Navigating the Complex World of Payment Processing: A Guide to Payment Processors, Facilitators, and ISOs

The payment processing industry has transformed how consumers and businesses transact, offering increased flexibility and efficiency. At the core of this evolution are various payment service entities that facilitate transactions between buyers and sellers. The rise of SaaS platforms and online marketplaces has also accelerated further change, connecting buyers and sellers in new ways. Together with other economic, social and technology drivers, these trends have helped shape the redesign of payment and financial services in shopping and industry.

There are numerous players in the payment processing ecosystem, but it is important to understand the central agents and their roles. As the payment landscape grows, understanding how each of these players may influence future developments is critical for business planning. Here, we will review the roles of payment facilitators (payfacs), ‘payfac as a service’ providers, and independent sales organisations (ISOs) to understand their roles in the payment landscape.

Payment facilitators (Payfacs)

Payment facilitators or payfacs are specific types of payment service providers. They are usually registered by an acquirer such as a bank, to facilitate transactions on behalf of submerchants. By taking on the major merchant role, the payfac underwrites the payments for sub-merchants and does all the interchanges between the financial entities involved, freeing sub-merchants of this complexity, usually at a higher cost per transaction. 

Payfacs empower businesses to accept electronic payments without establishing a direct association with an acquiring bank or an exclusive merchant account. They manage various facets of payment processing, such as transaction authorisation, settlement, and fraud management. Their services are often more attractive to smaller businesses with lower volumes of transactions, which by themselves would not be able to offer the speed and security that payfacs provide.

Payfacs as a Service (PaaS)

With Payfac as a service, SaaS companies can access all of the benefits of being a Payfac without incurring any upfront investments or ongoing costs. Software providers can implement a white-label strategy, offering integrated payments under their own brand and earning revenue from payments. Payfac as a service is sometimes called ‘payfac lite.’ These types of service offers are a result of industry players trying to own a greater portion of the customer payment process to improve brand loyalty and increase market share.

Independent sales organisations (ISOs) 

ISOs, or Independent Sales Organisations, are intermediary companies that facilitate transactions between businesses and acquiring banks. They function as providers of merchant services. ISOs offer merchant accounts and payment processing services on behalf of acquiring banks or payment processors, often working through a network of sales agents or resellers.

ISOs may also provide additional services of value, including POS systems, payment gateways, and tools for managing business operations. They have a wider range of products (often working with multiple acquirers) versus bank acquirers, and they can customise solutions that better meet the needs of merchants. Non-bank ISOs often have more competitive pricing than acquirers because they can work on lower margins and remain competitive in their value offers.

To maintain their status, ISOs must adhere to specific compliance standards set by payment networks such as Visa and Mastercard, as they are subject to regulation from these networks.

Other Important Concepts in the Online Payment Ecosystem

Merchant of Record (MoR)

The Merchant of Record, or MoR, is legally recognised as the seller of goods or services to the consumer. This entity is responsible for managing a transaction's financial and legal aspects. When a customer purchases online, the MoR ensures that the transaction is processed securely and efficiently.

The MoR, however, has a much wider range of responsibilities. These include handling payment processing, issuing refunds, managing chargebacks, providing billing-related customer support, and ensuring a business remains compliant with regulations and legal standards such as the Payment Card Industry Data Security Standards (PCI DSS). It is also accountable for maintaining financial liability for transactions.

Businesses can choose to be their own MoR (a MoR model), setting up the infrastructure and processes needed to manage payments and liabilities. Alternatively, MoR service providers do exist that can take the burden of payment processing and compliance away from businesses that would prefer to focus on building enterprise growth and product development strategy. Some payment facilitators (PayFacs) also provide this service. Examples of companies providing such services include 1D3 Digitech and Paddle – they handle all financial and legal aspects, providing a comprehensive solution for merchants.

Payment service providers usually don’t take on all the same direct responsibilities as an MoR. They may deliver services limited to handling transactions, payment processing, and fraud-security measures. The business though, retains responsibility for certain core legal and financial aspects in these cases. The decision to partner with a PSP such as a payfac or become (or partner) with an MoR depends on various factors, including the business's size, transaction volume, resources, and strategic objectives. Each business will need to make its own assessment.

Marketplaces

Another huge growth area in e-commerce and the payment services market is the enormous size of online marketplaces. Amazon, eBay, Etsy, Alibaba, Uber, Upwork, and Airbnb are extremely popular marketplaces that have grown into huge global brands in recent years. These marketplaces act as intermediaries, allowing third parties to exchange products, services, or information on their platforms. Unlike traditional e-commerce models, marketplaces involve multi-sided models with at least two distinct user groups (e.g., buyers and sellers, renters and providers). Marketplaces can involve B2B, B2C, or C2C interactions.

Marketplace platforms such as Amazon have numerous features that attract sellers. They offer sellers an almost one-stop solution. SMEs have access to a global network of buyers at a low cost, with the possibility of promoting their product or service to an existing market with millions of buyers. Marketplaces offer additional benefits such as payment processing, dispute resolution, and services such as shipping and logistics. This package of benefits removes many difficult aspects for small businesses wanting to do e-commerce. In some cases, the marketplaces take on MoR responsibilities from the sellers, making the sellers’ business models very streamlined and relatively simple.

Conclusion

With further growth of SaaS and marketplace platforms guaranteed, keeping abreast of how payment networks develop in this high-paced fintech landscape will remain imperative. The online payments ecosystem, in particular, continues to be a complex environment characterised by frequent change.

Each business model will add different value to your business, and should you wish to discuss anything, please feel free to contact me here