What is an ISO & How is Payment Processing Involved?

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 relationships 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. They’re distributors in that they have a buy-rate from a processing bank, but they can’t provide the processing without a bank 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 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, and 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. “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 name of these business 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, but they are essentially the same thing. 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, and they are not allowed to advertise their own business name as a service provider. You might be asking yourself, “Why all the hassle? Why complicate things so much?”The truth is that these different levels of credit card processing “spread out risk” and allow each entity involved in the transactions to focus on their own specialties. This multitude of steps and gives each organization the opportunity to do what they do best, and this guarantees that the customer will receive the best possible service.