Anyone exploring the payments world eventually runs into the terms ISOs and PayFacs. On the surface, they seem to do the same thing. However, there are many differences in the way they operate.
If you’re entering the world of online payment processing, chances are you’ve run into the term Independent Sales Organization (ISO) and Payment Facilitator (PayFac). Comparing an ISO versus PayFac is instructive since you must understand the differences before offering payment acceptance features to your clients.
Here’s what you’ll learn in this article about ISOs and Payfacs:
- Is an ISO a PayFac?
- 6 differences between an ISO and a PayFac
- Why a PayFac might be a better choice for your business
- Frequently asked questions about ISOs versus PayFacs
Table of Contents
Is an ISO a PayFac?
An ISO is a third-party payment processor. It handles merchant account setup and smooths payment acceptance for an ISV or SaaS platform. In contrast, payment facilitators offer sub-merchant accounts to their clients and process transactions on their behalf using PayFac’s merchant account.
There are several differences between an ISO and a PayFac when you look under the hood and examine how they operate. ISOs have long occupied the payment processing and acceptance space in the industry. PayFacs are a relatively new type of organization.
What Is the Difference Between an ISO and ISV?
An ISO assists in processing payments for its clients. ISVs or Integrated Software Vendors are usually an ISO’s clients. ISVs seek to offer payment acceptance functionalities to their customers and need an ISO or PayFac’s help to get up and running.
For example, let’s say you’re a salon owner using an app to manage all aspects of your business (an ISV or SaaS platform). The app allows you to accept payments from your clients through several channels. As a result, you experience a comprehensive product suite that solves all business management issues.
In the background, the ISO is helping the ISV establish merchant accounts and process payments. As far as you’re concerned, the ISV offers you a seamless experience.
Thus, the ISO is strictly confined to the payments world, while ISVs offer a range of solutions to their users, and payment acceptance is one of many functionalities.
6 Differences Between ISOs and PayFacs
Here are the six differences between ISOs and PayFacs that you must know.
1. Contracts
ISOs and PayFacs sign different contracts with their clients. An ISO acts as a middleman, facilitating the relationship between the ISV and the payment processor. When contracts are signed, the merchant and payment processor are counterparties. The ISO might be included in the agreement as a third party, but the situation can vary.
In fact, most ISOs opt out of signing the contract and dealing with the processor directly. Thus, in an ISO situation, the ISV or merchant deals with the payment processor directly while the ISO facilitates operations in the background, dealing only with the payment processor.
PayFacs sign contracts with all stakeholders, thus protecting everyone’s interests. PayFac signs a contract with the ISV and another with the payment processor. In this scenario, the ISV is onboarded as a referral agent, eliminating several risks associated with becoming your own payment facilitator.
The result is a seamless onboarding experience for the ISV and flexibility for the ISO in choosing with whom to partner. Underwriting risk reduces, lowering the potential damage a payment processor or acquiring bank might experience.
2. Onboarding Workflow
ISVs want to offer payment acceptance functionality to their clients as quickly as possible. Working with an ISO might delay the process due to ISOs’ hands-off approach.
ISOs typically pass merchant information to their payment processing partners and step away. Further onboarding communication occurs between the payment processor and the ISV, with the ISO acting as the middleman. This workflow can result in a frustrating experience for the ISV.
Payment processors are also potentially at risk in the ISO model. The ISO does not assume any underwriting risk, passing the buck entirely to the payment processor. As a result, the payment processor assumes a heavy burden.
PayFacs remove these issues by assuming underwriting risk and onboarding ISVs directly. The PayFac executes all the tasks a payment processor needs to onboard a client and gives the ISV a seamless experience. Several wholesale ISOs undertake underwriting risk, but most ISOs step away from this task.
3. Risk Management
PayFacs offer greater risk management abilities and impose stringent underwriting controls. They assume several payment fraud risks and thus install robust infrastructure to monitor transactions. An ISO’s hands-off approach results in non-existent risk management, leaving the payment processor and ISV at risk. Wholesale ISOs might implement strong risk controls, but these are rare. The result is a strong risk framework, from initial underwriting to transaction fraud monitoring.
4. Processor Relationships
ISOs typically have relationships with multiple payment processors since their business model relies on earning better commissions on reselling processing services. Thus, an ISO’s customers can access a wider range of processors, even if the onboarding experience is tedious.
In contrast, PayFacs have one or two processor relationships and onboard ISVs as referral agents. The PayFac aggregates transactions and sends them to its processor, keeping operations streamlined.
5. Technology
PayFacs adopt an active role in the payment facilitation relationship. Thus, the degree of technological investment they conduct is greater than an ISO. ISOs function as middlemen and merely need a bridge to their payment processors’ systems.
PayFacs, on the other hand, must underwrite sub-merchants and monitor for fraud and compliance. They must also offer robust reporting suites to their clients and monitor for fraud. ISOs offload these burdens to the payment processor.
ISVs will thus find PayFacs better-versed with technological infrastructure, offering better integration and related technical services.
6. Payment Distribution
One area where the ISO’s middleman model works for their clients is payment distribution. The ISO is a bridge to the payment processor and is a third party in the relationship. Thus, when the time comes for fund payouts, the processor transfers money directly to the ISV’s merchant account.
In contrast, PayFacs aggregate all sub-merchant transactions and forward them to a processor. The processor pays the PayFac’s merchant account first, and ISVs’ merchants are paid by the PayFac. Note that this arrangement does not cause significant delays.
Instead, there’s an additional step in the payment distribution process.
Why a PayFac Might Be a Better Choice for Your Business
The big question is: Should you work with an ISO or a PayFac?
Here are a few points that will help you decide.
Points to Consider When Evaluating Payment Vendors
Before choosing to work with a vendor, you must evaluate them in the following areas:
- Hardware and software: How deep is their expertise? Payments are highly digital nowadays, and a broken integration might result in delayed funds. Choose a partner that is well-versed in payment infrastructure.
- Contracts and fees: How transparent are their fee structures? Are they disclosing all relationships to you before you sign contracts?
- Security: Evaluate your payment partners for security. As an ISV, you are liable for data breaches involving your customers.
- Operations: How transparent are your payment partner’s operations? Are they clear about timelines for fund transfer, dispute handling processes, etc?
- Ease of setup: How soon can you get up and running? The longer their process takes, the longer your customers must wait to accept payments.
Must Read: How PayFac-as-a-Service Simplifies Customer Acquisition and Boosts Revenues for ISVs
Advantages of a PayFac Versus ISO
PayFacs are not the best choice for every business out there. However, a PayFac might be the best choice for your business if you need the following:
- A wide range of functions: PayFacs offer more flexibility and can have you up and running quickly. If you choose a PayFac-as-a-Service provider, you won’t have to apply for a PayFac merchant account or incur hefty fees.
- Unified operations: PayFacs have streamlined operations thanks to aggregating sub-merchant transactions. As a result, their risk reporting and underwriting processes are extremely robust.
- Better terms: Thanks to working with multiple ISVs, PayFacs can achieve economies of scale that reduce the cost of payment acceptance for an ISV.
- Accessibility: PayFacs allow ISVs to skip the PayFac merchant account application process. This process can take anywhere from six months to a year or more. In addition, ISVs will have to install infrastructure that increases costs significantly.
ISOs and PayFacs might seem to execute similar functionalities on the surface but are very different entities. Choose the one that suits your business the best.
Curious about how you can offer seamless payment acceptance to your clients? Get in touch with us!
Most commonly asked questions about ISOs and Payfacs
Q1. Is an ISO a PayFac?
While ISOs and PayFacs appear similar on the surface, they’re very different. ISOs function primarily as middlemen in the payments world, offering payment processing, while PayFacs are payment facilitation partners to their clients.
Q2. What are the differences between an ISO versus a PayFac?
PayFacs and ISOs differ in the following areas:
- Contracts: ISOs are third parties in contracts, while PayFacs are directly related to their clients.
- Onboarding workflow: PayFacs offer fast onboarding.
- Risk management: ISOs do not underwrite for risk unless they’re wholesale ISOs. Even in that case, PayFacs offer more robust risk management.
- Processor relationships: ISOs work with multiple payment processors while PayFacs work with a few.
- Technology: PayFacs heavily invest in technical infrastructure.
- Payment distribution: PayFacs aggregate transactions and distribute payouts to ISVs’ merchants. ISOs are not involved in payment distribution.
Q3. Which points should I consider when evaluating an ISO versus a PayFac?
Evaluate your payment partner along the following points:
- Hardware and software: Choose a partner that is well-versed in payment infrastructure.
- Contracts and fees: How transparent are their fee structures?
- Security: Evaluate your payment partners for security. As an ISV, you are liable for data breaches involving your customers.
- Operations: Are they clear about timelines for fund transfer, dispute handling processes, etc?
- Ease of setup: How soon can you get up and running?
Q4. What is the difference between an ISO and ISV?
An ISO is a middleman entity that processes client payments. ISVs are software platforms looking to offer payment acceptance functionality to their clients.
Q5. Are PayFacs a better option for my business?
PayFacs might be a better option if the following features are important to you:
- A wide range of functions: PayFacs offer more flexibility and can have you up and running quickly.
- Unified operations: PayFacs’ risk reporting and underwriting processes are extremely robust.
- Better terms: Thanks to working with multiple ISVs, PayFacs can achieve economies of scale that reduce the cost of payment acceptance for an ISV.
- Accessibility: PayFacs allow ISVs to skip the PayFac merchant account application process.
