Without any background in payment processing, it can be difficult to understand the differences between a Payment Processor and an ISO (Independent Sales Organization).
The two terms are often used interchangeably but have distinct roles in the payments industry.
In this article, we’ll break down almost everything you need to know about Payment Processors vs. ISOs, distinguish between them, and make the right decision for your business.
Related article: Evaluating the Differences Between an ISO and a PayFac.
- Payment Processors manage the technical and operational aspects of electronic payments, while ISOs act as intermediaries between merchants and Payment Processors.
- Payment Processors are responsible for authorization, authentication, data security, settlement, clearing, and reporting services, while ISOs focus on sales, marketing, merchant support, customer service, and value-added services.
- Payment Processors and ISOs have a symbiotic relationship, with each party benefiting from the collaboration.
- Examples of Payment Processors include GETTRX, PayPal, Stripe, Square, and Authorize.Net.
- ISOs offer customized payment solutions, personalized support, and value-added services. Still, they may charge higher fees and provide limited control to merchants.
- To choose the best payment processor or ISO for your business, consider pricing, payment options, integration, customer support, scalability, security, and compliance.
- Small businesses may find Payment Processors more suitable due to lower fees. In contrast, large, e-commerce, high-risk, and international businesses may benefit more from ISOs.
- ISOs are not the same as MSPs (Merchant Service Providers), as ISOs strictly work as intermediaries. MSPs may have a more direct relationship with payment processors and acquiring banks.
Without further ado, let’s dive into what these two terms mean:
Table of Contents
What Is a Payment Processor?
Simply put, a Payment Processor is a company that manages the technical and operational aspects of electronic payments.
Payment Processors usually provide additional services such as fraud prevention, compliance support, reporting tools, etc.
They also manage the technology to enable payments from a customer’s credit or debit card and acceptance of other payment methods such as ACH transfers, e-checks, and digital wallets.
In addition to processing payments, Payment Processors may allow merchants to customize their online checkout experience.
Role of Payment Processors in the Payment Ecosystem
Authorization and Authentication
The primary role of a payment processor is to authorize and authenticate transactions.
When a customer makes a purchase, the payment processor verifies the customer’s account information, checking the available balance or credit limit.
This process is essential to avoid fraud and ensure that transactions are completed only when sufficient funds are available.
Secure Data Transmission
Security is paramount when dealing with financial transactions. Payment processors use advanced encryption technologies and data security measures to protect sensitive information during transactions.
They ensure customer data is securely transmitted between merchants, banks, and other parties involved in the payment ecosystem.
Settlement and Clearing
After a transaction has been authorized and authenticated, the payment processor is responsible for the settlement and clearing process. This involves transferring funds from the customer’s bank or credit card to the merchant’s account.
Payment processors also manage reconciling transaction records, updating merchant accounts, and ensuring the funds are accurately transferred.
Compliance and Regulatory Adherence
Payment processors must adhere to strict regulations and industry standards to maintain their status as trusted intermediaries in the payment ecosystem.
This includes complying with the Payment Card Industry Data Security Standard (PCI DSS), Know Your Customer (KYC) guidelines, and Anti-Money Laundering (AML) regulations.
By maintaining compliance, payment processors help to create a secure and reliable environment for electronic transactions.
Reporting and Analytics
Payment processors often provide merchants with tools and services to track and analyze transaction data. This can help businesses identify patterns, monitor sales performance, and make data-driven decisions to optimize payment processes.
By providing authorization, authentication, data security, settlement, clearing, and reporting services, payment processors contribute to a seamless and secure customer experience.
And as the digital economy continues to evolve, these roles will continually evolve to meet market demands.
How Payment Processing Works
Payment processors act as intermediaries, connecting the merchant’s point of sale (POS) system to the customer’s bank or credit card company to verify the transaction details and ensure a secure, smooth transfer of funds.
Complete payment processing needs three key players:
- Payment Processors
- Card Networks
- Issuing Banks
And here’s how they work together to make this possible:
Initiating the Transaction
The process begins when a customer makes a purchase using a credit card, debit card, or other digital payment methods. The customer’s information, such as the card number, expiry date, and CVV, is entered into the merchant’s point-of-sale (POS) system or online payment gateway.
Next, the merchant’s system sends the transaction details to the payment processor, an intermediary between the merchant and the customer’s bank or credit card company.
The payment processor forwards the authorization request to the customer’s bank through the appropriate card network (e.g., Visa, Mastercard, American Express).
The customer’s bank or credit card company verifies the transaction details, checking the account balance or credit limit to ensure sufficient funds are available.
The bank or card company may also perform additional security checks, such as verifying the cardholder’s identity or checking for potentially fraudulent activity.
Once the transaction has been verified, the customer’s bank or credit card company sends an authorization response back through the card network to the payment processor.
This response indicates whether the transaction has been approved or declined. The payment processor then relays this information back to the merchant’s system.
Completing the Transaction
If the transaction is approved, the merchant’s system completes the sale, providing the customer with a receipt or confirmation. The transaction is now considered authorized but not yet settled.
Settlement and Clearing
At the end of the business day, the merchant sends a batch of authorized transactions to their payment processor for settlement.
The payment processor forwards the transactions to the respective banks or card companies, which transfer the funds to the merchant’s account. This process, known as clearing, usually takes 1-3 business days.
What Is an ISO?
An ISO (Independent Sales Organization) is a company that acts as an intermediary between merchants and Payment Processors.
ISOs typically handle sales and customer support for merchants, like helping them set up accounts with Payment Processors and assisting them with any technical or customer service issues they might have.
They’re sometimes called merchant account providers, payment gateways or acquirers. Still, their primary role is to act as a middleman between Payment Processors and merchants.
You can use them to find the best payment solutions and negotiate the terms of service with Payment Processors and other value-added services such as merchant cash advances, credit card terminals, fraud protection services, and development assistance.
Role of ISOs in the Payment Ecosystem
Sales and Marketing
One of the primary roles of ISOs is to market and sell payment processing services on behalf of their partnered processors or banks. They leverage their industry expertise, sales networks, and marketing strategies to acquire new merchant clients and expand the reach of their partners’ services.
ISOs often operate in specific regions or target industries, allowing them to tailor their sales and marketing efforts to the unique needs of their target markets.
Merchant Support and Customer Service
ISOs often act as the first point of contact for merchants, providing customer support and assisting with setting up and maintaining payment processing systems.
They may help businesses choose the right payment processing solutions, integrate payment gateways or POS systems, and troubleshoot technical issues.
By providing personalized support, ISOs can enhance the merchant experience and ensure the smooth operation of payment processing services.
Many ISOs offer additional services beyond payment processing, such as POS hardware and software, payment gateway integration, and payment security solutions.
They may also provide services like business financing, working capital loans, and merchant cash advances. By offering these value-added services, ISOs can help businesses optimize their payment infrastructure and better manage their financial needs.
Risk Management and Compliance
ISOs are crucial in managing risk and maintaining compliance within the payment ecosystem.
They are responsible for ensuring that the merchants they onboard adhere to industry standards and regulations, such as the Payment Card Industry Data Security Standard (PCI DSS) and Know Your Customer (KYC) guidelines.
ISOs may also assist merchants with fraud prevention strategies and risk mitigation measures to protect against unauthorized transactions and data breaches.
How Do ISOs Work?
ISOs begin by establishing partnerships with payment processors or acquiring banks. These partnerships allow ISOs to market and sell the processors’ services to merchants.
In return, ISOs receive a portion of the transaction fees generated by the merchants they onboard. ISOs may partner with multiple processors to offer diverse payment processing solutions.
Sales and Marketing
With partnerships, ISOs engage in sales and marketing activities to acquire new merchant clients.
They often target specific industries or regions, leveraging their industry knowledge and expertise to tailor their marketing strategies.
To reach potential clients, ISOs may employ various channels, including direct sales, telemarketing, trade shows, and digital marketing.
Once a merchant agrees to work with an ISO, the ISO guides the merchant through the onboarding process. This includes setting up the necessary payment processing systems, such as payment gateways or POS terminals, and ensuring that the merchant complies with industry standards and regulations.
Ongoing Support and Services
ISOs provide ongoing support and services to their merchant clients, often acting as the first point of contact for customer service and technical support. They assist with troubleshooting, system updates, and integrating new features or services.
Many ISOs offer additional services like business financing or payment security solutions.
The Relationship Between ISOs and Payment Processors
ISOs and payment processors have a symbiotic relationship, with each party benefiting from the collaboration.
For payment processors, ISOs serve as an extension of their sales and marketing teams, helping to expand their client base and increase revenue. ISOs have the advantage of in-depth knowledge of specific industries or regions, allowing them to tailor their sales strategies and acquire new clients more effectively than the processor could.
For ISOs, partnering with payment processors enables them to offer their merchant clients a comprehensive suite of payment processing solutions. The partnership also provides ISOs with a steady revenue stream through transaction fees or residuals from the merchants they onboard.
Both parties always maintain clear communication and alignment on goals, expectations, and performance metrics to ensure that the partnership remains mutually beneficial and contributes to the overall success of the ISO and the payment processor.
Examples of ISO Payments
Credit Card Processing
ISOs offer merchants the ability to accept credit card payments, both in-person and online. They may provide various solutions, such as POS, virtual, and payment gateways to facilitate credit card transactions.
With the rise of smartphones and digital wallets, many ISOs offer mobile payment solutions that enable merchants to accept payments through mobile devices. This can include contactless payments via near-field communication (NFC) technology or QR code-based payments.
ISOs provide e-commerce payment solutions for online businesses that integrate with popular shopping carts and e-commerce platforms. These solutions typically include a payment gateway, allowing merchants to securely accept and process online transactions.
Some ISOs offer Automated Clearing House (ACH) processing services, enabling merchants to accept electronic bank transfers as payment. This can be particularly beneficial for businesses with recurring billing or subscription-based models.
Strengths of ISO Payments
ISOs often specialize in specific industries or target markets, allowing them to offer customized payment solutions tailored to the unique needs of their clients. This can result in a more seamless and efficient payment experience for merchants and their customers.
ISOs typically provide personalized customer support and assistance, acting as merchants’ first point of contact. This can result in faster issue resolution and higher customer satisfaction.
In addition to payment processing, many ISOs offer value-added services, such as business financing, payment security solutions, and POS hardware and software. These services can help businesses optimize their payment infrastructure and better manage their financial needs.
Weaknesses of ISO Payments
Potential for Higher Fees
In some cases, ISOs may charge higher fees than working directly with a payment processor or acquiring a bank. This is because ISOs receive a portion of the transaction fees generated by the merchants they onboard, which can result in increased costs for the merchants.
Since ISOs act as intermediaries between merchants and payment processors, merchants may have limited control over the terms and conditions of their payment processing agreements. This can make it more challenging for businesses to negotiate fees or address specific concerns.
Varying Quality of Service
The quality of service ISOs provide can vary significantly, as not all ISOs are created equal. It’s crucial for merchants to carefully vet potential ISO partners and assess their track record, reputation, and expertise to ensure a positive and productive relationship.
Differences Between Payment Processors and ISOs
Here’re some key differences between payment processors and ISOs.
|Aspect||Payment Processor||ISO (Independent Sales Organization)|
|Main Function||Manage electronic fund transfers between parties||Act as intermediaries between merchants and payment processors|
|Relationship with Banks||Direct relationship with acquiring banks||May have partnerships with multiple banks and processors|
|Customer Interaction||Limited, mainly for technical support||Direct contact for sales, support, and merchant services|
|Technical support||Related to transaction processing and may offer APIs for integration||Focuses on account setup and integration with the payment processor’s platform|
|Services Provided||Payment processing, transaction authorization, and settlement||Sales, support, merchant services, and equipment leasing|
|Fee Structure||Charge merchants per transaction and/or monthly fees||May add a markup to processor fees for their services|
|Risk Management||Manage and mitigate risk in transactions||May handle underwriting and risk management for merchants|
|Customization & Flexibility||Limited customization and flexibility in terms of services and pricing||Greater customization and flexibility in terms of services and pricing, as they can negotiate on behalf of merchants|
|Regulations||Must comply with payment industry regulations (PCI DSS)||Must be registered with payment processors and card networks|
Payment Processor vs. ISO: Which Is Best for Your Business?
How do you determine the best solution for your business?
We’ve put together a table to help you make a choice.
The table compares the pros and cons for different business types when choosing between a payment processor and an ISO with a ranking score.
A higher score indicates a better fit (1 = least suitable, 3 = most suitable).
But you need to consider individual business needs and circumstances before deciding, as the best choice will vary depending on specific requirements.
|Business Type||Payment Processor||ISO||Overall Score|
|Small Business||Pro: Lower fees
Con: Limited customer support
|Pro: Personalized support
Con: Higher fees
|PP: 3, ISO: 2|
|Large Business||Pro: Better volume discounts
Con: Limited flexibility
|Pro: Customizable solutions
Con: More complex management
|PP: 3, ISO: 2|
|E-commerce||Pro: Integrated online solutions
Con: Limited customization
|Pro: Tailored solutions
Con: Potentially higher fees
|PP: 2, ISO: 3|
|High-Risk Business||Pro: May not support high-risk clients||Pro: Experience with high-risk
Con: Higher fees for high-risk
|PP: 1, ISO: 3|
|International Business||Pro: Multi-currency support
Con: Limited global support
|Pro: Multiple processor relationships
Con: Potentially higher fees
|PP: 2, ISO: 3|
Note: Sometimes, the pros and cons may not apply to every payment processor or ISO, as individual companies may offer different services and fee structures. Always research and compare offerings from multiple providers to find the best fit for your business.
FAQs on Payment Processors and ISOs
Is an ISO a payment processor?
No, an ISO (Independent Sales Organization) is not a payment processor. They are intermediaries that work closely with payment processors to provide sales, support, and merchant services. ISOs help merchants set up payment processing services by partnering with payment processors and banks.
Where do ISOs fit into the payment ecosystem?
ISOs play a crucial role in the payment ecosystem by connecting merchants with payment processors and banks. They help businesses find the right payment processing solution, offer merchant services like equipment leasing, and provide ongoing support. ISOs typically work with multiple payment processors and banks to offer merchants various options.
Are ISOs and MSPs the same thing?
MSPs (Merchant Service Providers) and ISOs are often used interchangeably, but slight differences exist. While both provide payment processing services and support to merchants, MSPs may have a more direct relationship with payment processors and acquiring banks. In some cases, MSPs can be payment processors themselves, whereas ISOs strictly work as intermediaries.
What does ISO stand for in payment processing vs. ISO?
In the context of payment processing, ISO stands for Independent Sales Organization. It refers to companies that partner with payment processors and banks to provide payment processing services and support to merchants. In other contexts, ISO can stand for International Organization for Standardization, which is an organization that develops and publishes international standards across various industries.
How do I know which processor is best for my business?
Choosing the best payment processor for your business depends on several factors, including your business type, size, transaction volume, industry, and specific needs. Consider the following when evaluating payment processors and ISOs:
- Pricing: Compare transaction fees, monthly fees, and any other charges.
- Payment options: Ensure the processor supports the payment methods your customers use.
- Integration: Check if the processor is compatible with your existing software and systems.
- Customer support: Evaluate the quality and availability of customer support.
- Scalability: Consider whether the processor can accommodate your business’s growth.
- Security and compliance: Ensure the processor complies with industry security standards like PCI DSS.
By comparing these factors, you can choose the payment processor or ISO that best suits your business needs.
Need help exploring your options?
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