Introduction

There are dozens of ways for merchants to start accepting online payments, which, for the uninitiated, can be a confusion of acronyms, third-parties, and regulations. 

But thanks to services like payment facilitators (PayFacs) and Independent Sales Organizations (ISOs), merchants can outsource much of the hard work to intermediaries, making it much easier to start accepting payments and growing their businesses. 

PayFacs and ISOs play a similar role for merchants, in that they form relationships with payment processors and banks. However, there are crucial differences that might make them more or less suitable depending on the specific needs of the organization. 

In this article, we explain each model, how they work, the key differences and similarities, and how to choose between them for your payment processing needs. 

What is a PayFac?

A PayFac provides merchant services to businesses that allow them to start accepting payments. It does this by managing the numerous responsibilities - including risk management and compliance - and relationships - including banks and card networks - necessary for payment processing on behalf of the merchant. 

This streamlined underwriting process makes it much quicker and easier for small merchants to get set up and start taking payments.   

How do payfacs work?

PayFacs perform the following functions for merchants:

Set up payments - partner with acquiring banks, integrate payment gateways to accept payments, obtain relevant certifications and licenses, and build systems to manage processes, payouts, and disputes.

Onboard sub-merchants - create processes for onboarding and verifying the identity of sub-merchants, including KYC, credit and risk checks.

Ensure compliance - PayFacs are responsible for complying with Anti-Money Laundering (AML), PCI-DSS, and any regulations specific to local regions/

Manage ongoing processes - on an ongoing basis, PayFacs continue to onboard new sub-merchants, perform due diligence, process payments, pay out funds, file taxes, prevent fraud, and renew licenses 

What is an ISO?

An ISO is essentially a third-party reseller of merchant accounts. An ISO has relationships with acquiring banks and payment gateways, and refers any merchant that wants to accept payments to payment service providers (PSP).

How do ISOs work?

As with a PayFac, the ISO business model means the merchant doesn’t have to deal directly with a payment processor or a bank. The ISO acts as intermediary, communicating pricing, terms and conditions, and any other necessary information to the merchant, and passing on their details to the processor. The processor then accepts payments on behalf of the merchant, and authorizes and settles funds in the merchant’s account. 

PayFac vs ISO: Key Differences

Even though PayFacs and ISOs may seem to be quite similar on the surface, there are a few key differences between them. Merchants need to understand these differences, so they can decide which of these options may be better suited for their business.

1. Onboarding process

Depending on whether you work with an ISO or a PayFac, the merchant onboarding process will look quite different. 

Since an ISO is simply a reseller of merchant accounts, it typically takes a hands-off approach as far as onboarding is concerned. It passes on merchant information to the payment processor, and it’s the latter’s responsibility to do due diligence before approving their application and onboarding them. This process can take anywhere from a few days to a few weeks.

On the other hand, in the payment facilitator model, the PayFac manages merchant applications as well as the onboarding process on their own, including underwriting. It’s worth noting that some PayFacs (like Transfi) do not perform underwriting at the time of the application, so approvals are almost instantaneous.

However, this means that you may be in for unpleasant surprises down the road. If they come across any red flags during underwriting, your merchant account could be suspended or terminated with little to no warning. So, make sure you choose a PSP that performs underwriting at the time of application.

2. Technology used

ISOs typically don’t need to invest a lot in technology or payment infrastructure as they mostly depend on the processor’s technology. However, since PayFacs perform activities like application, underwriting, and onboarding, they will likely need to build their own in-house apps and systems to accomplish all that. 

3. Settlement and funding

ISOs actually never handle a merchant’s money. Transactions are managed entirely by the payment processor including authorization, authentication, and settlement. Further, the processor is in charge of depositing the money to the receiving merchant account.

In contrast, the payment processor deposits the collective funds of all sub-merchants into PayFac's master merchant account. PayFac, in turn, distributes them to their sub-merchants, so payment processing is often faster. 

4. Risk management

In the ISO model, the payment processor assumes all the risks associated with processing merchant transactions, including losses from chargebacks, fraud, or merchants going out of business. ISOs, therefore, have no risk management procedures in place.

In contrast, payment facilitators may be liable for 100% of the risk associated with sub-merchant processing as they take on a more active role in the payment process. So, they need to have stringent controls in place to consistently monitor transactions. It’s also their job to ensure PCI compliance.

5. Contracts

In the ISO model, merchants enter into contracts directly with the payment processor. The ISO may sometimes be included as a third party, but not necessarily. 

In the PayFac model, contracts are always drawn between merchants and the PayFac. They may have the payment processor as a party, but this is not a necessary requirement. 

Read more: Payment gateway vs payment processor: what's the difference?

What are the similarities between PayFac vs ISO?

Despite the differences listed above, PayFacs and ISOs do have some similarities that, for merchants, mean they are genuinely competing models when deciding how to start accepting payments. 

The key similarities are that both:

1. Are intermediaries - both PayFacs and ISOs are intermediaries that form relationships and communicate with banks and payment processors on behalf of smaller merchants.

2. Make payment processing accessible - many banks and payment processors won’t work directly with merchants, either because they’re too risky or because they’re too small. PayFacs and ISOs make it possible for these smaller or high risk merchants to start taking payments.

3. Charge fees for their services - PayFacs and ISOs take a percentage of every transaction taken by a merchant, though commission structures vary. 

How to choose between a PayFac or ISO for your business?

There are pros and cons to the PayFac and ISO model depending on the size and specific requirements of your business. 

Generally speaking, a PayFac might be suitable for bigger businesses that need to process a large volume of transactions, and an ISO might be more suitable for smaller businesses. 

But size isn’t the only factor. Here are the main considerations when deciding between a PayFac and an ISO:

1. Onboarding - the ISO onboarding process is usually slower than the PayFac’s because the former relies on the payment processor, whereas the latter manages the entire process. If you need to get setup quickly, then a PayFac is probably your best option.

2. Flexibility - as ISOs tend to work with a greater number of processors, it's easier to find one that best suits your needs. However, as PayFacs manage their own infrastructure, they give merchants greater flexibility when it comes to designing their payment experiences.

3. Fees - PayFacs can negotiate lower fees than ISOs, so if your margins are tight, a PayFac might be a better option.

4. Visibility - if it’s necessary for your organization to have a significant degree of visibility over the payment process and your transaction payment data, a PayFac is probably your best option.

5. Settlement - if your business demands fast settlement of funds, you should probably choose a PayFac to handle your payment processing needs

Integrated platforms for PayFacs with TransFi

Transfi’s integrated platforms solution provides everything you need to set up as a PayFac.

We support you at scale. With contextual sign up forms, fully customizable checkouts, and a single API that accepts all major payment methods, you can offer online retailers a fully-optimized experience. What’s more, compliance tools covering everything from KYC to PCI-DSS are built-in, and your customers are given access to rich insights with actionable data at their fingertips. 

Integrated platforms also gives you complete flexibility over your payments program, allowing you to optimize your revenue streams by customizing fees and commission to each customer, gaining oversight of payments and payout with granular reconciliation data, and tracking all money movement to identify cost efficiencies. 

Landing with the right PayFac platform  

Selecting the right payment facilitator that consolidates billing, payments and subscription management tools is key to the success for your business. Transfi provides the following advantages over other solutions and gives valuable benefits to its users: 

1. Billing features: Transfi provides tools to support various billing methods, offers multiple payment options, provides robust fraud protection and includes robust subscription management.

2. Costs: Transfi comes with no transaction fees, minimal setup costs, and additional charges from various processors to fit the best fit for your budget.

3. Security and compliance: Transfi as a payment processor implements strong security and fraud prevention measures, complies with industry standards to protect customer data and collects taxes from customers correctly.

4. Customizability: The ability to customize functionalities and integrate with third-party software can help create a more seamless experience using Transfi.

5. Scalability: Transfi ensures to accommodate growing transaction volumes and expansion into new markets.

6. Localisation: for cross border payments, Transfi supports multiple languages and currencies.

7. Reliability: Transfi provides robust customer support and transparency in each and every step ensuring reliable means and legal compliances. 

Transfi is a cross-border infrastructure business focussed on enabling global companies to make payments in, out, and across the world. Transfi brings Virtual Accounts, combined with a global foreign exchange network, to countries across the globe providing flexibility of payment methods, currencies and stablecoins. 

Conclusion

Both payment facilitators and independent sales organizations simplify credit card processing and may be great options for small businesses to work with. However, when it comes to choosing one over the other, you’ll need to consider your unique business needs.

ISOs typically work with multiple payment processors and can set you up with the most lucrative rates. However, getting approved for a traditional merchant account requires you to do a fair amount of due diligence to establish your business’s credibility. If your business is quite new or has very low sales volumes, getting a traditional merchant account could prove to be challenging. 

On the other hand, PayFacs may be willing to accept that risk and can get you up and running fairly quickly. However, they would typically offset the risk through higher processing fees and stricter account limitations. To combat that, Transfi comes with flexibility of operations at a better and affordable pricing setup for your business. 

Frequently asked questions (FAQs)

1. What is a PayFac?

A PayFac provides merchant services to businesses that allow them to start accepting payments. It does this by managing the numerous responsibilities - including risk management and compliance - and relationships - including banks and card networks - necessary for payment processing on behalf of the merchant. 

2. What is an ISO?

An ISO is essentially a third-party reseller of merchant accounts. An ISO has relationships with acquiring banks and payment gateways, and refers any merchant that wants to accept payments to payment service providers (PSP).

3. How do payfacs work?

• Set up payments
• Onboard sub-merchants
• Ensure compliance
• Manage ongoing processes

4. How do ISOs work?

As with a PayFac, the ISO business model means the merchant doesn’t have to deal directly with a payment processor or a bank. The ISO acts as intermediary, communicating pricing, terms and conditions, and any other necessary information to the merchant, and passing on their details to the processor. The processor then accepts payments on behalf of the merchant, and authorizes and settles funds in the merchant’s account. 

5. Why should you choose Transfi as your Payfac platform?

Selecting the right payment facilitator that consolidates billing, payments and subscription management tools is key to the success for your business. Transfi provides the following advantages over other solutions and gives valuable benefits to its users in terms of billing features, costs, security and compliance, scalability, localization and transparency.