ISO

Independent Sales Organizations (ISO) act as intermediaries between merchants and their banks, essentially reselling the services of processors. In some cases, they might actually be banks: For example, Wells Fargo is a First Data ISO.

As payment gateways, they ensure the secure transfer of the transaction data. They also service merchant bank accounts and might create the relationship between a merchant and bank in the first place. For example, Square offers its merchants a merchant acquirerAcquirer (or Acquiring bank) Acquirer (or Acquiring bank) A bank or a financial institute, which acquires funds for its merchant from a shopper. To accept card payments, an acquirer should be licensed by corresponding card networks and either partner with a payment processor, or be a payment processor itself. relationship with Chase Paymentech. ISOs also lease point-of-sale terminals to merchants and may service customers who have problems with their cards. Because an ISO is not a bank, it does not physically manage merchants’ money and is also not regulated in the same way. This is part of the reason why much of the innovation in the payments space has been around ISOs.

Traditional ISOs, which provide point-of-sale technology to offline merchants, include Verifone etc. But there are plenty of newer entrants, like Braintree, Stripe, and Square.

How ISOs make money

ISOs make money in a number of ways—similar to the number of functions they perform. Their fees also vary, depending on the contracts they have. ISOs are paid the remainder of the merchant discount after the card issuerIssuer Issuer (or Issuing bank) A bank that issued a card for a shopper to make cashless payments via an ecommerce website, inside a mobile app, or in a physical store. To be able to issue a card, an issuer must be a member of one or several card networks. Sometimes a shopper’s bank is referred to as an issuer even if there is no card issued. This is to distinguish between a shopper’s bank, which sends funds, and a merchant’s bank, which acquires funds., network, and merchant acquirers get theirs. So, for example, Square would get a cut after Capital One, Visa, and Chase Paymentech all get paid after a transaction. On certain transactions, ISOs actually lose money. These losses tend to be offset, though, when they’re able to charge the same fee for purchases made with debit cards (which have very low interchange fees) or when they make money on other services.