Management & Finance

What Merchants Should Know about ISOs

The pandemic-induced shift to online and contactless payments has been a boon for credit card providers and their sales agents. The industry depends on those agents, called “independent sales organizations” — ISOs — to market payment services to businesses.

In this post, I will examine the role of ISOs. Understanding how ISOs operate will help merchants secure the best payment processing.

This follows from my 3-part series on credit card processing, which explains the participants and pricing methods and offers money-saving suggestions. My 2-part primer on merchant accounts addresses their purpose and how to select the best provider.

Why ISOs?

Acquiring banks and payment processors rely on ISOs to sell their services. A good ISO will use its experience in an industry to tailor solutions for merchants. ISOs that specialize in payment processing for restaurants are an example.

ISOs can sell the services of many merchant acquirers and payment processors, picking and choosing the best solution for a merchant. ISOs are similar to independent insurance agencies that find the best policies for their clients.

ISOs are supposed to understand the circumstances of their merchant clients and propose suitable solutions, such as pricing, equipment, and technology. The best ISOs take the time to understand their clients and build long-term relationships.

ISOs must register with the card brands — Visa, Mastercard, American Express, Discover. Registration fees are approximately $5,000 per year, per brand. ISOs frequently have their own agents, who do not have to register.

ISOs range in size. Some are huge, with hundreds of agents and employees; others are small, with just a few employees or even one employee. Larger ISOs sometimes subcontract parts of their business to smaller ISOs. To add to the confusion, Visa and Mastercard do not use the acronym ISO. Instead, Mastercard uses MSP (member service provider), and Visa uses TPA (third-party agent).

How ISOs Make Money

Understanding how ISOs are compensated will help merchants receive the best pricing and services. ISO revenue comes from:

  • Residuals, which are a percentage of the fees that merchants pay for payment processing. Every time a merchant accepts a payment, the ISO receives a residual. Residuals are the primary revenue source for most ISOs.
  • Value-added upselling, which are commissions from selling additional services, such as fraud verification, enhanced reporting, and point-of-sale accessories.
  • Bonuses from new sign-ups, which can range from $400 to $5,000 per merchant.
  • Selling portfolios. ISOs can sell their merchant portfolios to private investors or other ISOs. The price depends on potential residuals. Merchants should check their agreements carefully to ensure that pricing and service levels do not change if their account is sold.

ISOs: Good vs. Bad

I’ve worked in the payments industry for roughly 20 years. Most ISOs and their agents are honest, hard-working experts who want their merchant clients to succeed. Unfortunately, a few are not.

Good ISOs:

  • Review merchant statements frequently, looking for ways to reduce fees.
  • Provide expertise based on the merchant’s industry.
  • Sell products and services that help the merchant, regardless of residuals and bonuses.
  • Proactively help merchants.
  • Explain their contracts in detail, ensuring the merchant understands the terms.

Bad ISOs:

  • Use aggressive, high-pressure sales tactics.
  • Do not explain the fees, service levels, and terms and conditions.
  • Sell unnecessary services and equipment.
  • Disappear after the contract is signed.

Tips for Merchants

When dealing with ISOs:

  • Understand the fees. I’ve seen fees that start low but increase over time and other bait-and-switch sales tactics.
  • Remember that ISOs and their agents rely on residuals and bonuses. Make sure an ISO-recommended product is good for your business.
  • Review the contract carefully and retain the final, executed copy.
  • Ask as many questions as necessary. There are no stupid questions. A good salesperson will answer professionally and politely.
  • Inquire whether the ISO intends to sell your account. Understand your rights if that occurs.
  • Compare the offer to other ISOs.
  • Recognize that an ISO may not fit your business. Moreover, smaller ecommerce operations, micro-merchants, and occasional sellers likely will not benefit from an ISO and would be better off relying on end-to-end service providers such as PayPal, Square, and other peer-to-peer services.
Mike Eckler

Mike Eckler

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