This article, originally written by Alexandra Panac, Senior Product Manager at Checkout.com, delves into the differences between PayFacs and ISOs, helping you determine which is best suited for your business. Read on to learn more. 

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 Organisations (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 organisation.  

This article explains each model, how they work, their key differences and similarities, and how to choose between them for 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 authorises 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 authorisation 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.   

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This article was first published by Checkout.com and has been republished on our website with permission. 

Checkout.com is a member of our Payment Service Provider panel. 

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