Payment processing has been an important part of any business for centuries. When a merchant opens up a shop or store in the present time, they need to hire the services of a reliable payment processor. In the history of human civilization, payment systems were not there as there was no currency, and people used to buy things by exchanging commodities.
However, payment gateways and platforms like Paypound are essential for doing online business in the present era. Independent sales organizations (ISO) and payment facilitators (Payfac or PFs) both are parallel channels in the payments ecosystem as they act as mediators between payment processors and merchants by providing them with access to the payments system. Despite having so many similarities, ISOs and PFs differ in many ways. Read below to understand how they contradict each other.
Funding is an area where PFs are more flexible as compared to ISOs. In PF, funding can be done through the bank account to which it has been linked, whereas, in the case of ISOs, they are not allowed to touch the funds or the money in the processing system.
Sub-merchants who work under a PayFac do not have their own MIDs, and all transactions are processed via the agent’s master merchant account. The aggregated processing means that the funds from the transaction are first paid to PayFac, which distributes them to the merchants, which essentially acts as a funding organization towards the merchant. ISOs, on the other hand, never touch a merchant’s money that moves directly from the payment processor to the receiving merchant’s account.
PFS takes upon a large number of responsibilities as compared to ISOs. In PFs, the merchants apply directly, thus making it responsible for the whole on-boarding process, whereas ISOs pass the information through their boarding portals and processing partners, thus being less responsive.
Merchants usually apply directly to the PayFac, making it responsible for both the application and onboarding. ISOs pass the merchant data on their processing partner’s boarding portal. PayFac is responsible for most of the underwriting, while only some wholesale ISOs perform underwriting and share the responsibility with the processor.
The risk associated with PFs is generally more than that associated with PFS. In PFs, you trust a third party for underwritings and to perform consistent diligence on merchants. In contrast, ISOs have no or zero responsibility for any losses incurred by merchants. The additional risk is not something most processors are ready to absorb. So, PayFac or ISO needs to accept a greater level of responsibility that can be 100 percent in the case of PayFacs. Although there are benefits of taking on high risk, with great flexibility and portfolio control, it can raise the costs as well.
PayFacs needs to be extremely careful with your underwriting, even more so than wholesale ISOs, and that means more risk assessments and stronger and, therefore, expensive underwriting departments. In contrast, retail ISOs generally have no underwriting liability and little or no liability for dealer losses, with the exception of the loss of their own waste in fraudulent sales.
ISOs are more flexible than PFs as they primarily act as resellers and have a variety to resell, thus providing more options to the merchants. In contrast, PFs are less flexible as they keep their operations simple by having not more than two processing partners.
PFS requires more use of technology as compared to ISOs. Both require their own in-house systems in order to connect with their processing partners. But still, ISOs have less complex projects and require less technology than PFs.
There are also some popular technologies that both ISOs and PayFacs use to gain a competitive advantage, reduce costs and improve merchant acquisition. One of the most popular and influential shared technologies is client asset management software, platforms that provide the prospecting, selling, and maintaining tools ISOs and PayFacs need to excel in an overcrowded and competitive industry.
Many fundamental differences set both PFs and ISOs apart. ISOs these days are dying out, thus leaving the space for PFs. So if you are using an ISO, Switch to PF and start enjoying its benefits.
Contracts and Merchant Relationships
Both the models also differ in terms of merchant agreements. While the card brand rules allow dual-party agreements between a sub-merchant and PF, the sponsor bank must be a party to the contract in case of ISOs. In the cases where an ISO is selling services to a merchant, the contract is still between the merchant and the sponsor only. Sometimes the ISO will be included in a three-party agreement.
Wide Variety of functions
Payfacs offer a wider range of functions as compared to ISOs. Most ISOs resell merchant accounts issued by acquiring banks, PayFac actively participates in the merchant lifestyle. Some of the functions performed by PayFacs include payment processing, funding, onboarding, reconciliation, reporting, settlement, and chargeback handling.
ISOs act primarily as resellers, and the more products they have to resell, the more options they can offer dealers, the more flexible they are with applications, the more fees they have, etc. Access to a wider range of products requires more partners, and therefore most major ISOs have relationships with half a dozen or more payment processors. PayFacs are the opposite. Since they handle all their sub-merchant transactions centrally and in an aggregated manner, a large number of partners has no advantage. Most PayFacs have no more than two processing partners, and many work with just one to make their processes as simple and rational as possible.
ISOs and FPs may occupy a similar place, but their fundamental differences set them apart. The options PMs have in shaping their business practices can allow a greater degree of control over the merchant experience compared to an ISO. However, with this control, there is often a greater need to manage risk. Regardless of whether companies act as FPs or ISOs, they share their most important responsibility: protecting the integrity of the payment system.