ISOs are an integral part of the payment processing ecosystem. They act as intermediaries between financial service providers and merchants, helping them process their debit card, credit card, and ACH payments.
However, not many are entirely clear about what exactly ISOs do. This article explains the role of ISOs in the payment processing ecosystem, how to become one, and what ISOs should look for in a partner.
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What Is an Independent Sales Organization (ISO)?
An independent sales organization (or ISO) refers to an individual or company that acts as a third party between acquiring member banks and merchants to provide payment processing services to the latter.
Typically, large banks (like Wells Fargo or Bank of America) that are members of credit card associations (like Visa or Mastercard), are the ones responsible for accepting transactions from these card networks.
Historically, if a merchant wanted to start accepting payments from their customers, they needed to have a partnership with these banks.
However, this tends to be expensive—and rather limiting—for the average merchant. This is where ISOs come in. ISOs have grown over the last several years because they make payment processing more accessible to businesses.
Independent sales organizations go through a rigorous vetting process to get sponsored by association member banks, so they can handle merchant accounts for these businesses. They are authorized to accept payments on behalf of the association member banks.
Besides representing banks, ISOs may also represent payment processors or other financial service providers. Essentially, they resell the services of the organization they represent and also provide customer support and service on their behalf.
ISOs are also known as merchant service providers (MSP), although Visa uses the term “ISO” more commonly while Mastercard prefers the term “MSP.”
The Benefits of Forming an ISO Partnership with a Payments Platform
One of the main reasons why many ISOs prefer to partner with a payments platform (or payment services provider), is to create an additional income stream. As such, ISOs earn residuals on the transactions that their merchants process. And even though they may offer various services, this is the primary way that ISOs get paid.
So when a merchant accepts a payment from a customer, the payment processor typically takes a cut, and a small percentage also comes to the ISO as a residual payment. Throughout the lifetime of a merchant’s relationship with a payment provider, these residuals will accrue, making it a valuable revenue stream for ISOs.
ISOs may also offer additional services to merchants, such as recurring billing, custom point of sale solutions, alternate payment methods, etc., to create additional revenue streams.
For similar reasons and benefits above, more and more software businesses (i.e., SaaS companies) are becoming their own ISOs. By adding payments to their suite of capabilities and services, software companies are able to provide more value to users—while monetizing payments—in the process.
By serving as ISOs, SaaS businesses are reducing churn, while at the same time increasing their revenues through residuals on transactions processed on their platform.
What Do ISO Partners Do?
ISO partners form relationships or agreements with banks and other financial services providers for revenue sharing. Based on these agreements, the ISO will offer merchant accounts to businesses and build relationships with them.
Typically, these merchants will deal with the ISO directly for managing their merchant accounts rather than with the end service provider. This means that it’s the responsibility of the ISO to provide the support and service that merchants need in order to be successful.
To that end, ISOs will be helping merchants manage the day-to-day activities related to their merchant accounts including, but not limited to:
- The application paperwork
- Account setup
- Providing the payment technology
- Providing customer support
- Arranging the purchase or lease of terminals
- Setting up the terminals
- Assisting in handling disputes and chargebacks
The ISO partner will also be in charge of managing sales agents who represent them and get merchants to sign up with them.
How to Become an ISO Partner
In general, ISOs in the US may be “registered” or “unregistered.” Unregistered ISOs can simply sign merchants up on behalf of payment services providers or other registered ISOs, but they cannot hire sub-agents to work for them. Only registered ISOs can do so.
To become a registered ISO, you must be prepared to go through a lengthy and stringent vetting process, as discussed below.
1. Get your business in order
Make sure you have filed your incorporation papers and got your business licenses. File your taxes, have good credit, get legal representation, and ensure that you have everything you need to conduct business in your area.
The organization or bank you want to partner with may ask for your financials from the last two years during the application process. You may also need to produce financial reports of your partners, documentation of your business activities and registration, as well as a detailed business plan.
2. Find a sponsor
The next step is to find a sponsor. This could be a bank or a bigger ISO. In fact, it might be a good idea to work with multiple sponsors and resell their products. Find out how you can apply to become their partner and follow their instructions to the letter.
3. Register with card associations
Once you find a sponsor, the next step would be to register with Visa and Mastercard. This is going to be a lengthy and rigorous process so it’s best that you seek the help of a lawyer. Be absolutely sure that your financials and credit are in order or else the process may be drawn out even further or you may get rejected altogether.
The process can take a few weeks to a few months. Once approved, you’ll need to pay a fee of $10,000 in the first year, followed by $5000 every year, for each card network.
What Should ISOs Consider When Choosing a Partner?
Not all payment platforms are created equal. So you must take the time to research various ISO partner programs to find the ones best suited to your needs. Here are some things you should keep in mind:
- Look for a partner that offers innovative features that help merchants grow their business quickly and seamlessly. Data security is vital to the success of your merchants so make sure your payments partner is PCI DSS compliant. The ability to provide next-day funding is another big plus. Finally, a payments platform that offers robust reporting features can be immensely helpful for merchants to measure the performance and health of their business.
- Even though higher rates may mean more attractive commissions for your ISO, you’ll always be at risk of losing your customers to more competitive rates. So look for a payments platform whose markups are low. For the best results, choose a partner that offers membership-based pricing that gives merchants access to wholesale processing rates.
- If your partner provides support only during business hours, you may end up losing customers. That’s why it’s important to look for payment platforms that offer 24/7 customer support to solve the problems your customers may run into. Make sure to also check what kind of resources or support may be available to you.
- Make sure to check the reviews and ratings your potential partner has received on popular forums. Is responsive customer support a popular theme? Are they invested in the success and growth of their agent partners? Do they have a good reputation among their customers? These are important questions you should ask when deciding which payment platform you should partner with.
The process of becoming a registered ISO is not easy. It can be incredibly time-consuming and may involve jumping through a lot of hoops. However, the returns can be immensely rewarding. If you do decide that this is the route you want to go, make sure you find the right payment platform as your partner for this journey.
Interested in teaming up with Stax as an ISO partner? Get in touch with our team today.