Choosing a payment processing provider has become more challenging in recent years, due to the sheer number of providers in this space. According to a recent study, by 2025, the global gross payment volume processed by payment facilitators is expected to reach over $4 trillion. In this increasingly crowded market, businesses must take a thoughtful approach to choosing the right provider.

Two common payment processing models that companies encounter are payment facilitators (payfacs) and independent sales organizations (ISOs). Understanding the differences between them and choosing the best approach can help businesses build a well-functioning payment system. In this article, we’ll explore the distinctions between payfacs and ISOs, empowering businesses to make informed decisions about their payment processing solutions.

What’s in this article?

• What is a payment facilitator (payfac)?
  
• What is an independent sales organization (ISO)?
  
• What are the differences between ISOs and payfacs?
  
• Do I need an ISO or a payfac?
  
• Is Stripe an ISO or a payfac?
  

What is a payment facilitator (payfac)?

A payment facilitator (payfac) is a company that simplifies the process of accepting electronic payments for other businesses. Payfacs often offer an all-in-one payment solution that includes payment processing, risk management, fraud detection and prevention, and merchant account services.

Payfacs eliminate the need for individual businesses to set up their own merchant accounts with a bank or a card network. Instead, a payfac aggregates many businesses under one master merchant account. Businesses that choose to work with a payfac are essentially submerchants under this master account.

There are several benefits to this model. First, businesses do not have to spend time setting up a merchant account, making it particularly useful for smaller businesses that might lack the resources to go through this process. Generally, payfacs also offer straightforward fee structures, which can be helpful for new businesses or those with a lower transaction volume.

What is an independent sales organization (ISO)?

An ISO is a third-party company that is authorized to extend credit card processing services to businesses. ISOs work on behalf of banks and card networks to set up new merchant accounts, acting as an intermediary between these entities and businesses that want to accept card payments.

ISOs often provide a range of services, including equipment sales or leasing—for example, point-of-sale (POS) terminals—transaction processing, and customer service. Unlike payfacs, ISOs set up individual merchant accounts for each business they service.

Generally, ISOs are better suited to larger businesses with high transaction volumes. Since ISOs set up individual merchant accounts for businesses they work with, these businesses often have more control over their agreement terms and may be able to negotiate lower rates than they would with a payfac.

What are the differences between ISOs and payfacs?

Here’s an overview of the key differences between ISOs and payfacs, broken down by how they operate and which services they provide:

Merchant accounts

• ISO: An ISO sets up individual merchant accounts for each business. For example, imagine a mid-sized clothing retailer that processes high volumes of credit card transactions monthly. By setting up its own merchant account via an ISO, the retailer can negotiate specific terms and rates, potentially saving money in the long run. However, the setup process might be complex and time consuming.

• Payfac: A payfac operates under a master merchant account, and creates subaccounts for each business it services. For example, an artisan who sells handmade jewelry online may find the process of setting up their own merchant account daunting or unnecessary, given their lower transaction volume. By using a payfac, they can quickly and easily start accepting electronic payments without their own merchant account.

Customer base and services

• ISO: ISOs often provide a range of services that cater to the unique requirements of larger businesses or those with more complex needs. For example, if a large restaurant chain wants to integrate a new POS system across all its locations, an ISO might provide it with the necessary hardware, installation, training, and ongoing customer service support.

• Payfac: Payfacs tend to be a more appropriate choice for smaller businesses or those with simpler needs, because they provide an all-in-one solution. For example, a freelance graphic designer who wants to accept payments on their website can sign up with a payfac and have access to an integrated payment system, without needing to understand the complexities of payment processing or risk management.

Pricing

• ISO: ISOs may have a more complex pricing structure, but fees can often be negotiated based on the business’s transaction volume. A large online bookstore, for example, might work with an ISO to negotiate a better per-transaction rate based on its high sales volume, which could result in significant cost savings over time.

• Payfac: Payfacs usually have a straightforward, flat-rate pricing structure. This is beneficial for smaller businesses that have a lower transaction volume, since the cost breakdown is clear and there is no need to negotiate. For example, a small bakery that wants to sell its goods online may not have the transaction volume necessary to negotiate better rates. It may find a payfac’s flat-rate pricing model more appealing.

While ISOs and payfacs both facilitate electronic payments for businesses, they cater to different needs. ISOs offer greater control and potential cost savings for larger businesses with high transaction volumes, while payfacs provide a simpler, all-in-one solution for smaller businesses or those with fewer needs. Of course, this isn’t always the case. Some payfacs—including Stripe—are designed to work with businesses of all sizes, from small independent retailers to global platform businesses.

Do I need an ISO or a payfac?

When deciding between an ISO and a payfac, look beyond the conventional wisdom about which businesses are most suited to which category of payment provider. Modern payment providers are increasingly taking an innovative approach to supporting businesses, meaning that historical guidelines could be misleading. With this in mind, businesses should carefully consider their specific needs and circumstances to determine which option is the most suitable for processing their payments.

Here are some key factors to consider:

• Business size and transaction volume
  Evaluate the size of your business and the volume of transactions you expect to process. Larger businesses with high transaction volumes may benefit from the flexibility and potential cost savings offered by an ISO, while smaller businesses or those with lower transaction volumes may find the simplicity and convenience of a payfac more appealing.

• Control and flexibility
  Determine the level of control and customization you require for your payment processing setup. If you prefer negotiating specific terms, rates, and services that align with your business needs, an ISO may be the better choice. If you value a simple, plug-and-play solution and do not want or need to negotiate, a payfac can provide ease of use.

• Complexity of payment processing
  Consider the complexity of your business’s payment processing requirements. ISOs often offer a wider range of services beyond payment processing, such as equipment sales or leasing, additional software integrations, or dedicated customer support. If your business requires specialized features or more comprehensive support, an ISO might be the right fit. However, if your needs are straightforward and you prioritize simplicity, a payfac can offer an all-in-one solution that covers the essentials.

• Setup time and effort
  Evaluate the time and effort required to set up and start accepting payments. ISOs typically have a more complicated setup process, since each business needs its own merchant account. This process can take longer and involve more paperwork. Payfacs offer a streamlined onboarding experience, allowing businesses to start accepting payments faster.

• Cost structure
  Consider the pricing models of ISOs and payfacs. ISOs often provide more flexibility in pricing, with the potential to negotiate rates based on transaction volume. This can be advantageous for businesses with high transaction volumes, as they may be able to secure more favorable rates. Payfacs generally offer straightforward and transparent pricing structures, which can be advantageous for businesses with lower transaction volumes that prefer clarity and predictability.

While these guidelines are helpful when comparing payfacs and ISOs, they are not true in every case. For example, in some ways Stripe is closer to the payfac model, offering easy, out-of-the-box solutions for businesses with straightforward requirements. Yet Stripe also offers an extensive degree of customization for businesses with complex needs or high transaction volumes. It’s important to look at each potential provider to see what they offer and how they support businesses, and then decide which one is the best fit.

Is Stripe an ISO or a payfac?

As a payment provider with a payfac model, Stripe simplifies the payment processing experience for businesses by providing a comprehensive suite of services. When businesses sign up with Stripe, they become submerchants under Stripe’s master merchant account. This means that they do not need to set up their own individual merchant accounts with banks or card associations.

Stripe's payfac model allows businesses to quickly and easily start accepting electronic payments without working through the complex, lengthy process to set up a merchant account. By aggregating businesses under its master account, Stripe handles the technical aspects of payment processing, risk management, and compliance, making it convenient for businesses to integrate payment capabilities into their platforms or websites.

Stripe also offers additional features and services beyond payment processing, such as tools for managing subscriptions, processing international payments, preventing fraud, and accessing detailed analytics and reporting. Stripe’s user-friendly interface, developer-friendly APIs, and extensive documentation make it an appealing choice for many businesses and industries. The variety of Stripe solutions, the degree of customization it offers, and its unified approach to operations and reporting go beyond what is typically thought of as the payfac model. This emphasizes how important it is to consider the pros and cons of individual providers before choosing one.

There are aspects of Stripe that do fall in line with traditional payfac benefits, such as Stripe’s simplified onboarding process, which allows businesses to focus on their core operations rather than the complexities of merchant account setup and management. A simpler approach and comprehensive suite of services makes Stripe a popular choice for startups, small businesses, and larger enterprises.

While Stripe is generally considered to be a payfac, it also partners with ISOs and acquirers to provide services. This allows Stripe to extend its offerings to businesses with more specialized needs or those that require additional services beyond what a typical payfac model can provide. For more information and to get started, go here.