Payment service providers are companies that provide the infrastructure, service, and support systems merchants need to accept credit card payments, both in-store and online. The payments environment as a whole can be a bit complicated, but it helps to think of payment service providers as a pyramid, with a small number of acquiring banks at the top, a larger number of payment processors below them, an even larger number of ISOs and PayFacs serving the payment processors, and then merchants all across the globe at the bottom. With that in mind, the following is a brief rundown of what the companies at each level of the pyramid do and how they all add value to the overall payments ecosystem. 

 

Acquiring Banks

Acquiring banks are one-half of the banking equation that underpins all credit card payments. Acquiring banks partner with the major credit card associations like Visa and Mastercard, and are responsible for providing merchant accounts and authorizing card payments with the issuing bank – the other half of the banking equation. When a payment is made, the acquiring bank requests authorization from the bank that issued the customer’s card to ensure that there is adequate credit available to make the purchase. Acquiring banks also perform authentication duties, ensuring the card is in the hands of an authorized user with security protocols like 3D Secure. 

Not all banks are acquiring banks for all card companies, and many banks choose to work with only one credit association to minimize operational complexity. While every merchant has an acquiring bank, most merchants never deal with their acquirer directly, instead communicating with either a payment processor or independent sales organization. 

 

Payment Processors

Payment processors represent one of the middle layers of the payments pyramid. They are the payment service providers that sign the contract with a merchant and manage the merchant account and transaction processing on behalf of the acquiring bank. While some acquiring banks act as their own payment processors, in many cases, the processor is a distinct entity that provides infrastructure to facilitate transaction processing, but isn’t a bank. 

Payment processors come in a variety of sizes, but the leaders in the industry are large, multi-national companies that serve merchants all over the world and process billions of dollars in transactions each year. However, with millions of merchants around the globe in need of credit card transactions and a relatively small number of processors offering them, the payments industry depends on an additional middle layer to act as the liaison between merchant and processor – independent sales organizations and payment facilitators. 

 

Independent Sales Organizations and Payment Facilitators

Independent sales organizations (ISOs) and Payment facilitators (PayFacs) are payment service providers that specialize in the merchant-facing aspects of the payments business. They partner with payment processors to resell their services, handling the entire merchant acquisition process – marketing, prospecting, recruiting, and sales. ISOs and PayFacs also often provide ongoing support to merchants after they’ve been signed to a merchant account, effectively handling all of the service aspects of the relationship, leaving the processor to handle and manage the transactions and the merchant’s account. 

ISOs and PayFacs perform nearly identical duties, but there are some key differences in how they operate. ISOs don’t sign direct contracts with merchants. They can be a party to them, but merchants going through an ISO must be signed primarily to the payment processor. PayFacs, on the other hand, can sign merchants directly to their own services. They still partner with one or more payment processors, but they act as the primary service provider to the merchant. That arrangement places extra responsibility and extra risk on the PayFac, but also offers them some major benefits over ISOs, like more control over pricing and which merchants get approved. 

In both cases, the companies are compensated for their services with a small slice of the transaction fees charged by the payment processor, known as a residual. Residuals are tiny – a fraction of a percent on each transaction – but they add up quickly across hundreds of merchants processing thousands of transactions. 

 

Merchants

Finally, at the bottom of the payments pyramid are the millions of merchants around the globe that consume payment services and provide us all with the products and services we buy on a daily basis. Merchants often utilize other third-party solutions, too, like online payment gateways, anti-fraud systems, and more. Sometimes those services are purchased directly from the third parties that provide them, but they can also be accessed directly through ISOs and payment processors in many cases, as well. 

 

The payments pyramid helps a complex industry run in a frictionless fashion, enabling customers’ electronic payments to be completed in seconds despite the complex, multi-level operations going on behind the scenes. 

In addition to being complex, the payments industry is also exceptionally competitive. To get an edge and compete smarter, ISOs, PayFacs, and even merchants often turn to customer resource management systems, like IRIS CRM. IRIS CRM is the payments industry’s top CRM, packed full of features designed specifically to meet the challenges faced by ISOs and PayFacs on a daily basis. From merchant acquisition to residual calculations to automated onboarding to ongoing service, IRIS CRM streamlines and enhances every aspect of an ISO or PayFac’s operations. 

To find out more about everything IRIS CRM can do for your organization, reach out to a member of the team or schedule a free guided demonstration of the platform today.