much more. Automating as many areas of operations as possible makes acquiring new merchants easier and enables time and resources to go further by cutting waste. The result is an instant competitive advantage over less-tech-savvy competitors – an especially big boost for ISOs just getting off the ground. 

IRIS CRM is the payments industry’s top CRM platform, and offers everything an ISO needs to automate and enhance merchant acquisition, agent management, and day-to-day operations. To find out more about how customer resource management can help your ISO establish a strong competitive advantage, grab more market share, and boost revenues, book your free guided demonstration of IRIS CRM today!