Over the last decade, there has been significant growth in credit card and debit card transactions worldwide, with cash payments on the decline.
According to data from the Federal Reserve, credit cards account for 32% of retail purchases, followed by debit cards at 30%, making cards the dominant payment method for retail transactions
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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PayFac vs. ISO at a glance
PayFacs and ISOs both help businesses accept card payments, but they do it in different ways. The biggest differences come down to merchant accounts, onboarding, risk, compliance, and who manages the payment relationship. Use the table below for a quick side-by-side comparison before diving into the details of each payment model.
| Feature | PayFac | ISO |
| Merchant account | Merchants operate under the PayFac’s master merchant account as sub-merchants. | Each merchant receives its own dedicated merchant account from the acquiring bank or processor. |
| Onboarding speed | Typically faster, with streamlined onboarding that can take minutes or hours. | Usually takes several days because the processor completes underwriting and approval. |
| Underwriting | Managed by the PayFac, either upfront or after onboarding depending on the provider. | Primarily handled by the payment processor or acquiring bank. |
| Risk & compliance | The PayFac takes on greater responsibility for risk management, compliance, fraud monitoring, and chargebacks. | The processor or acquiring bank assumes most risk and compliance responsibilities. |
| Funds flow | Funds are deposited into the PayFac’s master account before being distributed to sub-merchants. | Funds are deposited directly into the merchant’s own account by the processor. |
| Merchant relationship | Merchants work directly with the PayFac for onboarding, support, and payment services. | Merchants typically work with the ISO for sales and support but contract directly with the processor. |
| Technology | Often provides an integrated payments platform with embedded onboarding and payment tools. | Relies largely on the payment processor’s technology and infrastructure. |
| Best for | SaaS platforms, marketplaces, and businesses that prioritize fast onboarding and embedded payments. | Established businesses that want their own merchant account, more processor choice, and potentially lower processing costs. |
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. 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.
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 (merchant service provider) 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 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.
When should you choose a PayFac?
A PayFac is often the better choice if speed, simplicity, and a seamless payment experience are your top priorities. Instead of applying for a dedicated merchant account, businesses can start accepting payments as sub-merchants under the PayFac’s master merchant account. That typically means less paperwork and a much faster onboarding process.
A PayFac may be a good fit if you:
- Want to start accepting payments quickly
- Run a SaaS platform, marketplace, or other software business with embedded payments
- Value a streamlined onboarding experience
- Prefer working with a single payment provider for onboarding, payments, and support
- Want a more integrated customer experience
The tradeoff is that PayFacs take on greater responsibility for compliance and risk management, which often comes with stricter monitoring and account policies.
When should you choose an ISO?
An ISO is often the better option for businesses that want their own merchant account and greater flexibility when choosing a payment processor. Rather than operating under a master merchant account, you’ll have a direct relationship with the processor or acquiring bank, which can provide more control as your business grows.
An ISO may be a good fit if you:
- Want your own dedicated merchant account
- Process higher transaction volumes
- Want access to multiple payment processors and pricing options
- Prefer a direct contractual relationship with your processor
- Are an established business looking to optimize payment processing costs
While the onboarding process may take longer, many businesses appreciate the added flexibility, potential for lower fees, and ability to tailor their payment processing solution to their long-term needs.
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 Connect advantage
Stax Connect gives SaaS platforms the technology, infrastructure, and expertise needed to launch and scale embedded payments without building a payments organization from the ground up. With an end-to-end payments stack, white-label capabilities, and direct connections to card brands, platforms can manage the payments experience through a single partner rather than piecing together multiple vendors.
Beyond the technology, Stax Connect supports critical parts of the payments lifecycle, including enrollment, underwriting, risk and compliance, settlement, go-to-market strategy, and customer support. This combination of payments infrastructure and hands-on expertise helps platforms increase payment adoption, grow payments revenue, and deliver a seamless experience to their customers.
Quick FAQs about PayFac vs ISO
Q: What is a PayFac in payment processing?
A payment facilitator (PayFac) is a type of merchant service provider that simplifies the payment process for businesses by allowing them to accept electronic payments using the PayFac’s infrastructure.
Q: How does an ISO differ from a PayFac in the payments ecosystem?
An independent sales organization (ISO) acts as a third-party intermediary, connecting merchants with acquiring banks or payment processors. Unlike PayFacs, ISOs do not handle the funds and typically do not take on underwriting responsibilities.
Q: Which is better for my business: PayFac or ISO?
The choice between a PayFac and an ISO depends on your business needs. PayFacs offer faster onboarding and a simplified process, ideal for new or small businesses. ISOs, on the other hand, can offer more competitive rates by working with multiple payment processors.
Q: What are the similarities between PayFacs and ISOs?
Both PayFacs and ISOs act as intermediaries between merchants and payment processors, facilitating credit card processing. They simplify the process for businesses, especially those considered high-risk or small, and both charge a commission for their services.
Q: How do PayFacs handle risk management differently than ISOs?
PayFacs are responsible for managing risks associated with sub-merchant processing, including chargebacks and fraud. They need to have strict controls in place for monitoring transactions. In contrast, ISOs pass the risk management responsibilities to the payment processors.
Q: What is the onboarding process like for PayFacs compared to ISOs?
PayFacs handle the entire onboarding process, often providing instant approval without upfront underwriting. ISOs, however, transfer merchant information to the payment processor for due diligence, which can make the process longer.
Q: How do PayFacs and ISOs earn their revenue?
Both PayFacs and ISOs earn revenue through commissions on transactions processed by merchants. This can be structured as a per-transaction fee or a monthly subscription model.
Q: What role does technology play in the operations of PayFacs and ISOs?
PayFacs often invest in technology and payment infrastructure to manage applications, underwriting, and onboarding processes. ISOs rely more on the technology provided by their partnered payment processors.
