There are more than a dozen ways merchants can start accepting online payments. But it’s not as simple as just picking one of many options and proceeding with it; it’s more complicated than it sounds. There are third-party providers, different (and complicated) regulations, and countless acronyms. This is where two common models, Payment Facilitators (PayFacs) and Independent Sales Organizations (ISOs), simplify the process.
Both PayFacs and ISOs act as intermediaries between payment processors/banks and merchants. However, several key factors set them apart. In this article, we’ll discuss PayFac vs. ISO, what each model entails, key similarities and differences, and more. By the end, you’ll be clear on your choice, whether your business will benefit from a PayFac or an ISO.
A Payment Facilitator streamlines the overall process of accepting electronic payments for businesses. They aggregate a range of businesses under one merchant account, mitigating the complexities they may face when working directly with a bank or processor. In this model, the PayFac is the primary merchant of record, which also onboards other businesses as sub-merchants under its account.
Merchants do not handle payment processing to obtain merchant accounts; instead, they are sub-merchants of the PayFac platform and can start accepting payments quickly. The PayFac handles numerous responsibilities on behalf of its “sub-merchants”:
Independent Sales Organization (ISO), in simple terms, is a third-party reseller of merchant accounts and payment processing services. ISO partners with acquiring banks and payment processors and offers to set up merchant accounts for individual businesses. They act as intermediaries, connecting merchants with the backend payment provider.
What makes ISO different from PayFac is how your merchant account is set up. Unlike adding a business as a sub-merchant under a single master account, an ISO helps merchants set up their own merchant identification number (MID) and account directly with a payment processor or acquiring bank.
ISOs offer a range of services in their portfolio, including:
The actual payment processing, including transaction authorization, funding, etc, is handled by the payment processing partner, not by the ISO. Large, established businesses prefer the ISO model to the PayFac model because, with ISO, they receive their own MID. It gives them greater control over contract terms and the ability to negotiate lower processing rates based on their monthly transaction volume.
PayFac and ISO models differ in how they operate and the responsibilities they assume.
PayFac carries more risk than an ISO with every new merchant onboarding. That’s because PayFac onboards and underwrites sub-merchants directly and is heavily involved in processing their transactions. It makes them liable for fraud, chargeback, and any compliance issues. They must implement a robust risk management procedure and comply with the industry regulations discussed above for all their sub-merchants.
An ISO, however, has little to no direct risk; the payment processor bears the complete liability for fraud and chargebacks. They are essentially “agents” who refer business to an acquiring bank or processor. They typically do not maintain risk controls or compliance programs beyond their sales activities, as they are not responsible for handling funds or underwriting merchants.
As “quasi-payment providers,” PayFacs encounter stricter regulations and network requirements. They must be registered or licensed with the appropriate financial authorities or card networks and meet high compliance, capitalization, and oversight standards.
ISOs don’t have to be separately licensed as a financial institution; they operate and fall under the acquiring bank/processor’s licenses. They don’t require direct registration with card networks, as PayFacs do. ISOs must comply with the partner processor’s terms, but regulatory compliance is largely the responsibility of either the processor or the merchant.
PayFacs oversee every part of the merchant onboarding and underwriting process. With an established network and infrastructure, they can offer immediate onboarding for new merchants. They perform internal KYC checks, collect essential merchant information, conduct risk assessments, and approve the sub-merchant account.
Whereas, ISO’s role in the onboarding process is to collect the required details and pass it along to one of its processing partners, who actually does the underwriting and approval of that merchant.
In the PayFac model, when a customer pays a sub-merchant, the money flows through PayFac’s master merchant account, then PayFac routes these funds and settle in the sub-merchant’s bank account. They are basically responsible for distributing the funds to the appropriate accounts. That’s why PayFac is able to make faster payouts (sometimes daily payments) as it pays out funds on its own schedule. Merchants also get better visibility, with faster payouts, and daily reports are detailed and sent when the payment is settled.
But ISOs have no role in handling the transactions on the merchant’s behalf. All funds flow directly from the acquiring bank or processor to the merchant’s account in accordance with the processor’s settlement schedule. Essentially, the merchant’s payout time and transparency in that process is all at the mercy of the processor’s systems. Settlement might be slower, and the merchant may only see batch deposit totals rather than granular breakdowns.
With a PayFac, the merchant signs an agreement directly with the PayFac (the PayFac is the merchant’s service provider).
In the ISO model, the contract for services is fundamentally between the merchant and the payment processor/acquiring bank because the merchant obtains a direct merchant account. The ISO itself typically cannot be the primary party in a merchant processing agreement; at most, the ISO might be included as a third-party or agent in the contract terms, but frequently the ISO isn’t explicitly part of the merchant’s contract with the processor.
Payment Processor Relationships:
ISOs usually maintain partnerships with multiple payment processors and acquiring banks, giving them flexibility to shop around and offer merchants a variety of processing options. An ISO might have relationships with five different processors and can place a high-risk merchant with Processor A, a low-cost rate with Processor B, etc., depending on the merchant’s needs. This breadth of processor relationships means ISOs can often find a processing solution that best fits a particular merchant’s industry, risk profile, or volume.
PayFacs typically work with a very limited number of processors and often just one primary acquiring partner (or at most two). With volume concentration with a single processor, a PayFac can simplify integrations and negotiate favorable wholesale rates for itself and its sub-merchants.
Technology and Infrastructure:
Because PayFacs handle so many aspects of the payment process, they must invest heavily in their own technology platforms and infrastructure. Many PayFacs build proprietary systems for merchants onboarding, transaction processing, risk monitoring, payout management, and reporting, effectively serving as mini payment processors.
This results in a seamless, integrated experience for sub-merchants using a PayFac’s services, but the PayFac bears the cost and complexity of maintaining that tech stack. ISOs, in contrast, do not require such extensive infrastructure because they outsource processing operations to their partners. An ISO typically relies on the payment processor’s platform for most functions – the ISO’s role might only require a CRM for sales and maybe a portal to track referrals or residuals.
Despite their many differences, PayFacs and ISOs do have some important similarities. These commonalities are why both models remain viable ways for businesses to handle payments, and why a merchant might be choosing between them in the first place:
So what is the right payment model for your business? The right payment model depends on your specific needs, the technical capabilities your business requires, the level of control you are willing to relinquish, and your tolerance for complexity.
You should consider the scale of your operations and the monthly processing volume. Large businesses tend to prefer ISOs because they have leverage to negotiate better rates and the infrastructure to manage a more complex setup.
Startups or small businesses with lower sales volume often prefer the PayFac model over an ISO because of its simplicity. And they are willing to pay slightly higher for that convenience.
PayFac is the fastest option out of the two, with minimal paperwork and faster payouts. PayFacs offers streamlined onboarding by handling underwriting internally. You can start as early as the same day.
With ISOs, however, you have to show some patience; the process involves a detailed application and underwriting process for a new merchant account, which can take anywhere from a few days to a week for approval and setup.
If you want complete control over your payment infrastructure and contract terms, the ISO model is the better option. You can negotiate better rates if you have healthy monthly sales volume and even fine-tune the services to your specific business’s needs.
PayFac, on the other hand, has built-in rates and terms. There is very little scope for flexibility in this model. If you value a simple system and don’t want to deal with negotiations or custom arrangements, a PayFac provides ease of use. If you prefer a customized payment solution and direct control over your merchant account details, an ISO model might better suit your needs.
Does your business require a complex setup, specialized payment features, and support beyond just basic payment processing? If that’s the case than ISOs are the better option here. They often work with full-service merchant account providers, so you can expect a broad range of services for in-store and online processing, including POS systems, terminals, offshore processing, advanced fraud tools, a dedicated merchant account manager, and more.
But if you want a simple payment accepting setup for a primarily online audience, PayFac’s all-in-one platform covers the essentials.
If you want to keep overall transaction costs low, an ISO can save you money over time. As mentioned, with ISO, you can negotiate with better terms and get interchange-plus pricing.
Whereas, businesses that prefer a more predictable approach can choose the PayFac model. Their transparent, flat-rate fees may also be beneficial.
An ISO an oftentimes consult you, offers hands-on support, and helps you with things like setting up POS terminals, providing training for your staff, or troubleshooting issues with your merchant account. If you want a dedicated payment rep by your side, then this option stands out.
PayFacs tend to offer a more self-service experience. You might get excellent online documentation and integration support, but less in-person or one-on-one service. PayFacs are ideal for businesses that are comfortable with a DIY approach to setting up payment plugins or using developer-friendly APIs.
PayFacs manages the entire payment lifecycle for sub-merchants, providing a comprehensive dashboard and reporting that let you view individual transaction details, payouts, and customer data in one place, in real time. If granular insight and a unified view of all your payments are important, a PayFac can provide greater transparency than an ISO.
In an ISO setup, your reporting typically comes from the processor’s systems, which might only show aggregated batch deposits or require you to log into a bank’s merchant portal for details. Additionally, PayFacs can often provide faster notification of issues (such as chargebacks) because they monitor transactions directly, whereas with an ISO, you might learn about them secondhand from the processor.
If fast access to your funds (same-day or next-day settlement) is a priority, working with a PayFac may be beneficial. PayFacs typically control the disbursement of funds to sub-merchants and often offer faster settlement times or even on-demand payouts, since they aggregate funds and then pay out to you on their own schedule.
With an ISO, settlement times are usually in line with the acquiring bank’s standard, and the ISO cannot speed that up, as the funds flow directly from the processor to you. If your cash flow needs mean every day matters, the PayFac model’s faster funding cycles could be a deciding factor.
Weigh in your requirements and choose the right option. If you are a startup or small business struggling to obtain a merchant account, choose PayFac. The biggest drawback is the slightly higher cost.
But if you are an established business with solid monthly sales volumes, undergoing a thorough underwriting process through the ISO model could yield better, more favorable long-term rates and a wider array of services.
