The Evolution of Merchant Services: PayFac vs ISO

Written by

James Davis

Written by James Davis

Senior Technical Writer at United Thinkers

Author of the Paylosophy blog, a veteran writer, and a stock analyst with extensive knowledge and experience in the financial services industry that allows me to cover the latest payment industry news, developments, and insights. Read more

Reviewed by

Kathrine Pensatori

Reviewed by Kathrine Pensatori

Product Specialist at United Thinkers

Product specialist with more than 10 years of experience in the Payment Processing Industry. I help payment facilitators and PSPs solve their various payment processing issues. Read more

PayFac vs ISO is an illustrative example of natural selection and adaptation in the fintech world. About 50 thousand years ago, several humanities co-existed on our planet. Relationships of modern humans with other human species, such as Neanderthal etc, ranged from killing and eating each other to interbreeding. Modern-type humans turned out to be better adapted to changing environmental conditions. So, at some point, all other human species became extinct. However, fragments of Neanderthal and other archaic DNA patterns can still be found in the DNA of many modern nations. The same applies to merchant services.

The world of merchant services is, presently, inhabited by its own modern-type and archaic-type individuals. We are talking about payment facilitators and independent sales organizations. It took nature about 10 thousand years to select the best-adapted species, wiping out other humanities. However, in the world of merchant services, the process of replacement of ISO by PayFac might take just 10 years or so. PayFac vs ISO (or ISO vs PayFac) is not some existential conflict, but payment facilitator model is steadily becoming the dominant one.

In comparison to Neanderthal people, modern-type humans diversified their activities, used more versatile materials, and, probably, had better immunity. But why are PayFacs the “better-adapted species” of the present-day merchant services world? Shortly speaking, payment facilitation model is more beneficial for acquirers/processors, merchants, and, of course, PayFacs themselves.

PayFac vs ISO: 5 significant reasons why PayFac model prevails

1. Wide range of functions. PayFacs perform a wider range of tasks than ISOs. ISOs mostly resell merchant accounts, issued by multiple acquiring banks. Besides that, a PayFac also takes an active part in the merchant lifecycle. The key aspects, delegated (fully or partially) to a PayFac by an acquirer, include underwriting, onboarding, payment processing, funding, reconciliation, settlement, chargeback handling, reporting, and others.
2. Consolidated volume and unified operations. An ISO, usually, partners with many acquirers and processors. That’s because it wants to be able to refer merchants from different industries to acquirers supporting the respective MCC codes (for a modest fee). However, a PayFac prefers to be a partner of one or two acquirers only. Thus, in contrast to an ISO, it can consolidate transaction processing volume and unify internal processes.
3. Better processing terms and higher revenues. It becomes more lucrative for a PayFac to offer merchant, gateway, and other services in one package and to support a single acquirer/processor. As a result of the first two advantages, a PayFac can negotiate better processing terms (lower fees) for its sub-merchants and get its rightfully earned part of residual revenue.
4. Accessibility of PayFac model for many types of companies. These include independent software vendors (ISV), SaaS platform providers, franchisors, and (lo and behold!) ISOs. If you have a customer base and some CRM/KYC logic in place, then why not become a PayFac and make some extra cash on diversified merchant services?
5. Platforms and acquirers offer PayFac programs. Seeing the growing popularity and benefits of the PayFac model, processing platforms and acquirers also take a step towards it. More and more of them start offering PayFac programs to those willing to implement the payment facilitator business model. Such offerings can include both a full-fledged PayFac model and PayFac as a service option.

Conclusions

Now, is it the fate of Neanderthal people that awaits ISOs in the near future? Well, not necessarily. ISOs in their present-day form are, indeed, dying out, vacating the space for PayFacs. However, an ISO can become a payment facilitator (an option that archaic humans, unfortunately, did not have). The acquirer has to underwrite a merchant as a PayFac and implement merchant lifecycle support functions within his platform. For the skeptics, who think it is “easier said than done,” there are a lot of intermediary options. These include “try-it-before-buy-it” solutions, such as the white-label PayFac model.

Feel free to contact us for more information on PayFac vs ISO dichotomy and watch our short video guide on PayFac gateway selection.