Independent sales organisations (ISOs): What they are and how they work

The global shift toward cashless payments has gained momentum in recent years – and businesses must adapt to their customers’ changing payment preferences.

Understanding the role of modern payment processing providers, including independent sales organisations (ISOs), is important for businesses seeking to adapt and improve their payment processing capabilities. But ISOs are not merely payment processing providers. They serve as a bridge between businesses and the financial institutions responsible for processing electronic payments.

This article will describe the key aspects of ISOs, why their role has become important and how they can help businesses improve their operations. Partnering with an ISO could generate new e-commerce opportunities for your business.

What's in this article?

• What is an ISO?
  
• What do ISOs do for businesses?
  
• ISO vs payment processor: What’s the difference?
  
• Are ISOs different from merchant services providers?
  
• Who can become an ISO?
  
• What types of businesses should work with an ISO?
  
• Pros and cons of working with an ISO
  

What is an ISO?

An ISO is a third-party entity that’s authorised to market and sell the credit card processing services of banks or credit card companies. They are intermediaries between these financial institutions and businesses that need to process credit card transactions.

What do ISOs do for businesses?

ISOs provide value most visibly in sectors where traditional banking services fall short, particularly in high-risk industries and for businesses requiring more flexible or specialised payment processing. The rise of ISOs also mirrors broader trends in finance and technology, where personalisation, ease of use, flexibility and specialised solutions are in high demand.

ISOs provide several key services to businesses, primarily related to credit and debit card payment processing. These include:

• Merchant accounts
  ISOs help businesses set up merchant accounts, which are special types of bank accounts that allow businesses to accept credit and debit card payments.
• Payment processing
  ISOs provide the technology and services needed to process credit card transactions. This can include physical card readers, online payment gateways and more.
• Equipment sales or leasing
  Many ISOs sell or lease the equipment needed to accept card payments, such as credit card terminals or point-of-sale (POS) systems.
• Customer support
  ISOs often provide customer support to help businesses troubleshoot any issues that they may have with their payment processing systems.
• Value-added services
  Many ISOs offer additional services beyond just payment processing. This can include things like business analytics, integrated payment solutions, security and fraud prevention services, and more.

The goal of an ISO is to make it easier for businesses to accept and process card payments. By acting as an intermediary between the business and the bank or credit card company, ISOs can provide personalised service and support that may not be available directly from larger financial institutions.

ISO vs payment processor: What’s the difference?

ISOs and payment processors both operate behind the scenes to facilitate seamless and secure electronic transactions. However, they differ in the roles that they play, their responsibilities and their interactions with businesses and financial institutions.

Here’s an explanation of their differences in more detail:

• Independent sales organisations
  ISOs are third-party entities that serve as intermediaries between businesses and the payment processors or acquiring banks. They are authorised to sell or lease the services of banks and credit card companies. Their responsibilities include establishing relationships with businesses, assisting them in setting up merchant accounts, sometimes supplying the necessary equipment for accepting card payments, and often providing additional services such as customer support and business analytics.
• Payment processors
  Payment processors manage the back-end technical and financial details of processing transactions. When a customer pays with a credit or debit card, the payment processor communicates with the issuing bank (the customer’s bank) and the acquiring bank (the business’s bank) to facilitate the transfer of funds. Their role is to ensure that the transaction information is accurately transmitted, the customer has sufficient funds or credit and the funds are correctly debited from the customer’s account and credited to the business’s account.

Sometimes the roles of ISOs and payment processors overlap. Some businesses function as both ISOs and payment processors, offering a comprehensive range of services from sales and account setup to technical transaction processing. This dual role allows these ISOs to offer businesses a single point of contact for all their payment processing needs, which can lead to a better payment processing experience.

Are ISOs different from merchant services providers?

" Merchant services provider" is a broad term that encompasses a variety of entities, including both ISOs and payment processors. A merchant services provider is any company that provides services allowing a business to accept electronic payments, including credit and debit cards.

So, while all ISOs can be considered merchant services providers, not all merchant services providers are ISOs. Other types of merchant services providers may include payment processors, payment gateway providers and businesses that offer POS systems.

In some cases, a single business may act as both an ISO and a payment processor, providing a comprehensive suite of merchant services. In other cases, a business may work with several different merchant services providers to meet all of their payment processing needs. The best arrangement can depend on a variety of factors, including the size and type of the business, the volume of transactions and the specific services required.

Who can become an ISO?

The ISO market has been evolving recently, partly driven by the rapid growth of digital transactions and the increasing need for specialised payment solutions. More businesses are offering ISO services to capitalise on these developments and provide personalised services to specific business sectors. Since traditional banking institutions sometimes struggle to adapt quickly to new trends or niche market needs, ISOs can fill this gap with their agility and a customer-centric approach.

Becoming an ISO can be attractive for a business that wants to help other businesses with the complexities of payments or implement recurring revenue models. And the increase in ISOs reflects broader trends in the financial sector toward decentralisation and using technology to provide more personalised, efficient services.

Becoming an ISO requires meeting several criteria and going through a formal registration process. Here are the general steps for becoming an ISO:

• Form a business entity
  The first step is to set up a legitimate business entity, such as a corporation or an LLC. In the US, this involves filing the appropriate paperwork with your state’s Secretary of State or other appropriate agency.
• Obtain a sponsoring bank
  ISOs must have a sponsoring bank. This is a bank that has a relationship with the major credit card networks and can underwrite the transactions processed by the ISO. The sponsoring bank is responsible for any risk associated with the transactions processed by the ISO.
• Register with the card networks
  ISOs must register with the major card networks that they plan to work with. This usually involves paying a registration fee, and the ISO must meet the networks’ standards for financial stability and compliance with regulations.
• Secure insurance
  ISOs are typically required to have a certain amount of insurance to cover potential losses.
• Set up compliance processes
  ISOs must comply with all relevant regulations, including the Payment Card Industry Data Security Standard (PCI DSS) and any applicable local or nationwide laws.
• Build customer service and technical support functions
  ISOs need to have a system in place to support their business customers. This can involve hiring staff or contracting with third-party providers.

Remember, these are just general steps. The specific requirements can vary depending on the regulations in your area and the requirements of the sponsoring bank and card networks. And becoming an ISO is a significant undertaking that involves financial risk, so it’s important to thoroughly understand the business and have a solid business plan in place before getting started.

What types of businesses should work with an ISO?

Many types of businesses can benefit from working with an ISO, particularly those that process a significant volume of credit or debit card transactions. Here are a few types of businesses that might consider partnering with an ISO:

• Retail businesses
  Any business with a brick-and-mortar presence where customers are regularly paying with credit or debit cards can benefit from the services of an ISO. This includes everything from clothing shops to restaurants to grocery shops.
• Online businesses
  E-commerce companies, online retailers and any business that accepts payments online can also benefit from working with an ISO.
• Service providers
  Businesses that provide services, such as salons, consulting firms or repair shops, often accept card payments and can benefit from an ISO’s services.
• High-risk businesses
  Some businesses operate in industries considered "high risk" by payment processors due to factors such as higher chargeback rates or regulatory scrutiny. Examples could include businesses in the adult, gambling, tobacco or cannabis industries. ISOs can sometimes help these businesses secure merchant accounts when traditional banks might be reluctant to do so.
• Small- and medium-sized businesses (SMBs)
  While businesses of all sizes can work with ISOs, small- and medium-sized businesses can particularly benefit from the personalised customer service that ISOs often provide.

While many businesses can benefit from working with an ISO, it’s not the right choice for every business. Consider your business’s size, industry, transaction volume and specific needs when deciding whether to work with an ISO.

Pros and cons of working with an ISO

Working with an ISO can offer several benefits as well as potential drawbacks for a business.

Benefits of working with an ISO

• Customer service
  ISOs often provide more personalised and responsive customer service than larger banks or card processors. They are generally more accessible and can quickly address any issues or concerns that may arise.
• Flexibility
  ISOs can often provide more flexible solutions that can be tailored to a business’s specific needs. They may offer a wider variety of equipment options, payment gateways and pricing structures.
• Assistance for high-risk businesses
  Businesses in high-risk industries may have trouble securing a merchant account with a traditional bank. ISOs often have more flexibility and may be able to help these businesses set up accounts.
• Value-added services
  Many ISOs offer additional services beyond payment processing, such as business analytics, security and fraud prevention services and more.

Drawbacks of working with an ISO

• Higher cost
  ISOs may charge higher fees than direct processors or banks. This can include merchant account setup fees, transaction fees, monthly fees and equipment lease or purchase fees.
• Hidden fees
  Some ISOs are not transparent about their fee structures, which can result in unexpected costs for businesses.
• Contract terms
  Some ISOs require businesses to sign long-term contracts that can be difficult and costly to exit.
• Reliability and reputation
  As with any business, the quality of service provided by ISOs can vary. It’s important for businesses to do their due diligence and research the ISO’s reputation before entering into an agreement.

Whether or not to work with an ISO depends on the specific needs and circumstances of your business. Thoroughly research and consider all of the options before choosing a payment processing solution, to ensure that your provider is not only equipped to support your current payment needs but also the growth and evolution of your business – and how that will shift your future payment needs.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.