What is an ISO & How is Payment Processing Involved?

Understanding ISOs

An Independent Sales Organization, or as it is most commonly known, an ISO, is a denomination given to a third-party organization that is not an Association member (such as Visa or MasterCard), but that has a relationship with member banks.

Basically, they have a relationship with one or several processing banks, even though they’re not a bank themselves. This organization could be a company or an individual, and their partnership with these banks allows them to provide different services for consumers. That includes payment processing.

ISOs are distributors in that they have a buy-rate from a processing bank, but they can’t provide the processing without a bank.

Is an ISO a payment processor? In practical terms and from the perspective of your business, yes. 

An ISO is structured differently and can even work with multiple payment processors. They may offer more or different services than a processor. However, in terms of payment processing, the end result is largely the same for your organization.

There isn’t much of a debate in terms of functionality in the larger payment processor vs. ISO question. ISOs handle credit card processing, and other payment processing functions, for many businesses.

Even though the initialisms are the same and they refer to similar industries, ISOs should not be confused with ISO 20022. This is a messaging standard for financial communication, not an option for business payment processing.

How a Business Becomes an ISO and Demonstrates Legitimacy

To ensure that they are legitimate, ISOs must display the name and location of their sponsor bank on their website and marketing material. Failure to do so in an appropriate manner could result in a $25,000 fine.

Typically, ISOs sign merchants up to accept credit cards on behalf of acquiring banks, and they receive a commission for this service. Since ISOs are not banks, the acquiring bank that has contacted the ISO is the entity responsible for handling the merchant’s money. As a result, they tend to be large financial institutions, such as Wells Fargo or Bank of America.

In order to solicit merchants, ISOs must first register with a credit card association. To prove they are capable of performing their duties, all principals must submit:

 
• Financial statements or personal tax returns dating back two years.
• Executed Articles of Incorporation or partnership documents
• A detailed business plan
• A copy of sales materials and solicitations
• A complete list of their employees and agents

Once their application has been approved, the registration fee for each Credit Card Association is typically $5,000. With each successive year, ISOs have their registration reviewed, and an additional fee of $2,500 per Association is due upon approval.

These fees are simply the cost of doing business for an ISO. They’re similar to the foundational, non-negotiable merchant fees that help pay for your own company’s payment processing.

What are MSPs? Are They the Same as ISOs?

“MSP” is a related term that you might come across while dealing with ISOs. Standing for “Member Service Provider,” MSP is MasterCard’s preferred term for what Visa users would typically call an ISO.

MasterCard defines MSPs as "a non-member that is registered by the Corporation (MasterCard) as an MSP to provide Program Services to a member, or any member that is required to register, in the Corporation’s sole discretion, and has been registered as an MSP to provide Third Party Processor Program Services to another member.”

It is common for banks to be registered with both Visa and MasterCard, so the full, technical name of the businesses that provide services on behalf of member banks is “ISO/MSP.”

Perhaps for the sake of brevity, most of these organizations usually refer to themselves as either an ISO or an MSP. However, they are essentially the same thing in practice — they just use different terminology.

Learning More About ISO Operations

‍ISOs/MSPs can also recruit sales agents to help them sign new merchants; in addition, ISOs can also sign ISOs under themselves. These agents can only introduce themselves to their clients as representatives of their ISO/MP. Specifically, they are not allowed to advertise their own business name as a service provider.‍

This multitude of steps gives each organization the opportunity to do what they do best. In turn, that specialization, guarantees that the customer will receive the best possible service.

Swipesum helps businesses just like yours find the very best payments solution. Our experts take price, quality of service, your business’s unique needs, and much more into account. We can help you eliminate many credit card processing fees, negotiate contracts, monitor fees, and find the payments workflow that works best for you.