When you’re beginning your small business, you may not pay a lot of mind to merchant services—aka how you’ll be processing payments. But, as you build out, you may want to consider adding options for credit card payments by looking into an independent sales organization, which can help you accept credit card payments and create a credit card of your own.
This can provide a great deal of convenience on the receiving end for your shoppers, who will be able to patronize your shop more conveniently, or even earn discounts or perks for using their accounts with you.
We’ll review not only the definition of an independent sales organization, but also its component parts including processors, associations versus associates, and more. Then, we’ll go through how you could work with an independent sales organization to optimize your merchant services offerings. By the end of this piece, you’ll have a clearer sense of whether you want to engage an independent sales organization to expand your merchant service offerings.
An independent sales organization (or ISO) is a company that sells credit card processing services independently from a financial firm or bank. In other words, an ISO is a third-party company that can sign up your business to accept credit cards.
Although the ISO isn’t directly part of a bank, they’ll accept credit cards on your behalf through the partnerships they’ve established with banks.
Importantly, ISOs will work with you as a partner to establish which credit cards you accept, the fees taken for these transactions, and any markups on processing rates. They’re also able to help you with getting the equipment and terminals you’ll need to process payments. ISOs will also be the point of contact for customers with credit card issues or disputes who need to speak to someone for service on behalf of your business.
As we go forward, keep in mind that we are mostly speaking here about Visa and MasterCard, as these are the most common financial institutions that license their bank credit program.
You may have heard the term member service provider, and wondered what the difference is between that and an ISO. The short answer? There isn’t really one. These terms are used interchangeably, and the only small differences are relative to the financial institutions using the term. (For instance, one card company or financial institution may use one term over the other; MasterCard uses MSP, while Visa uses ISO.) This also can be known as a merchant service provider (MSP, too).
For your purposes as a small business owner, while you’re learning the nuances of independent sales organizations, you’ll want to ignore these details—just treat these terms as equal to each other.
The one other term you may want to know as you understand independent sales organizations is a sales agent. This is one term that’s sometimes used interchangeably with ISOs, but is actually a little different.
A sales agent, also called a third-party agent, is essentially a sales rep. The sales agent works with the ISO to sell their services. They sign an agreement to contract for the ISO; the sales agent isn’t itself registered with financial situations, and isn’t responsible for paying fees as an ISO (since, obviously, they aren’t!). Instead, they work under the umbrella of the ISO.
Independent sales organizations work to sign you on as a merchant. Once that happens, the ISO will use the services of a credit card processor to do the actual processing work of the transactions that the ISO is now handling—that’s because the ISO isn’t a bank itself, it just has an agreement with them. (A little more on that in a second.) Instead, ISOs will work as contractors for processors.
If it’s a bit worrying to you that there’s yet another spoon in the soup, so to speak, don’t worry too much—it’s standard fare if you work with an ISO. The ISO’s main jobs are to sign up merchants (that’s you) for your processing account, and then provide any subsequent help with getting you up and running, whether that’s advertisement, lead generation or cardmember offers, and actually getting a hold of the gear to carry out the credit card transactions.
On the other hand, a processor is responsible for actually running a merchant’s credit card transactions through on their end, and providing you with the tech support you need to make sure your payments are getting approved.
Tired of all the terms yet? We hear you. There’s one final piece of technical jargon that’s part of independent sales organizations: associations.
An association is a group within a financial institution that licenses out its credit card services to ISOs (so, in our case, this is happening within Visa or MasterCard). The associations may be regional or statewide associations that help small businesses and retail stores establish card programs. So, as you might expect to follow, ISOs are organizations that aren’t association members—aka not a member bank.
One final piece of the puzzle includes the ISO’s relationship to merchant cash advances. These are small business loans that enable merchants that take a great deal of credit card payments to get an instant loan. The drawback is that these are expensive loans, and the MCA lender will take a percentage of your daily credit card sales until you pay them back. It’s a good option for fast access to capital if you don’t have a strong credit score, and it is a type of business loan that doesn’t require collateral.
For an ISO, they act as a kind of middleman between you as the merchant and the MCA lender. Since they’re doing all of the processing and backend work with your credit card payments, the ISO can handle all of the gritty work for the MCA lender, too. (This isn’t always the case, but it’s worth mentioning so you can understand the full scope of an ISO’s role.)
Perhaps you’re wondering how working with an ISO is different than signing up for a merchant services provider such as Square or Stripe. In essence, an ISO is the same thing as a merchant services provider.
Merchant services providers enable you to take credit cards, can provide you data, and can transfer the money spent on credit cards to your bank account—sound familiar? When you sign up for a merchant service provider like Square or Stripe (or ShopKeep or Clover… you get the idea), you’re actually working with an ISO. And your merchant account that you establish with this ISO/MSP is what enables you to accept those credit card and other electronic payments.
Now, why would you want to engage an independent sales organization as a small business owner? There are two key reasons from a small business owner’s perspective.
First, becoming a merchant for an ISO means the ability to offer credit card and debit card payments from your customers from Visa and Mastercard. They’ll be able to set you up with equipment as well as customer service for those who pay you (including any credit card disputes that might arise). Perhaps most importantly, they’ll make sure you receive the money that’s charged on your behalf—a crucial step, since you’re offering credit to customers, and therefore not ending up with more cash in your till when an item flies off your shelf.
According to a 2018 study from researchers at Experian, only 24% of consumers in the US relied purely on cash. That means credit cards are a major piece of the revenue puzzle for you! ISOs especially come in handy when you want to accept credit cards but you don’t have the sales volume to establish and operate a merchant account—and especially if you don’t have the infrastructure or risk management processes to handle chargebacks.
As your business grows, you also might want to consider purchasing a Visa or MasterCard license to create your own store card. As you likely know from using store credit cards yourself, some offer discounts such as 10% off every time you use your store card, or send members coupons, for instance.
Retail store cards can create a sense of loyalty for businesses, too. To see what a store credit card could provide shoppers, take a look at these pieces on the Costco business credit card and Walmart business credit card as examples.
The ISO enables you to license from financial institutions and also provides all of those “back office” services we mentioned before.
Well, of course, as in all things business, it depends—you have to do what’s right for your business. That said, you may see a significant benefit from beginning to take credit cards, which is the preferred payment for the vast majority of Americans.
If that’s your aim, then you’ll want to get a merchant account with an ISO. Luckily, you’ll know that they’ll be there to have your back in case anything goes wrong. It’s quite literally their job.
Meredith Turits is a contributing writer for Fundera.
Meredith has worked as a writer and editor for more than a decade. Drawing on her background in small business and startups, she writes on lending, business finance, and entrepreneurship for Fundera. Her writing has also appeared in the New Republic, BBC, Time Inc, The Paris Review Daily, JPMorgan Chase, and more.