ISOs are companies that resell merchant services on behalf of payment processors, handling merchant acquisition and ongoing service. They act as a middle layer between merchants and processors, allowing a small handful of major payment processors worldwide to interact with millions of merchants — something that would be impossible for most processors to do effectively on their own. 

When an ISO recruits a new merchant, they pass that merchant on to a payment processor for approval through a process called onboarding, in which the payment processor performs due diligence and risk analysis and decides whether or not to work with the new merchant. In essence, ISOs are like the sales, marketing, and support arms of major payment processors, but they operate as independent contractors rather than internal departments or employees. 

Within the wider category of independent sales organizations, there are two types of companies that work directly with payment processors: retail ISOs and wholesale ISOs. Both make their money primarily by reselling merchant services, but there are some key differences in their responsibilities during the process. 


What Makes a Wholesale ISO Different?

When a retail ISO recruits a merchant, they send the merchant processing application to the payment processor, and their job — at least as far as acquisition goes — is effectively over at that point, assuming an approval comes back. Underwriting — the process of examining the merchant application and analyzing risk — is entirely the processor’s responsibility. Wholesale ISOs differ in that they take on at least partial responsibility for underwriting, which not only adds work to their plates, but also makes them at least partially liable in the event one of their merchants can’t cover refunds or defrauds customers. 

Taking on underwriting requires wholesale ISOs to have entire departments dedicated to doing due diligence on merchants. Applications have to be checked for accuracy, business and owner vitals verified, background and credit checks must be run, business plans sometimes need to be analyzed, and more. It’s a lot of extra work, and the acceptance of additional liability means additional risk, but wholesale ISOs are willing to accept both for one key reason — they make more money. 


How do Wholesale ISOs Make Money?

The primary way that all ISOs make money is by earning a small cut on the fees for each transaction their merchants process, known in the industry as residuals. Each residual is tiny — generally a fraction of a percent — but they add up fast when you consider that an ISO may have hundreds or even thousands of merchants, each processing hundreds or even thousands of transactions per day. 

The specific percentage an ISO earns is based on the deal they have with their processors. Most ISOs work with multiple payment processors, and their residuals for each may look very different. Going wholesale allows ISOs to negotiate a higher percentage of the transaction fees in exchange for taking on the responsibility and risk involved with underwriting. As long as the ISO is performing thorough due diligence, the increase in residuals more than outweighs the extra costs associated with the time, effort, and risk involved in underwriting. 

Wholesale and retail ISOs also often tap into additional revenue streams by offering value-added services, either internally or through partnerships with third parties. For instance, a wholesale ISO might offer its merchants additional fraud prevention services, reporting and analytics software, payment hardware for in-store sales, payment gateways for ecommerce, and much more. Accessing those services through a wholesale ISO makes payment processing simpler and easier for the merchant and allows the ISO to extract more value from each merchant in their portfolio. 


Why Aren’t All ISOs Wholesale ISOs?

With more money on the table, it might stand to reason that all independent sales organizations would want to become wholesale ISOs, but the reality is that becoming a wholesale ISO isn’t always realistic or even possible. 

First and foremost, all wholesale ISOs must be registered. To become registered, ISOs must go through a lengthy, difficult, and expensive registration process with the major card companies. The process is difficult enough that many smaller ISOs choose to stay unregistered, immediately disqualifying them from going wholesale and taking on responsibility for underwriting. 

But even if an ISO is registered, there are still hurdles to jump through. Underwriting is an extremely important process. If it isn’t done right and financially unstable or untrustworthy merchants slip through the cracks, a payment processor could potentially end up on the hook for refunding customers who have been victims of fraud or are due refunds from a bankrupt merchant. The seriousness of those costs means that processors won’t just hand off underwriting to any ISO they work with. Wholesale ISOs need a long history of successful operations in the merchant services space — reputation matters. Potential wholesale ISOs also need to have the staff and resources necessary to take on underwriting and a larger volume of merchants — a process that could easily cost a million dollars or more. Finally, potential wholesale ISOs have to have an appetite for the risks that come with wholesale operations.

Unsurprisingly, many registered ISOs choose not to go the wholesale route. However, for those that do, the growth and increased residuals that wholesale ISOs enjoy are often a boon. 


What Kind of Technology do Wholesale ISOs Use?

Retail and wholesale ISOs both utilize customer resource management (CRM) software to centralize their merchant-facing tasks, including lead management, contract signing, merchant onboarding, residuals management, reporting, and much more. A good payments CRM automates the most time-consuming processes — like manual residual calculation or manual data entry during onboarding — eliminating wasted time and allowing ISOs to focus more effort and resources on tasks that can’t be automated or have a more significant impact on revenue generation and growth. 

One valuable technology specific to wholesale ISOs is cloud-based automated underwriting. Automated underwriting tools perform thorough, accurate, consistent due diligence on new merchants using dozens of checks conducted against blocked merchant databases, law enforcement and government databases, credit databases, and more. They can even check Google Maps to make sure a business is actually at its claimed address. Automated underwriting tools reduce the due diligence process from hours to a matter of minutes and eliminate the costly inconsistency that plagues manual underwriting. Some automated underwriting tools can even be integrated directly with a wholesale ISO’s customer resource management platform, further centralizing the onboarding process. For instance, Conformance Technologies PreComm Toolkit runs risk analysis against 70+ data points and can be integrated directly with IRIS CRM to allow underwriting to be triggered automatically whenever an ISO processes a new merchant application. 

To find out more about how IRIS CRM can help your retail or wholesale ISO streamline and enhance your merchant acquisition and customer service operations, or how the combination of IRIS CRM and PreComm Toolkit can revolutionize your onboarding and underwriting, click here to schedule a free guided demonstration of the platform now.