ISO Payment Processing Basics

The number of people who pay by cash at business establishments is significantly low. With the technological revolution making it possible to pay with a simple tap of the credit card or using Apple Pay, more and more consumers are moving towards digital payments. This is seen as a more efficient way to pay during the pandemic as you could go completely contactless with your transactions. But from a merchant’s perspective, is the transition easy? How would a medium or small-scale enterprise go digital without using third-party apps like Paypal, which charge a fortune in terms of transaction fees?

The easiest answer is approaching a bank to open a merchant account and process the transactions during this account. But opening a merchant account is not as simple as it seems and could get cumbersome, and your application could get rejected if you do not meet the criteria. The best alternative to situations like this is to use the services of Independent Sales Organizations or ISOs. They act as a merchant account and help you process payments on behalf of your business establishment. While ISOs play a significant role in the success of small and medium business owners, there is not much awareness of what they are and how they operate. In this article, we answer all your questions and give you a glimpse into what ISO is and how it could improve your business.

What Is an ISO?

ISOs have been gaining prominence since the early 2000s, when e-commerce and card-based transactions became popular. As card-based transactions’ popularity increased, even the likes of Visa and Mastercard could not meet the demand. They had to bring in a third-party merchant who could take up the services on their behalf, leading to the creation of ISOs.

ISO is an intermediary organization between businesses and the acquiring banks. They help their clients process transactions, customer support and ensure the easy transition to digital and card payments of small business owners. As banks cannot connect and offer their services to all the cardholders, the ISO Payment Processing services come into play and serve as a buffer. Even the biggest financial institutions and banks cannot establish a direct-to-merchant connection and reduce the risks of processing credit card transactions. Banks and financial institutions partner with ISOs.

How Do ISOs Make Money?

ISOs reduce the risk of card-based transactions for both the merchant and the bank by shifting the risk to their institution. But this does not happen without a fee. While there are no exuberant fees or charges that ISOs bill to their merchants and banks, they charge a small percentage on every processed transaction. While these charges usually run in pennies when combined with all the transactions processed using ISOs in a week, month, or year, it could run into several hundred or thousands of dollars.

The charges imposed by the ISO are referred to as the residuals, and the ISOs work with building a healthy and long-term residual portfolio. As the ISOs make a fortune on every transaction and continue to make money long after they have onboarded a merchant, they need to invest in building memorable customer experiences. Once the customer moves to a different ISO provider, the business is lost forever, and so are all the future residuals.

How Do ISOs Fit In the Payments Ecosystem?

Understanding the ISOs in the payments and business ecosystem can be simplified if we look at ISOs as the center of the financial transactions pyramid. At the same time, the businessman and the customers form the base of the structure. In other words, the ISOs act as an intermediary agent between the customer and the merchant’s bank. While ISOs collect payments on behalf of the customer, they do not substitute for a bank or a merchant banking account.

Instead, they act as an enabling tool that allows a merchant to transact digitally without a merchant account. An ISO can dramatically impact small and medium-sized businesses by changing how they conduct business and simplifying the transactions. When customers pay using debit and credit cards, an automated bill is generated. The business owner can then file their accounts. As the bills are computerized, there is little to no scope for human error.

How to Pick an ISO Provider?

Using the services of an ISO provider can have a significant impact on your business. This makes it important to carefully scrutinize and take an informed decision while picking an ISO. Transparency and innovation are key attributes of a reliable ISO. As most of your business transactions will happen using a card and online payment gateway, you need to find a service provider who has a seamless payment gateway and a flexible invoicing system.

Ask questions about their loyalty programs, joining bonuses, and processing fees. ISOs offer gift cards and loyalty programs to both customers and merchants. If you are a merchant, try to understand the various loyalty programs your ISO is offering before you sign a contract. Read the fine print carefully to see if there are any hidden charges that you are possibly missing out on. Understanding the contract terms regarding payments, cancellation fees, over transacting, etc., are crucial.

Additional Services

In addition to the payment processing services, ISOs also offer CRM services and tools to small business owners. As ISOs aim to retain the merchants for as long as possible, offering add-on services will enhance their user experience. The merchants will continue to engage with the same ISO. On the other hand, the merchant benefits from customer loyalty by providing a better and engaging user experience to all the customers of the small business. In short, it would be a win-win situation for the ISO, merchant, and end-user.

In Conclusion

Using the services of an ISO is a big step for the merchants as it increases the scope of their operations. But it is important to ensure that the ISO is reliable, trustworthy, and has ample experience. Talking to industry peers and getting personalized recommendations of the ISOs would be a great way to ensure that your payment processing partner is trustworthy and offers a user-friendly experience. We hope these points give you a clear picture of what ISOs are, how they operate, how to pick a service provider, etc. Do share your thoughts in the comments section.