PayFac vs. ISO: Which Service to Choose For Your Business?

In the past decade, there’s been a notable growth in credit and debit card transactions worldwide. By 2021, 65% of Americans (about 168 million people) used credit cards. As a result, merchants today simply can’t afford not to accept credit card payments. The question is: which credit card payment solutions should you opt for?

In this article, we’ll go over two of the most popular credit card payment services on the market today: PayFacs and ISOs. Here’s how they work and how to pick one for your business.

What Is a PayFac?

A PayFac (short for payment facilitator) is a merchant service provider that allows businesses to accept electronic payments. It does so by managing a variety of responsibilities necessary for payment processing on merchants’ behalf. Common PayFacs include PayPal, Stax, and Stripe.

The way PayFacs works is simple. They have a partnership with an acquiring bank, which supplies them with a master merchant account (MID). Then, PayFacs adds their customers as sub-merchants. This prevents the need for the merchant to apply for a unique account with a bank or payment processor and allows them to leave everything to their PayFac.

What Is an ISO?

An ISO is a third-party reseller of merchant accounts. Like PayFacs, they function by forging relationships with acquiring banks and payment processors. If a merchant wants to use an ISO to accept credit card payments, the ISO will refer them to a payment service provider (PSP). Again, this saves the merchant from having direct contact with a bank or payment processor.

Key Differences

Though the similarities between PayFacs and ISOs are obvious (both act as middlemen and simplify credit card processing), there are some key differences as well. They are:

  • Processor relationships: Since ISOs mostly act as resellers, the amount of options they offer depends on how many relationships they have with payment processors. By comparison, PayFacs usually have no more than two processing partners.
  • Technology: Some activities performed by PayFacs (like applications and boarding) require them to develop their own in-house systems. ISOs can pass off these tasks to their processors.
  • Risks: Most ISOs have little to no responsibility for underwriting and merchant losses. PayFacs take on those responsibilities in exchange for greater portfolio control.
  • Contracts: With ISOs, the merchant’s contract must include the name of the payment processor they’re using. PayFacs are solely responsible for their merchant portfolio, so you enter the agreement with them directly.

PayFac vs. ISO

When it comes to which service to choose, it all depends on your personal needs. Since ISOs work with multiple payment processors, they’re more likely to set you up with better rates. However, this involves getting approved for a traditional merchant account. If your business is new or simply has a low sales volume, this could be a challenge.

With PayFacs, you can get up and running fairly quickly. However, they make up for the risk they take through stricter account limitations and higher processing fees.

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