The world is rapidly moving toward a cashless economy, and the data proves it. According to the Pew Research Institute, a whopping 41% of Americans say they don’t use cash at all for any of their weekly purchases—a significant jump from 29% in 2018.
Furthermore, FIS Global reports that across Scandinavian countries like Norway and Sweden, more than 90% of point-of-sale (POS) transactions are completely cashless. With global digital transaction volumes continuing to climb into the trillions, the writing on the wall is clear: businesses must accept digital payments, and software providers must offer a seamless way to facilitate them.
For software platforms looking to integrate these capabilities, navigating industry jargon can be confusing. Two terms dominate the conversation: ISV (independent software vendor) and PayFac (payment facilitator). However, these are not competing business types—they are complementary pieces of a highly lucrative fintech puzzle.
Here is what software leaders need to know about maximizing revenue and control through embedded payments strategies.
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 leverage an embedded payments partner to offer a seamless, white-labeled payment experience under their own brand, unlocking massive revenue potential via revenue-share models.
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.
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)
An ISV develops, markets, and sells software applications tailored to specific industries or business needs—such as point-of-sale (POS) systems, eCommerce platforms, medical charting, or accounting software. Because ISVs own their proprietary intellectual property, they are uniquely positioned to serve as the primary operating system for their business clients.
Historically, ISVs only focused on core software features. Today, modern ISVs integrate payment capabilities directly into their platforms, transforming passive software into an active fintech engine.
Payment facilitators (PayFacs)
A PayFac is a specialized payment infrastructure provider. Instead of requiring every individual small business (sub-merchant) to establish a dedicated merchant account with an acquiring bank—a process requiring intense paperwork and days of underwriting—the PayFac utilizes its own master merchant account.
The PayFac aggregates these sub-merchants under its corporate umbrella. This allows the PayFac to deliver instantaneous onboarding, frictionless merchant setup, automated payouts, and comprehensive risk management.
The core difference: An ISV is a software provider that creates the business platform. A PayFac provides the financial infrastructure required to process payments within that platform.
The traditional dilemma: ISO vs. wholesale PayFac
When an ISV decides to monetize the transactions flowing through its software, it historically had to choose between two extreme models:
1. The independent sales organization (ISO) referral model
In this legacy framework, the ISV acts as a simple referral agent. When a SaaS user wants to accept payments, the ISV sends them to a third-party payment processor.
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The pros: The third party handles underwriting, risk, and PCI compliance.
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The cons: The ISV loses control over the customer experience, onboarding takes days, and the software company only receives a tiny fraction of the payment revenue.
2. The fully registered wholesale PayFac model
On the other end of the spectrum, an ISV can choose to build its own payment infrastructure from scratch and legally register as a standalone PayFac.
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The pros: Complete control over branding, custom underwriting, and maximum revenue retention.
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The cons: Massive financial hurdles, months or years of development, and ongoing, multi-million-dollar compliance burdens (KYC, AML, and PCI DSS compliance).
The modern alternative: PayFac-as-a-service
Fortunately, the market has evolved beyond this rigid dichotomy. Modern SaaS platforms no longer have to choose between zero control (ISO) or massive risk (Wholesale PayFac).
Through PayFac-as-a-service (or managed PayFac) partnerships, ISVs can natively embed payment features into their platforms. This hybrid approach gives software providers the best of both worlds:
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Instantaneous onboarding: Sub-merchants can sign up and start processing payments in minutes, directly inside the SaaS platform.
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White-labeled branding: The payment experience looks, feels, and is branded exactly like the ISV’s software.
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Turnkey compliance: The embedded payments partner takes on the technical weight of PCI monitoring, underwriting, and risk management.
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Substantial revenue share: The ISV unlocks highly profitable, recurring revenue from every card transaction processed on their platform.
Final words: Future-proof your SaaS with Stax Connect
Choosing how to structure your platform’s payment architecture requires a careful assessment of your technical capabilities, timeline, and long-term business goals.
As an ISV looking to maximize enterprise value and delight your users, you don’t need to shoulder the immense costs and regulatory liabilities of becoming a standalone financial institution. Partnering with a specialized embedded payments partner allows you to launch faster with less risk.
With Stax Connect, you can seamlessly monetize your platform’s ecosystem while leaving the heavy lifting of merchant underwriting, risk management, and compliance to us. Turn your software into a comprehensive financial ecosystem and scale your revenue effortlessly.
Quick FAQs about ISV vs. PayFac
Q: Can a company be both an ISV and a PayFac?
Yes. In fact, this is the ideal goal for many growth-stage SaaS companies. An independent software vendor (ISV) provides the business software, while the payment facilitator (PayFac) infrastructure allows that software to process transactions natively.
Q: Why shouldn’t an ISV just become a registered PayFac independently?
Becoming a fully registered wholesale PayFac requires hundreds of thousands of dollars in upfront registration fees, months of specialized engineering, and a dedicated internal team to manage ongoing risk, anti-money laundering (AML) mandates, and legal liabilities.
Q: What is the fastest way for an ISV to start offering integrated payments?
The fastest, most secure route is partnering with a PayFac-as-a-service provider like Stax Connect. This approach allows an ISV to offer a fully white-labeled, embedded payment experience and split transaction revenue without taking on regulatory burdens.
Q: How do software companies generate revenue from payments?
When an ISV embeds payments via a revenue-share model, they earn a percentage of the credit card processing fees (interchange plus a software markup) charged on every transaction processed by their users.
