Independent Sales OrganizationsThe Role of an ISO in the Payment Process

July 6, 2022 | 11 min read

independent sales organization ISO

In a Nutshell

An independent sales organization, or ISO, is an outside provider who connects merchants to credit card processing. In this article, we’ll explain what you need to know about ISOs—what they are, how they work, why you need one, and any potential downsides they may hold for your business.

Players in the Payment Process

Merchants aren’t lacking options regarding payment technology. There are multiple options available that get the job done expertly and efficiently. Independent Sales Organizations play a key role in the payment process for many merchants, but most don't know what an ISO is.  So what makes an independent sales organization different? What sets ISOs apart from a member services provider (MSM) or a third-party payment processor?

What is An Independent Sales Organization?

An independent sales organization, or ISO, sounds like a team of freelance sales representatives you can hire to bring in business … and that’s actually not far from the truth. ISOs are actually outside providers connecting merchants to credit card processing.

Independent Sales Organization (ISO)

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An Independent Sales Organization, or ISO, is a specialized third-party company that sells and manages credit card processing services outside of a bank or other financial institution. This service is usually provided in exchange for a percentage of the merchant’s sales.

An ISO allows retailers to process credit cards without having a merchant account with an acquirer. It effectively serves as a middleman between your business and the bank. To better understand what an ISO is and does, though, we should discuss some related banking terms that can confuse things.

Credit Card Associations

These are major card networks like Visa, Mastercard, and American Express. The credit card associations set the rules regarding credit card payment processing and interchange fees. They also serve as an intermediary and arbiter between acquiring and issuing banks, and maintain standards for their own credit card networks.

Association Member Banks

Financial institutions like BofA, Wells Fargo, and Chase are association member banks. That means they’re part of a card association’s network, and are therefore allowed to accept transactions from credit card networks and third-party payment processors.

Merchants

In order to accept credit cards, you’ll need a merchant account, which is normally set up directly with an acquiring bank. This allows your acquirer to accept funds from cardholders on your account.

Independent Sales Organizations

ISOs are not members of any card association, but they do maintain a special relationship with one or more banks that are association members. They act as third-party representatives for banks and payment processors, selling processing services to merchants, then managing daily merchant account activities and interactions.

You can think of independent sales organizations as brokers who resell and service processing abilities to businesses who either can’t or don’t wish to have a merchant account directly with a bank. They help connect millions of merchants to a comparatively small number of payment processors.

ISOs can sometimes garner a skewed reputation as an illegitimate enterprise, but they are as safe and secure as a bank. In fact, each one must be sponsored by an association member bank, which is responsible for the actual handling of funds.

A brief note: ISO’s are often confused with MSPs (Member Service Providers or Merchant Service Providers). The reason for this is simple; they’re basically the same thing. In most instances, the only difference is that Visa refers to merchant account providers as ISOs, while Mastercard uses MSPs.

Who Can Become an ISO?

To process payments safely, legally, and with member bank approval, ISOs must pass a strict vetting process. An association member bank will want to ensure the ISO meets its legitimacy and security requirements before sponsoring the company.

That said, not all ISOs are created equal. A non-registered ISO typically isn’t sponsored by a bank, but is simply a subcontractor working for a registered provider. To be safe, any merchant considering working with an independent sales organization should choose from the list of ‘registered’ ISOs… and those alone.

Why You Should Work With an ISO

If this is your first time considering an independent sales organization or MSP, you might be asking yourself if it wouldn’t make more sense to process payments directly through the bank or processor.

Well, not always.

There are several benefits to working with independent sales organizations over financial institutions and other third-party payment processors:

ISOs are More Versatile

Because they’re not subject to all the strict regulations banks must follow, ISOs can be much more flexible than member banks or even processors.

More importantly, ISOs can work with various acquiring banks at once, and partner with other merchant service providers, eCommerce platforms, and payment vendors. As a side benefit, this also may give you the opportunity to negotiate pricing–something that seldom happens with a bank.

ISOs are More Customizable

An ISO’s flexibility also allows them to tailor a particular program to your business. Especially for merchants with unique business requirements, an ISO is more likely to find the specific service providers and hardware platforms that best fit your needs. You’re not necessarily tied to one product.

ISOs are More Supportive

With far fewer barriers to interaction, independent sales organizations tend to be better at providing customer service and support.

Major banks and processors generally lack the bandwidth to cater to each merchant on an individual level. ISOs, on the other hand, are usually smaller, and deal with fewer and smaller merchants. This often means they can provide a more personable and human experience for their clients.

ISOs may be the Only Option

Acquiring banks are extremely selective about which businesses they’re willing to offer merchant accounts to. This makes sense, as acquirers may be liable if their merchants commit fraud, receive chargebacks, or go bankrupt.

And since some types of businesses (online gambling, adult entertainment) are more prone to risk and credit-card fraud than others, a bank may automatically reject a merchant, based only on the type of business.

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In these situations, ISOs may be your best option. Again, they have access to a wider range of vendors, meaning they may be able to procure an account on your behalf.

So if you’re looking for a more all-around personalized payment processing experience, working with an independent sales organization may be the answer. That said, potential drawbacks do exist.

Potential Downsides of Working With an ISO

As we frequently mention in this blog, there is no such thing as a truly ‘perfect’ solution in business. Independent sales organizations can be an extremely effective and prudent choice for most merchants, but like any payment and sales model, there are drawbacks, as well:

Increased Costs

Banks and processors charge you for the services they provide, and ISOs are no different. ISOs typically work on a commision basis, receiving a cut on each transaction the merchant processes.

Depending on your situation, your fees through an ISO may be less than you’d pay at the bank. But remember, ISOs are not subject to the same laws and regulations that banks must follow. That means their rates can be substantially higher, especially for high-risk merchants. Be sure to carefully compare to make sure you’re comfortable with the fees.

Longer Processing Times

ISOs have their own internal practices and command strata, and you don’t get a say-so in that. They can take 48 hours to begin processing a payment, which delays when funds appear in your account. Again, do a careful comparison to see if this inconvenience is offset by the lower transaction fees and custom-tailored programs.

External Auditing

Keep in mind that you’re dealing with a sub-contractor, not the bank. When you outsource any aspect of your operation, there are a variety of contracts and legal issues you must observe. It’s the only way to protect your business and ensure you’re compliant with IRS and state and local regulations.

While this is hardly less time-consuming or costly than hiring in-house staff, it is still a concern that merchants should be aware of.

Level of Priority

Whether the ISO is a small or large enterprise, you will likely not be their only customer. Your position on their priority scale will never be up to you.

Of course, the same could be said about dealing with a bank or processor, but if response time concerns you, factor a smaller-sized ISO into your search. If you and an ISO are going to establish a positive and mutually beneficial working relationship, it’s wise to vet each of your choices carefully.

What to Look For in an ISO

It should be clear by now that not all independent sales organizations are ideal for every business. To make the best decision, you should look for an ISO that most closely aligns with your individual needs and possess:

  • Member bank certification
  • Verifiable industry expertise
  • Dynamic partnerships 
  • Tech certifications and capabilities
  • Capable and informed staff
  • A plan for your business

Again, you’re probably safest if you stick to companies on the registered list.

Once you’ve found a company that fits the above considerations, ask their representatives about the following:

#1 | Is Their Tech a Good Fit?

Depending on your business type, you may require more than one method of taking payments. A brick-and-mortar merchant with a heavy eCommerce component, for example, will need payment technology solutions that integrate with both.

Not all tech is the same, so be sure you choice aligns well with you and your equipment.

#2 | What Payment Types are Supported?

Most payment processors accept just about every type of card out there (definitely make sure to ask this question aloud), but you may need to accept alternative forms of payment. If your business requires BNPL or recurring billing options, make sure your ISO represents a payment processor who offers these options.

#3 | Fees and Pricing

Each ISO and payment processor has its own associated costs and fees, from transaction fees to interchange fees to residuals. We’ve said it before, but it bears repeating: before you select an ISO, make a careful comparison of costs–including potential hidden fees. The right vendor should be a good working fit… but you also want to be sure you’re getting the most out of your investment.

The Bottom Line

Independent sales organizations are a great alternative to working directly with a bank to process payment cards. That said, whenever you outsource functions like payment processing, it’s important to know exactly what you’re getting into and what you’re hoping to achieve.

Thankfully, you don’t have to work through the selection process alone.

If you’re on the fence about payment processors because you are experiencing a high number of chargebacks, effective chargeback management could be your solution.

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