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Over the last decade, there has been significant growth in credit card and debit card transactions worldwide, with cash payments on the decline.

In 2021, 65% of Americans—that’s 168 million people—paid for their purchases using credit cards. While credit cards remained the most popular payment method for eCommerce transactions, debit cards found more popularity among shoppers in-store.

All this to say, modern-day merchants simply can’t afford not to accept card payments from their customers. And that’s where merchant services providers come in.

However, there are many different players and payment solutions in the world of credit card processing, which can often confuse small business owners. To make it a little easier, this article compares and breaks down the similarities and differences between two types of payment service providers (or PSPs): PayFacs and ISOs.

Let’s delve in.

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PayFacs Defined

Payment facilitators (or PayFacs) are a type of merchant service provider that enables businesses to accept electronic payments, both online and in-store. Think Stripe, PayPal, or Stax. They fall in between payment processors/acquiring banks and merchants, providing processing services on a sub-merchant basis.

How PayFacs work

A payment facilitator has a partnership with an acquiring bank. This bank supplies them with a master merchant account (MID), to which the PayFac can add their customers as sub-merchants (with their own sub-merchant IDs).

So, instead of applying for a unique merchant account directly with a payment processor or bank, a merchant applies with the PayFac. The merchant then goes through the PayFac’s underwriting process—a fairly quick one. Upon approval, the PayFac aggregates the merchant into a pool, so they can conduct business under the PayFac’s umbrella. 

The acquiring bank also takes on the liability for all transactions processed by the PayFac’s customers. The latter must, therefore, abide by some stringent rules laid down by the former.

There is also a processor involved in this payments ecosystem, whose job is to authorize transactions, route them to card networks, and settle funds from card-issuing banks to the acquiring bank. Sometimes, the acquirer and processor functions may be merged into what’s known as a sponsor bank.

When a sub-merchant accepts a payment from a customer, the processor moves the funds from the customer’s card-issuing bank to the PayFac’s acquiring bank. The payment facilitator will, in turn, move the funds to the merchant’s bank account. 

Functions of a PayFac

The payment facilitator provides customer support for sub-merchant payment processing. They also offer processing equipment such as POS systems, card terminals, and payment gateways. As far as merchants are concerned, they can bypass the payment processor completely and deal only with the PayFac. 

Since the PayFac effectively lends their MID to sub-merchants, they assume the responsibility of managing any disputes or chargebacks that may arise. They are also liable for 100% of the associated financial risks and losses that may come with processing these transactions. That’s why they must have robust controls in place to monitor their sub-merchant transactions consistently. 

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ISOs Defined

Independent sales organizations or ISOs are simply “resellers” of merchant accounts issued by acquiring banks or payment processors. They fall in between banks/payment processors and merchants—just like PayFacs—and some (not all) can take on an active role in facilitating payments.

How ISOs work

In the ISO business model, merchants don’t have to deal with the bank or payment processor directly. Instead, they would be dealing with the ISO, who would explain the terms and conditions to them, collect their information, and pass it on to the payment processor.

The processor will, in turn, sign them up as merchants on their platform and set them up with individual merchant accounts.

When a merchant accepts a payment from a customer, it’s the processor that authorizes and settles the transaction, and also deposits the funds to the merchant’s bank account.

Functions of an ISO

An ISO will explain the pricing, fees, and terms to the merchant and sign them up. They will also provide the necessary paperwork for the application and then pass on the information to the processor.

Some wholesale ISOs may share underwriting responsibility with the processor, but most ISOs do not undertake this task. In most cases, they offer customer support and arrange for the leasing/purchasing of payment processing equipment.

Independent sales organizations usually partner with multiple banks or payment processors so they can offer more flexibility to merchants and serve a larger customer base. They are typically not part of the contract between the payment processor and the merchant, but in some cases, they may be included as a third party. 

ISOs vs MSPs

The terms ISO and MSP are often used interchangeably, so you may wonder if there’s any distinction between the two. Both terms actually mean the same thing, although, Visa uses the term ISO, while Mastercard prefers to use MSP (or member service provider). 

PayFac vs ISO: Key Similarities

There are a few high-level similarities between PayFacs and ISOs, which is why they are often considered to be parallel channels in the payments ecosystem. Let’s take a closer look at some of these.

1. Both act as middlemen

Both ISOs and PayFacs act as intermediaries between their customers (merchants) and acquiring banks/payment processors, offering merchants a way to accept payments online and in-store. They can’t provide payment processing; they must partner with banks/payment processors for the same. 

2. Both simplify credit card processing

Most acquiring banks are reluctant to work with high-risk merchants and often work directly only with large businesses. Small businesses, therefore, find it quite difficult to get merchant accounts directly from banks.

Both ISOs and PayFacs make payment processing more accessible for small and high-risk businesses by acting as intermediaries. By working with a PayFac or ISO, merchants don’t need to approach banks directly to process payments. They’re also assured of better customer support should they run into any difficulties. 

3. Both PayFacs and ISOs charge commission

ISOs and PayFacs both get a commission from every transaction that a merchant processes. Commission can be taken per transaction run by the merchant, or paid in a lump sum/subscription-style fee.

PayFac vs ISO: Key Differences

Even though PayFacs and ISOs may seem to be quite similar on the surface, there are a few key differences between them. Merchants need to understand these differences, so they can decide which of these options may be better suited for their business.

1. Onboarding process

Depending on whether you work with an ISO or a PayFac, the merchant onboarding process will look quite different. 

Since an ISO is simply a reseller of merchant accounts, it typically takes a hands-off approach as far as onboarding is concerned. It passes on merchant information to the payment processor, and it’s the latter’s responsibility to do due diligence before approving their application and onboarding them. This process can take anywhere from a few days to a few weeks.

On the other hand, in the payment facilitator model, the PayFac manages merchant applications as well as the onboarding process on their own, including underwriting. It’s worth noting that some PayFacs (like Stripe, PayPal, or Square) do not perform underwriting at the time of the application, so approvals are almost instantaneous.

However, this means that you may be in for unpleasant surprises down the road. If they come across any red flags during underwriting, your merchant account could be suspended or terminated with little to no warning. So, make sure you choose a PSP that performs underwriting at the time of application.

2. Technology used

ISOs typically don’t need to invest a lot in technology or payment infrastructure as they mostly depend on the processor’s technology. However, since PayFacs perform activities like application, underwriting, and onboarding, they will likely need to build their own in-house apps and systems to accomplish all that.  

3. Settlement and funding

ISOs actually never handle a merchant’s money. Transactions are managed entirely by the payment processor including authorization, authentication, and settlement. Further, the processor is in charge of depositing the money to the receiving merchant account.

In contrast, the payment processor deposits the collective funds of all sub-merchants into the PayFac’s master merchant account. The PayFac, in turn, distributes them to their sub-merchants, so payment processing is often faster. 

4. Risk management

In the ISO model, the payment processor assumes all the risks associated with processing merchant transactions, including losses from chargebacks, fraud, or merchants going out of business. ISOs, therefore, have no risk management procedures in place.

In contrast, payment facilitators may be liable for 100% of the risk associated with sub-merchant processing as they take on a more active role in the payment process. So, they need to have stringent controls in place to consistently monitor transactions. It’s also their job to ensure PCI compliance.

5. Contracts

In the ISO model, merchants enter into contracts directly with the payment processor. The ISO may sometimes be included as a third party, but not necessarily. 

In the PayFac model, contracts are always drawn between merchants and the PayFac. They may have the payment processor as a party, but this is not a necessary requirement. 

PayFac vs ISO: Which Is Better for Your Business?

Both payment facilitators and independent sales organizations simplify credit card processing and may be great options for small businesses to work with. However, when it comes to choosing one over the other, you’ll need to consider your unique business needs.

ISOs typically work with multiple payment processors and can set you up with the most lucrative rates. However, getting approved for a traditional merchant account requires you to do a fair amount of due diligence to establish your business’s credibility. If your business is quite new or has very low sales volumes, getting a traditional merchant account could prove to be challenging. 

On the other hand, PayFacs may be willing to accept that risk and can get you up and running fairly quickly. However, they would typically offset the risk through higher processing fees and stricter account limitations.

The Stax Advantage

Stax is both an ISO and a PayFac —but with a difference. Our underwriting is done upfront, so you’ll never have any unpleasant surprises later on. Stax’s all-in-one platform helps you build your payments toolkit easily without having to work with multiple vendors.

Plus, our transparent membership-based pricing ensures that you pay a monthly fee in exchange for the direct costs of interchange—regardless of how much you process. That too, without any contracts, hidden fees, or markups.

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