PayFac vs ISO: which one to choose for your business?

There are dozens of ways for merchants to start accepting online payments, which, for the uninitiated, can be a confusion of acronyms, third-parties, and regulations. 

But thanks to services like payment facilitators (PayFacs) and Independent Sales Organizations (ISOs), merchants can outsource much of the hard work to intermediaries, making it much easier to start accepting payments and growing their businesses. 

PayFacs and ISOs play a similar role for merchants, in that they form relationships with payment processors and banks. However, there are crucial differences that might make them more or less suitable depending on the specific needs of the organization. 

In this article, we explain each model, how they work, the key differences and similarities, and how to choose between them for your payment processing needs. 

What is a PayFac?

A PayFac provides merchant services to businesses that allow them to start accepting payments. It does this by managing the numerous responsibilities - including risk management and compliance - and relationships - including banks and card networks - necessary for payment processing on behalf of the merchant. 

This streamlined underwriting process makes it much quicker and easier for small merchants to get set up and start taking payments.   

How do payfacs work?

PayFacs perform the following functions for merchants:

• Set up payments - partner with acquiring banks, integrate payment gateways to accept payments, obtain relevant certifications and licenses, and build systems to manage processes, payouts, and disputes
• Onboard sub-merchants - create processes for onboarding and verifying the identity of sub-merchants, including Know Your Customer (KYC) checks, credit and risk checks
• Ensure compliance - PayFacs are responsible for complying with Anti-Money Laundering (AML), PCI-DSS, and any regulations specific to local regions 
• Manage ongoing processes - on an ongoing basis, PayFacs continue to onboard new sub-merchants, perform due diligence, process payments, pay out funds, file taxes, prevent fraud, and renew licenses 

What is an ISO?

An ISO is essentially a third-party reseller of merchant accounts. An ISO has relationships with acquiring banks and payment gateways, and refers any merchant that wants to accept payments to payment service providers (PSP).

How do ISOs work?

As with a PayFac, the ISO business model means the merchant doesn’t have to deal directly with a payment processor or a bank. The ISO acts as intermediary, communicating pricing, terms and conditions, and any other necessary information to the merchant, and passing on their details to the processor. The processor then accepts payments on behalf of the merchant, and authorizes and settles funds in the merchant’s account. 

What are the differences between a PayFac vs ISO?

Both PayFacs and ISOs help merchants to start accepting payments, but there are a number of crucial differences in their level of involvement, their assumed risk, and the technology they use to perform their functions. 

Risk 

As they’re responsible for onboarding merchants and directly involved in payment processing, PayFacs assume liability for any risk associated with these activities, such as chargebacks and fraud. That’s why they’re personally obliged to comply with PCI-DSS, KYC, AML, and any other relevant regulations. 

In contrast, ISOs are simply agents of the processor and are not directly involved in accepting payments. Because of this, the payment processor retains responsibility for any risks and the ISO does not have to put in place any risk management procedures. 

Operational control 

PayFacs oversee the entire application and onboarding process, from underwriting each merchant to ensuring compliance. ISOs simply sign the merchant up and then the payment processor takes over for the application and onboarding process.  

Payment distribution and settlement

PayFacs are directly responsible for settling payments in their merchant’s accounts. The PayFac receives the collective funds for all their sub-merchants from the payment processor, and then distributes the correct amounts into each sub-merchant’s account. Because of this, settlement times are relatively quick, and they can give their merchants much greater visibility over their transactions. 

ISOs are not involved in distributing or settling their merchant’s funds. The whole payment process, from authorization to distribution is handled entirely by the payment processor.  This means that, for a merchant, the payment and settlement process can be slower and less transparent when working with an ISO.  

Contracts

To put it simply, in the PayFac model, merchants and PayFacs enter into a contract with each other, and in the ISO model, merchants enter into a contract with the payment processor. In each model, it’s possible for the processor or ISO to be included in the contract as a third party, but it’s not necessary.  

Technology

Because their involvement in the process is a lot more substantial, PayFacs are required to invest a lot more in tech and infrastructure than ISOs. PayFacs often build their own in-house systems to manage onboarding and payments, while the ISO relies on the payment processor’s technology. 

Payment processor relationships

ISOs generally have relationships with far more payment processors than PayFacs. This allows them to give their merchants more options that suit their needs. PayFacs, on the other hand, prefer to work with just one or two processors, which not only makes integration and onboarding easier, but allows them to negotiate exclusive rates for their merchants.  

Read more: Payment gateway vs payment processor: what's the difference?

What are the similarities between a PayFac vs ISO?

Despite the differences listed above, PayFacs and ISOs do have some similarities that, for merchants, mean they are genuinely competing models when deciding how to start accepting payments. 

The key similarities are that both:

• Are intermediaries - both PayFacs and ISOs are intermediaries that form relationships and communicate with banks and payment processors on behalf of smaller merchants 
• Make payment processing accessible - many banks and payment processors won’t work directly with merchants, either because they’re too risky or because they’re too small. PayFacs and ISOs make it possible for these smaller or high risk merchants to start taking payments
• Charge fees for their services - PayFacs and ISOs take a percentage of every transaction taken by a merchant, though commission structures vary

Read more: A guide to marketplace payments

How to choose between a PayFac or ISO for your business?

There are pros and cons to the PayFac and ISO model depending on the size and specific requirements of your business. 

Generally speaking, a PayFac might be suitable for bigger businesses that need to process a large volume of transactions, and an ISO might be more suitable for smaller businesses. 

But size isn’t the only factor. Here are the main considerations when deciding between a PayFac and an ISO:

• Onboarding - the ISO onboarding process is usually slower than the PayFac’s because the former relies on the payment processor, whereas the latter manages the entire process. If you need to get setup quickly, then a PayFac is probably your best option
• Flexibility - as ISOs tend to work with a greater number of processors, it's easier to find one that best suits your needs. However, as PayFacs manage their own infrastructure, they give merchants greater flexibility when it comes to designing their payment experiences 
• Fees - PayFacs can negotiate lower fees than ISOs, so if your margins are tight, a PayFac might be a better option
• Visibility - if it’s necessary for your organization to have a significant degree of visibility over the payment process and your transaction payment data, a PayFac is probably your best option 
• Settlement - if your business demands fast settlement of funds, you should probably choose a PayFac to handle your payment processing needs

Integrated platforms for PayFacs with Checkout.com

Checkout.com’s integrated platforms solution provides everything you need to set up as a PayFac (we don’t support ISOs).

We support you at scale. With contextual sign up forms, fully customizable checkouts, and a single API that accepts all major payment methods, you can offer online retailers a fully-optimized experience. What’s more, compliance tools covering everything from KYC to PCI-DSS are built-in, and your customers are given access to rich insights with actionable data at their fingertips. 

Integrated platforms also gives you complete flexibility over your payments program, allowing you to optimize your revenue streams by customizing fees and commission to each customer, gaining oversight of payments and payout with granular reconciliation data, and tracking all money movement to identify cost efficiencies. 

Find out more about Checkout.com’s integrated platforms.