Payments 101: What Is ISO Credit Card Processing?

ISO Credit Card Processing

Once upon a time, cash was king, but in today’s digital world, electronic transactions have usurped the throne. According to a poll conducted by payment processing giant TSYS, 80% of consumers prefer debit and credit cards compared to just 14% who said they prefer cash. Merchants have long understood how important it is to accept credit card payments, both online and in-store, in order to maximize revenues. But one thing many merchants don’t necessarily understand is what options are available to them to process those payments. Many just “sign on” with third-party payment processors like PayPal by default. Some go into their banks to open merchant accounts, only to be turned away for failing to meet qualifying criteria. In the middle of those two extremes are independent sales organizations, representing arguably the easiest and most accessible way for business to establish new merchant accounts – especially their first merchant accounts. But ISOs aren’t well understood, and that’s a problem since all merchants should have at least a basic knowledge of how their payment processing functions. In this article, we’ll look at the basics of independent sales organizations, including what they are, how they operate, and why going with one is the best choice for a wide range of businesses. 


What is an Independent Sales Organization?

An independent sales organization (ISO) is a company that acts as an intermediary between merchants and the acquiring banks that ultimately take in the payments from credit card transactions. The ISO serves a number of functions, including finding new merchant clients on behalf of the acquiring banks and major payment processors, processing the transactions put through by small businesses, and, in many cases, providing support and customer service to merchants for the lifetime of their relationship with the ISO. 

Effectively, rather than acquiring banks (or the major card companies) dealing directly with the millions of businesses around the world that need payment processing, ISOs serve as a buffer. That’s important for a couple of reasons. For one thing, even giants like Visa and Mastercard don’t have the resources to handle the volume that would exist with direct-to-merchant relationships. The second reason is “risk”. Processing a credit card transaction naturally carries a certain level of risk – risk that the bank at the end of the chain desperately wants to avoid. As such, acquiring banks are extremely picky about who they’ll partner with. That fact would freeze out a lot of smaller players who would represent too much risk for the bank itself. Registered ISOs solve that problem by taking on the risk themselves, providing access to merchant accounts and services to a wider market than would otherwise be eligible. 


How ISOs Make Money

Obviously, ISOs don’t take on that additional risk for free. Each merchant that signs up with an ISO enters an agreement that sees the ISO take a very tiny slice of each transaction processed as their payment. Those fees are essentially small markups on the fees charged by the acquirers, and, while individually they often only represent pennies, when aggregated over hundreds or thousands of transactions across an ISO’s entire roster of merchants, they add up quickly. 

ISOs call their cut “residuals,” and every ISO’s primary goal is to build the largest, healthiest long-term residual portfolio they possibly can. ISO residuals are owned for the lifetime of the company’s relationship with the merchant, so the ISO stands to earn long after they’ve performed the initial work of recruiting. That’s one thing that makes good customer service so important – if a merchant jumps ship and goes to another ISO or payment processor, all future residuals from that merchant are lost. 

Registered ISOs – the kind that goes through the long, arduous, and costly process of partnering with an acquiring bank and being certified by the major card companies – also have the option of hiring independent ISOs, or agents, to work under them. In that case, the residual payments are split between the registered ISO and the agent that brought in the new merchant business, and, like the ISO, the agent often owns those residuals for the life of the merchant-ISO relationship. 


The Benefits of Engaging an ISO

There are a lot of benefits of engaging merchant services through an ISO, ranging from costs to personalization of service, and beyond. From a cost perspective, while ISOs do charge a small markup on transaction fees, those fees are normally still much lower than the fees charged by third-party processors like PayPal and Square. Because third-party processors pool all of their customers under a single master merchant account, everyone pays the same rates, regardless of business history or risk. That means reputable, reliable businesses are left holding the bag for high-risk merchants and paying higher fees for no reason. With an ISO, each merchant’s account is underwritten individually, ensuring each merchant can negotiate fees based on the merits of their business, often resulting in significant savings. 

Once a business has established a track record of success and is ready to move away from third-party processors to their own merchant account, it might seem like going straight to the acquiring banks and cutting out the middleman would make sense. That is sometimes possible, and in cases where it is, merchants might see slightly lower fees, but, as mentioned earlier, the banks have very high standards for who they’ll deal with directly. That means the average merchant probably won’t even qualify for a direct relationship, necessitating going with an ISO. But even in cases where a direct relationship is possible, going with an ISO still offers some notable benefits. One is that, because ISOs are smaller companies than the big issuing banks, merchants can expect to receive a more personalized level of attention and customer service – especially since it’s in the ISO’s best interest to keep merchants around for the long haul. 

One additional reason to go with an ISO is that some independent sales organizations offer their merchants access to additional services and tools, like IRIS CRM, the payments industry’s leading customer resource management platform. ISOs utilizing IRIS CRM can offer their clients a completely white-label merchant portal, helping merchants to handle everything from enrollment to deposits, transaction disputes, and more. To find out more about how IRIS CRM can help ISOs boost their residuals while simultaneously providing better service to their merchants, contact us today!

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