The payment processing industry is full of opportunities for entrepreneurs looking to help merchants get set up with the right payment processing for their needs, and the most common way that’s done is through an independent sales organization, or ISO. ISOs are one of the most important players in payments, bridging the gap between merchants and payment processors and earning potentially very healthy commissions along the way. But in a complex industry like payments, with so many layers and moving parts, it can be easy to misunderstand just what ISOs do and why they exist. So what is an ISO, why do merchants need them, and why do they represent such a potentially lucrative opportunity?


What is an ISO?

An ISO, or independent sales organization, is a company that resells payment services to merchants on behalf of a payment processor or acquiring bank. ISOs are an exceptionally important part of the payments ecosystem, serving a critical role that supports both their processing partners and their merchants.

In order to understand how ISOs fit into the payments ecosystem, it helps to imagine payments as a pyramid, with millions of individual merchants at the bottom and just a few major credit card companies at the top. In between, there are multiple levels of intermediary companies that add value to the process and keep everything running smoothly, including association member banks, payment processors, and ISOs. 

Credit Card Associations: The card associations, also known as card networks, are the major brands we’re all familiar with, namely Visa, Mastercard, American Express, and Discover. There are also some regional card associations, like UnionPay in China. Aside from their role in branding, these companies act primarily as high-level governance, setting and enforcing the rules for how credit card processing works. 

Association Member Banks: Member banks are the financial institutions that actually provide credit cards to customers and merchant accounts to sellers. Companies like Bank of America, Capital One, Barclays, and Wells Fargo are all examples of association member banks, which can range in size from the national and multinational giants listed here to much smaller regional banks.

Acquiring Banks: Acquiring banks are association member banks that provide merchant accounts to sellers. They process transactions, accept the funds from successful payments, and deposit them in the merchant’s bank account once everything is settled.

Issuing Banks: Issuing banks are the member banks that issue credit cards to consumers and businesses. Among other things, when a payment is made, it’s the issuing bank’s job to ensure the customer has available credit, approve the transaction, and then send the funds through the system.

Payment Processors: Payment processors are companies that partner with acquiring banks to provide the infrastructure necessary to support merchant accounts, securely pass all the sensitive data back and forth whenever an electronic payment is made, and ensure the funds get from point A to point B successfully. 

ISOs and MSPs: Independent sales organizations – or merchant services providers, as they’re known in the Mastercard world – are frontline companies reselling payment processing on behalf of a processor or an acquiring bank. ISOs work directly with merchants providing both the initial sales process and most of the ongoing support once a merchant’s business is up and running. 

As you move down each level of the pyramid, the number of companies grows – from only four card networks at the very top to hundreds of member banks to thousands of ISOs at the bottom. The key thing to understand is that, with millions of merchants across the globe all needing payment processing offered by just four card networks, this tiered system is the only practical way to keep everything running smoothly. Without ISOs, acquiring banks would each be forced to recruit, serve, and juggle potentially hundreds of thousands of merchants on their own – a completely unrealistic burden. 


How Do Independent Sales Organizations Make Money?

In exchange for the important role they play in the payments pyramid, ISOs are rewarded with a small slice of the fees charged on each credit card transaction – known in the industry as residuals. Whenever a customer makes a card payment, the acquiring bank charges a fee to the merchant – generally between one and two percent of the transaction value plus a small fixed fee of five to ten cents. Each company down the value chain adds a small markup on those fees, normally no more than a fraction of a percent. 

A fraction of a percent of each transaction might not seem like it’s worth getting out of bed for, but small fees add up quickly when you consider the sheer volume of electronic payments made every day. An ISO may only make a quarter of a percent on each transaction its merchants process, but it may have hundreds of merchants in its portfolio, each accepting hundreds of card payments per day. That snowball effect makes reselling payment processing an extremely lucrative business, especially for the largest ISOs working with big, well-established sellers. 


Wholesale ISOs vs Retail ISOs

Not all ISOs are created equal. There are two major types of registered ISOs: retail and wholesale. While both provide the same core services of reselling payment processing on behalf of a partner, wholesale ISOs also take on some of the responsibility for underwriting – or risk assessment – on each new merchant they recruit. Performing underwriting exposes wholesale ISOs to a higher level of risk, since they’re at least partially on the hook if any of the merchants they sign off on commit fraud or cause problems. In return for that added risk, wholesale ISOs get to work with a wider pool of merchants and also make a little more on each transaction they process, making wholesale a logical step for ISOs looking to grow. 


How Do ISOs Differ from Payment Facilitators?

While reading up on ISOs, you may also run across the term payment facilitator in relation to merchant sales. Payment facilitators – or PayFacs for short – are a newer model of merchant services reseller that act more like a third-party processor like PayPal or Square than a traditional ISO. Rather than reselling a merchant their own merchant account on behalf of a payment processor or acquiring bank, PayFacs have their own master merchant account, and they sell their customers access to processing as sub-merchants through that master account. The PayFac model offers some big advantages – namely control over pricing and flexibility in choosing which merchants to work with – but it also means PayFacs are totally on the hook if anything goes wrong with one of their clients. ISOs, on the other hand, don’t actually have anything to do with a merchant’s processing itself – they just handle the sales and support aspects and let their processing partners do the rest. 


Why do Merchants Choose to Work with ISOs?

It may not seem obvious why a merchant would choose to work with a “middleman” ISO, especially if it results in a slightly higher markup on their fees. But, really, the reason merchants need ISOs boils down to the same reason the acquiring banks need them – volume. Acquiring banks do work directly with merchants, but it’s almost always large chain merchants with huge accounts. Even if a smaller merchant manages to get processing services directly from an acquiring bank, they’d be so low on the priority list that the service they’d receive would likely leave a lot to be desired.

ISOs also offer merchants some additional flexibility, thanks to their wider set of offerings. Many ISOs work with multiple top payment processors or acquiring banks, each with its own service offerings, pricing, etc. As a result, working with an ISO may give merchants access to more tailored processing solutions at better prices in addition to a more personalized sales and support experience. 


How do ISOs Use Technology?


Customer resource management tools have gained wide adoption across all sales fields thanks to their ability to streamline and enhance everything customer-related. ISO CRMs are customer resource management systems that have been specifically designed to tackle the challenges faced by payments companies. Systems like IRIS CRM include a number of features developed to save ISOs significant time and resources, like the TurboApp automated boarding tool and automatic residuals calculations. With the right CRM, an ISO can improve everything from its merchant acquisition process to its operations to its support and beyond, resulting in lower costs, a larger portfolio of merchants, and significant residuals growth. 

Automated Underwriting Tools: 

Wholesale ISOs responsible for performing due diligence on new merchants often find themselves facing a catch-22. A thorough underwriting process is so time-consuming and resource-intensive that it significantly slows down the ability to onboard new business. But speeding up the process at the expense of completeness risks missing red flags and letting risky merchants slip through the cracks, rendering the entire process almost moot. 

Automated underwriting tools solve the problem by using rules-based checks and, in some cases, artificial intelligence to perform a complete, thorough underwriting process in as little as a few minutes. A wholesale ISO’s underwriting department then only needs to review the automated tool’s report and recommendation and make a decision. It’s a huge time saver that also ensures wholesale ISOs are well protected from risk at all times. Some automated underwriting tools, like Agreement Express, can even be rolled into an ISO CRM, streamlining the process even further. 


IRIS CRM is the payments industry’s top ISO CRM, combining a powerful sales tool with a suite of features designed specifically to meet the daily needs of ISOs and PayFacs. By automating everything from onboarding to underwriting to residuals calculations and putting data at the core of the business, IRIS CRM helps ISOs work smarter, save time and money, and take their growth and residuals to the next level. 


For more information on how an ISO CRM can help you generate a competitive advantage from day one as a new ISO, reach out to a member of the team or schedule a guided demonstration of IRIS CRM today.