Before payment facilitators began enabling smaller merchants to accept payments, acquiring banks relied on another business model to work directly with SMBs: the independent sales organization, or ISO.

Like PFs, ISOs serve as intermediaries to provide merchants with access to the payments system on behalf of their acquiring bank partners, often serving specific markets with solutions tailored to their needs. However, they differ from PFs in important ways.

Contracts and merchant relationships. The differences between the two models begin with the terms of the merchant agreements. While card brand rules allow two-party agreements between a PF and a submerchant, the sponsor bank must be a party to the contract when ISOs are involved. In some cases where an ISO is the entity selling services to the merchant, the contract is still between the sponsor and the merchant only, and sometimes the ISO itself will be included in a three-party agreement.

There are other practical differences between the two models, including the ownership and portability of the merchant portfolio. The PF owns its own submerchant portfolio and may move it from one sponsor to another at will. For ISOs, the ownership and portability of the portfolio varies by contract. 

Applications, onboarding and monitoring. A PF is typically liable for the risk posed by the merchants in its portfolio, which affects how it handles merchant applications as well as its onboarding and monitoring processes. 

ISOs’ responsibility can differ depending on their agreement with their sponsor. Some ISOs, known as wholesale ISOs, are liable for the risk posed by the merchant while others, those known as retail ISOs, do not.

In either case, sponsors have requirements regarding merchant oversight that PFs and ISOs must adhere to. However, PFs have some latitude to create their own processes within those requirements. PFs can create their own submerchant applications and develop their own processes for underwriting, onboarding, and monitoring of submerchants – again, as long as they are doing so within the parameters outlined by their sponsor.

While sponsors have varying requirements, they often have more stringent constraints for ISOs. In most cases, ISOs must use the sponsor’s merchant application, for example, and adhere to strict direction regarding how onboarding must be performed.

Funding. Funding is another area where PFs have more latitude to choose how they would like their business to operate. The PF may choose to perform funding from a bank account that it owns and / or controls. The ISO, on the other hand, is not allowed to touch the funds. Settlement must be directly from the sponsor to the merchant.

ISOs and PFs may occupy similar space, but their fundamental differences set them apart from each other. The choices that PFs have when designing their business practices can enable them to have an increased level of control over the submerchant experience when compared to an ISO. However, with that control often comes an increased need to manage risk. Regardless of whether businesses operate as PFs or ISOs, they share their most important responsibility: protecting the integrity of the payments system.