We live in a digital world and a post-pandemic payment ecosystem, where cash has fallen out of favor and card payments have quickly become a consumer favorite. Payment processing is a huge source of opportunity for entrepreneurs looking to get a piece of the $100-billion-plus in card transactions done in the U.S. alone each year.
There is no better way for new entrants to the industry to get in on that action than by becoming an independent sales organization (ISO) – a company that links merchants with the services they need to do business.
Curious as to what exactly does an ISO do, how do they fit into the payment landscape, and how do they actually make money? The answers lie in understanding how the payment ecosystem works as a whole and how money and fees move through it.
The Payment Processing Pyramid
Electronic payment processing happens almost instantly, but there are a lot of moving parts behind the scenes that enable that convenience. In total, there are four major layers involved whenever a customer taps their credit card or makes a purchase online – card issuers, payment processors, ISOs, and merchants.
Those layers exist because there are just too many merchants at the bottom of the pyramid for the small handful of card companies at the top to deal with. To handle that volume, the middle of the pyramid – processors and ISOs – help spread out the work and the risk in exchange for a small slice of the pie.
Card Issuers
At the top of the pyramid are the card companies – the big names like Visa, Mastercard, Discover, and AMEX. These companies issue their credit cards through partnered banks, known as issuing banks. Whenever a credit payment is made online or in-store, the funds come from the buyer’s credit account with their issuing bank.
On the other end of the transaction is an acquiring bank, representing the merchant account that the funds from the purchase eventually flow into. Because that payment is provided in advance to the buyer until they pay their bill at the end of the month, there is serious risk involved in this process for the card companies.
Payment Processors
With Visa alone claiming 46 million merchants worldwide, it would be impossible for the card companies to work with each of their merchants one-on-one. Payment processors represent the first level of middleman in the pyramid, enabling the card issuers to spread out their business across a larger number of partners.
Leading processors like TSYS, Fiserv, Worldpay, and others issue merchant accounts to sellers on behalf of acquiring banks and handle the bulk of the infrastructure payment processing happens through. They also generally perform the entire underwriting process, exposing them to some of the risk involved on the merchant side.
Independent Sales Organizations (ISOs)
Even with dozens of payment processors doing their best, tens of millions of merchants is still too much to handle — especially when you consider the time and resource demands of actually finding and recruiting those merchants, let alone providing ongoing customer service.
In order to lighten their own load, payment processors turn to ISOs to carry part of the burden. ISOs handle the upfront sales process involved in merchant acquisition, and in many cases, also handle a large chunk of the customer support duties for the lifetime of that merchant’s account.
In return, ISOs get a small commission on each and every transaction a merchant makes. In essence, ISOs are a middleman serving the card issuers.
Merchants
At the bottom of the pyramid are the millions and millions of merchants engaged in B2C and B2B sales all over the world. These merchants need a way to get money from their customers’ cards into their bank accounts, and the ISOs and payment processors they work with provide the infrastructure and the risk handling necessary to do so.
How do ISOs Make Money?
Money in the payment processing pyramid flows upwards from the merchant to the card issuers, with each level along the way taking a small cut as payment for their services and the risk they assume – risk that is inherent anytime credit is extended.
The card companies charge the merchants a fee on each transaction, based on their interchange rates. That’s the base fee – the minimum that a merchant will pay on each transaction. As an example, the average Visa interchange rate is 1.4%, so if a customer makes a $100 Visa transaction, Visa is owed $1.40 (plus a small per-transaction fee). To make a profit, payment processors and, in turn, ISOs, charge a small premium on those rates, known as residuals.
Residuals
If the interchange rate on that $100 transaction is 1.4% + 10 cents, for example, the payment processor might charge 1.6% + 12 cents. The extra 0.2% and two cents represent their residual on that transaction. If the merchant was signed through an ISO, the ISO tacks on their own small fee, resulting in an end price to the merchant of 1.8% + 15 cents on every transaction. So, if a $100 transaction is made, Visa gets their $1.50, the payment processor gets $0.22, and the ISO gets $0.23.
Making cents on a transaction might not sound impressive, but the ISO makes that commission on every single transaction processed by every single one of their merchants for the entire lifetime of that merchant’s relationship with the payment processor. While the slice of the pie the ISO gets on each transaction is tiny, those slices can add up to a lot across an ISO’s entire residuals portfolio.
ISO Value-Added Services
Another way ISOs make money is by earning residuals on value-added services offered either through the payment processors or by third-party companies offering additional merchant services. For example, merchants selling online need a payment gateway to facilitate sales on their ecommerce sites.
They can get those gateway services directly from a company like Authorize.Net, but forward-thinking ISOs can also resell those same services, earning a small cut of the monthly fees while maximizing convenience for their merchants.
If you’re looking to start building your own residuals portfolio as a new ISO, IRIS CRM can help you automate and streamline your merchant acquisition and service, maximizing your slice of the pie and minimizing the work required to get it. For more information on how this leading payments CRM can help your new ISO get established as quickly and seamlessly as possible, schedule a free demonstration of IRIS CRM today.