The world is increasingly moving towards becoming cashless and there are numbers to prove it. According to the Pew Research Institute, in 2022, a whopping 41% of Americans said they don’t use cash at all for any of their weekly purchases—a significant jump from 29% in 2018.
FIS Global reports that in Norway, Sweden, and other Scandinavian countries, more than 90% of transactions processed at point-of-sale (POS) in 2023 were cashless. Further, Statista projects that the value of global digital transactions will exceed $11 trillion in 2024.
The writing on the wall is clear—businesses need to start accepting digital payments and software providers need to start offering payment services one way or another. In this article, we’ll break down two popular terms used in the payment processing industry—ISV and PayFac—and see what they exactly mean.
TL;DR
- An independent software vendor (ISV) develops and sells software applications independently of hardware manufacturers. ISVs create software platforms for various industries, including business management, healthcare, and finance.
- There are two main ways that an ISV can become a payment provider—by adopting the ISO model or the PayFac model. In the ISO model, an ISV partners with a third party that handles merchant account setup, payment processing, risk, and compliance. The ISV has little control over the end user’s payment experience or the processing costs.
- In contrast, an ISV can partner with a PayFac to offer an integrated payment experience to its users. This gives them greater control over the customer experience and an opportunity to generate additional revenue.
What Is an ISV vs PayFac?
The payment processing industry facilitates electronic transactions between merchants and customers, spanning online, mobile, and in-person payments. It involves a complex ecosystem of financial institutions, including acquiring banks, payment processors, and card networks, alongside technology providers and regulatory bodies.
Payment processors handle transaction authorization, settlement, and security, ensuring seamless and secure payment experiences.
An independent software vendor (ISV) develops and sells software applications independently of hardware manufacturers. ISVs create software platforms for various industries, including business management, healthcare, and finance. They often customize and integrate their applications to meet specific client needs and market demands.
Now, there are two ways that a software service provider can become a payments provider. They can adopt the independent sales organization (ISO model) or the payment facilitator model (PayFac).
In the ISO model, an ISV partners with a third party that handles merchant account setup, payment processing, risk, and compliance. The ISV has little control over the end user’s payment experience or the processing costs.
In contrast, an ISV can partner with a PayFac to offer an integrated payment experience to its users. This gives them greater control over the customer experience and an opportunity to generate additional revenue.
Payfacs simplify payment processing for small businesses by aggregating transactions under their master merchant accounts. SMBs get access to payment processing services without the need for individual merchant accounts. PayFacs also provide a streamlined onboarding experience, manage underwriting, and handle compliance for its sub-merchants.
Independent Software Vendors (ISVs)
ISVs create software applications tailored to specific industries or business needs, such as point-of-sale (POS) systems, eCommerce platforms, or accounting software. One of the biggest advantages of an ISV is that they often offer customization options to meet the unique requirements of different businesses.
Their software solutions can even integrate with existing hardware and software architectures of clients, making ISVs a great option for large companies looking for payment processing applications. As ISVs develop and maintain their software, they have complete ownership of their software as well as all related intellectual properties.
Payment Facilitators (PayFacs)
Software companies that do not want to get into the payment processing business themselves can opt to work with a PayFac. Oftentimes in the ISV vs PayFac debate, the cost of developing, marketing, and maintaining payment processing software can be overwhelming. Also, companies may choose not to become an ISV in the payment processing industry as they do not want to stray too far from their core business.
In such cases, collaboration with a PayFac offers the best of both worlds—SaaS providers can offer payment processing to their clients without taking on the huge financial and resource burdens of developing a payment processing application.
PayFacs facilitate credit card transactions between merchants and payment processors. They handle merchant onboarding, including underwriting and meeting regulatory requirements like Know Your Customer (KYC) mandates. Additionally, PayFacs conduct ongoing monitoring of merchants to ensure compliance with Payment Card Industry (PCI) regulations post-onboarding.
Similarities between ISVs and PayFacs
Now that we understand what they mean, let’s take a look at how ISVs and PayFacs are similar.
Allow businesses to achieve the same goals – In the payment processing ecosystem, both ISVs and PayFacs essentially allow businesses to accept digital payments. Both aim to provide seamless, efficient, and user-friendly payment experiences. Moreover, they also allow businesses to not only monitor electronic payments but also obtain helpful data and trends.
Overlapping customer base – ISVs and PayFacs can have overlapping customers, particularly businesses seeking integrated payment solutions. ISVs offer software with built-in payment processing capabilities, while the PayFac model simplifies payment acceptance for merchants. Both cater to businesses looking for streamlined and efficient payment solutions within their software applications. Both ISVs and PayFacs also often collaborate with other stakeholders in the payment processing ecosystem, such as payment processors, acquirers, and financial institutions.
Regulatory compliance and security standards – ISVs and PayFacs prioritize compliance and security in their respective roles. ISVs ensure software solutions meet standards like PCI DSS (Payment Card Industry Data Security Standard). PayFacs implement strong security measures for payment transactions, complying with regulations to safeguard customer information.
Differences between ISVs and PayFacs
All said and done, there are significant differences between ISVs and PayFacs. Let’s take a look.
Same goals, different methods – Although ISVs and PayFacs both allow businesses to accept electronic payments, they take different paths to achieve the same goal. ISVs focus on the development and customization of payment processing software. PayFacs focus more on reducing the administrative burden of accepting payments by handling all the paperwork as well as the payment processing.
ISVs develop payment processing SaaS or APIs that merchants can buy and implement in their own companies. Once the software has been integrated into the merchant’s existing software ecosystem, they can accept various payment methods seamlessly. On the other hand, PayFacs offer payment processing solutions to sub-merchants by aggregating transactions under their own merchant accounts and simplifying onboarding processes.
Business model and revenue streams – ISVs generate revenue through software sales, licensing fees, and subscription models. PayFacs earn money by charging merchants processing fees per transaction, often a percentage of the transaction value. Additionally, Payfacs earn from setup fees or monthly fees for access to their payment processing services.
Underwriting and merchant accounts – ISVs don’t handle underwriting or merchant accounts and focus only on software development. PayFacs, however, underwrite merchants, vetting their eligibility for payment processing, and aggregating transactions under their master merchant accounts, simplifying the process for businesses to accept card payments.
Case Studies
Successful ISVs include Salesforce and Shopify, offering robust software solutions with payment processing being one of their core functions. Salesforce’s CRM is ubiquitous and as of 2023, it has a 23.8% market share in the CRM software industry. Shopify dominates eCommerce as it allows customers to create their own eCommerce websites. It has user-friendly platforms and extensive customization options for online stores.
PayFacs like Square and Stripe have revolutionized payment processing, providing easy-to-use platforms for businesses to accept payments online and in-person, disrupting traditional payment methods.
The ISVs mentioned provide comprehensive solutions tailored to specific business needs, while the PayFacs prioritize simplifying payment processing through user-friendly platforms, reasonable pricing, and efficient merchant services.
Final Words
Before choosing to offer ISV or PayFac type of model to your customers, you need to assess your business’ technical capabilities, resources, client base, and capital at hand. Payment technologies are evolving rapidly so both ISVs and PayFacs have a huge potential for growth in the future.
However, as an ISV looking to facilitate payments for its users, you can drastically reduce your costs as well as your time-to-market by partnering with a PayFac like Stax Connect. Easily monetize payments while leaving the heavy lifting of onboarding, risk management, and compliance to us. Contact us today for a consultation and learn how we can help.
ISV vs PayFac FAQs
Q: What is the difference between PayFac and ISOs?
PayFacs act as intermediaries between merchants and payment processors or banks. They are registered with major card brands to onboard merchants under their master merchant account, simplifying the merchant account application process.
Meanwhile, ISOs are third-party agents or companies that partner with banks or payment processors to sell merchant accounts. Unlike PayFacs, ISOs do not onboard merchants under a master merchant account but instead facilitate the setup of individual merchant accounts with banks or processors.
Q: What is the difference between ISV vs PayFac?
ISV (Independent Software Vendors) develop and sell software applications, which can range from retail management systems to healthcare record systems. PayFacs, on the other hand, are entities that have taken on the role of facilitating payments for merchants.
Q: What is the difference between PayFac and payment aggregator?
Payment aggregators are companies that allow multiple merchants to accept payments under a single merchant account. They aggregate the payments processed for these merchants, simplifying the onboarding process and reducing administrative overhead. PayFacs also enable businesses to accept payments under a master merchant account, but they typically offer a more comprehensive suite of services, including merchant onboarding, risk management, and settlement services.
Q: Is a PayFac a payment processor?
Yes, in a broad sense, a PayFac can be considered a type of payment processor because it processes payments on behalf of its merchants. However, it’s more accurate to describe a PayFac as a facilitator or intermediary that provides access to payment processing through its master merchant account, rather than being a processor in the traditional sense.
