PayFac vs ISO: Weighing Your Payment Options

Before we dive in, here are some terms that’ll be helpful to know:

• Acquiring bank: This is the bank on the merchant’s side, where they have their business bank account. It’s where the funds land after a completed transaction.

• ISO: An Independent Sales Organization (ISO) is a company that refers businesses that need to accept card payments to processors and acquiring banks.

• ISV: An Independent Software Vendor (ISV) is a company that creates and sells software. Often, ISVs will operate as ISOs.

• Merchant: A merchant is a business that accepts payments in exchange for goods or services

• Payment Card Industry (PCI) compliance: A data security standard for organizations that store or transmit payment card information.

• Payment processor: An organization that processes transactions between issuing banks, acquiring banks, and the card networks (Visa, Mastercard, etc.).

• PayFac: A PayFac, also known as a payment facilitator, is a service provider for merchants who want to accept payments online or physically. PayFacs are essentially mini-payment processors.

• SaaS platform: A software-as-a-service (SaaS) platform is a business that develops and sells cloud-based software via a subscription model.

• Sub-merchant: In the context of this blog, a sub-merchant is a SaaS platform’s customer.

In today’s digital world, it’s pretty safe to say that cash has been “dethroned.” There’s a new king, and that’s card-based payments. Case in point, 81% of US payments in 2021 were made with a debit card, credit card, or digital wallet (check out our infographic for more stats on payment trends).

While a larger contributor to the recent uptick in card payments is Covid, especially when it comes to card-not-present (online) transactions, the virus can’t take all the credit (pun intended). The truth is, credit and debit card usage has been on the rise for years.

The first-ever credit card was the Charg-It card created by John Biggins. But the first universal credit card was the 1950 Diner’s Club card. American Express soon followed up with its travel and entertainment card in 1958, and the rest, as they say, is history. These cards, however, could only be used at physical locations. It wasn’t until the mid-to-late 90s that people could make online payments.

For a more in-depth look at the history of payment processing, check out one of our previous blogs: The Payment Processing Players.

The introduction of online payments quickly exposed a serious gap in payment processing for businesses—especially for software companies. When ISOs first hit the scene, they sold point of sale (POS) terminals and ATM machines to small businesses for card-present transactions. When the e-commerce movement began, ISOs moved away from just selling physical devices and instead began selling merchant accounts on behalf of processors and acquiring banks as well.

Around the same time, many software companies (i.e. ISVs) that had started off simply integrating various payment gateways began operating as ISOs to capitalize on the new revenue opportunity online payments presented. However, as the demand for online services increased—along with the expectation of better customer experiences—the limitations of ISOs became apparent. By 2010, the payment facilitation model was introduced and was a game-changer for software platforms.

For all you finance and/or history buffs, you can learn more in our blog: The History of Payment Facilitation.

Both ISVs operating as ISOs and PayFacs provide a way for companies to accept payments and serve as intermediaries between their customers and the payment processors and banks. It’s also possible to monetize transactions with both options. But that’s where the similarities end.

What makes a PayFac different from an ISO?

For starters, ISOs function only as resellers. They are agents of the banks and therefore only sell merchant accounts issued by processors and/or acquiring banks—they can’t issue merchant accounts on their own. In almost all cases, ISOs are “hands-off” in that they aren’t directly involved in the process outside of actually accepting card data and processing payments. A payment facilitator, on the other hand, is actively involved in the payment process (hence the name “facilitator”). PayFacs also handle underwriting, onboarding, settlements, reporting, and chargebacks, along with payment processing. They are essentially mini-payment processors.

Let’s take a look at these differences in more detail.

Another distinction between PayFacs and ISOs is in the “fine print.” A PayFac can have a two-party agreement, meaning it enters into a direct contractual relationship with its merchants (with or without a processor as part of the contract). An ISO can’t enter into this type of agreement. Instead, it must include the payment processor in its contract. In fact, most ISOs disclude themselves from the contract altogether because they don’t want to assume any of the risk involved (more on this later).

When it comes to onboarding, payment facilitators and ISOs are like night and day. PayFacs manage the entire application and onboarding process, including underwriting for each merchant. They also handle most of the PCI compliance requirements.

After an ISO signs on a merchant, they pass the baton to a payment processor, and it’s the processor that actually handles the merchant onboarding. This is one of the biggest sources of frustration for merchants when using the ISO model, as it creates a disconnect between the ISO and the merchant because the merchant has no control over the onboarding experience for its sub-merchants.

The next differentiating factor between ISOs and PayFacs is risk. PayFacs take on more risk as they play a larger role in the payment process (i.e. underwriting and compliance). ISOs, on the other hand, have no risk as they refer customers to a processor. Therefore, it’s the payment processor that assumes all the risk in an ISO/merchant relationship.

When it comes to processors, ISOs invite more “friends” to the payments party. They may have relationships with a large number of processors so that they can offer their customers more options and flexibility. Payment facilitators prefer a more intimate setting and usually only have a relationship with one processor (but sometimes two). This makes integration simpler for the PayFac when onboarding merchants, but it also has the benefit of potentially negotiating lower fees for merchants because of the exclusive relationship with a single processor.

A merchant receives funds more or less in the same way, regardless of whether they use an ISO or a PayFac for payment processing. The distinction is how the funds are treated behind the scenes. PayFacs pay merchants directly and can often process payments faster, whereas ISOs don’t touch any money directly. Rather, the money is passed from the processor to the merchant’s account.

The most significant difference when it comes to merchant funding is visibility into settlements. Payment facilitators offer SaaS companies much greater visibility into settlements compared to ISOs because an ISO’s settlement reporting is provided via the processor and only shows bulk settlement amounts. PayFacs can provide details down to the transaction level.

When it comes to technology, PayFacs provide better infrastructure to their clients. This is because PayFacs need to develop in-house tech solutions and systems for merchant onboarding, whereas ISOs only provide merchants with the ability to process payments and they rely solely on a payment processor’s tech.

Let’s look at this through the lens of an analogy.

Think of an ISO as a toll bridge. It provides access to customers wanting to cross the bridge, but after the ISO processes the payment, it has nothing else to do with the customer’s “trip” across the bridge. Payment facilitators actually architect and engineer the bridge, maintain it, and are responsible for everything that happens while the customer is on it.

What the PayFac builds in the above analogy are the APIs that allow merchants to integrate into its platform, the payment gateway that’s responsible for tokenization and secure transmission of card data, and the tech behind such features as reporting and merchant onboarding.

The answer is, it really depends. That said, from market analysis and our experience, PayFacs tend to be a better fit for SaaS platforms. Many people assume that if they aren’t processing a certain volume of payments, they have to integrate with an ISO first.

But that’s not true.

At least not when it comes to Finix. You can integrate with a PayFac right away with the right partner. Starting with a payment facilitator is particularly beneficial as you won’t have to worry about outgrowing your current payment model. A payment facilitator like Finix is designed to scale with you. In fact, Finix is the only provider that allows you to become your own payment facilitator when you’re ready.

For the record, ISOs aren’t bad. They certainly have their place in the payments space. But they do have limitations that can negatively impact SaaS platforms, which are outlined below.

1. Less control over the sub-merchant experience Once platforms start to grow, they quickly realize how badly a disjointed payment experience can affect their customer base.

2. Strict adherence to application and onboarding regulations This directly correlates with point #1. ISOs must adhere to regulations set forth by the processors they work with—there’s just no wiggle room. These regulations are for the protection of all parties involved, but their restrictive nature can become a hindrance when it comes to creating a frictionless customer experience.

3. Slower onboarding Traditional ISOs have a much slower onboarding process as they rely on the processor’s merchant application process, whereas PayFacs handle the application process directly.

4. Can’t touch the money stream ISOs have no control over the flow of funds. This becomes apparent when it comes to settlement visibility.

5. Lack of customization and visibility Because ISOs don’t provide their own APIs and internal systems to their customers, customization options and reporting features are limited to what the processor offers. This can greatly affect a customer’s overall experience.

This one’s easy. Take the limitations outlined above and reverse them—that’s how a PayFac solves them—plus a couple of extras for a bonus.

1. More customization and control over sub-merchant onboarding With a PayFac, you can create a seamless, fully-customized payment experience for your customers.

2. Provides own infrastructure and is less restrictive Of course, every payment provider has rules to follow, otherwise making an online payment would be total chaos. But since a PayFac facilitates the payment process using its own tech, it can provide more freedom to its customers when it comes to point #1.

3. Faster onboarding Platforms upload their customers directly to the PayFac and not the processor.

4. Real-time fraud monitoring Another perk to using a PayFac is real-time fraud monitoring, which can help reduce disputes and chargebacks.

Partnering with a payment facilitator like Finix offers SaaS platforms a way to earn revenue on transactions without the limitations of an Independent Sales Organization. You can create a frictionless, white-labeled experience for your customers, receive greater insight into settlements, and access more robust reporting features. Finix also lets you integrate into our platform even if your current processing volume is zero. Finix is also the only provider that lets you become your own PayFac when you’re ready.

Still have questions? No worries. We’re a people-first company that’s full of payment nerds who are ready and willing to help!