An Independent Sales Organization – more commonly known as an ISO, but also called a Member Service Provider or MSP – is a third-party company that is contracted by a credit card member bank to procure new merchant relationships. ISO’s also process online credit card processing transactions for small businesses, usually in exchange for a fee or percentage of sales.
Merchants that wish to open a credit card processing account for their small and emerging businesses will typically seek out ISO’s. An ISO will sign up a merchant and explain the terms and rates of a credit card merchant account or cardholder relationship. After the merchant has completed the merchant account application, the ISO either submits this paperwork to an acquirer for underwriting or underwrites the account internally. Once the merchant is approved, another company known as a “processor” is then enlisted to actually process the merchant’s subsequent card payment sales transactions.
Who Services What?
In many cases, the ISO is additionally responsible for providing ongoing customer service to the merchant once the account has been activated. Technical support for the actual credit card terminals, whether physical or virtual (PC software), is generally provided by the processor, the payment gateway or the individual hardware or software vendor behind the various payment-acceptance devices available in the market today.
ISO’s employ what they call “merchant-level salespeople” to solicit merchants directly in order to establish new accounts. As independent contractors, merchant-level salespeople work for commissions and, ultimately, the right to receive ongoing monthly residual payments for the accounts that they refer to the ISO. Besides regular service charges or discount rates paid to the service provider, these sales representatives also represent another mandatory payment that merchants must hand over on a monthly basis to maintain their crucial merchant service bank account.
Since the overwhelming majority of e-commerce processing transactions involve credit cards, the ability to accept credit cards as a form of payment has been essential for e-commerce merchants since the rise of the Internet and online sales in the 1990′s. In order to obtain this capability, merchants must apply for special merchant accounts with acquiring banks. After such an account has been established, acquiring banks accept funds from credit card-holding consumers on behalf of the merchant. While a number of different steps and variables are involved in this process, this essentially involves payment being transferred from the bank that issued the credit card to the consumer, to the acquiring bank, and ultimately, to the merchant who made the sale in the first place.
For the purpose of risk reduction, always a top priority in this industry, acquiring banks are highly selective about the companies to which they provide merchant processing accounts. Some types of businesses – such as computer and high-tech stores, shopping clubs, home-operated business, mortgage services, pawn shops, telecommunications equipment brokers, cell phone sellers, gun and ammunition dealers, online custom jewelry, custom products, multi-level marketing, educational seminars, time share sales, detective services, downloading of software, check cashing services, online auctions sites and companies that are small, home-based or not yet fully operational for whatever reason – are at higher risk for credit-card fraud than other types of merchants.
Higher Risk, Higher Fees
For these kinds of businesses, obtaining merchant accounts directly from acquiring banks can be rather challenging. ISO’s, as third-party organizations that partner with acquiring banks, find, open and ultimately manage merchant accounts on behalf of such businesses, in exchange for a higher fee or even a percentage of the merchant’s total sales. ISO’s are also called merchant service providers (MSP) when they offer financial transaction processing services. Some ISOs are able to offer merchant accounts to riskier merchants and, in turn, charge higher fees, because they do not fall under the same laws and regulations that actual banks must adhere to. In addition to the acquiring banks they work with, ISO’s also assume a great deal of the liability and risk that comes with the many services that they offer, both traditional and new.
By 2001, merchant account industry sources indicated that ISO’s were responsible for opening nearly 80 percent of all merchant accounts existing today, with banks accounting for the remainder. The exact number of ISO’s and MSP’s has been difficult to ascertain due to the lack of regulation within the credit card processing industry. Although it generally costs merchants more to obtain merchant accounts through these third parties, the fees and other costs involved vary considerably. ISOs often refer to themselves as merchant account providers even though they do not provide the account, a matter of semantics that has not yet been clarified by any industry association or regulatory body.