Independent Sales Organization (ISO) is a term that is thrown around quite a bit in the payment card industry, however not always accurately. In this article we will look at exactly how the Credit Card Associations of Visa and MasterCard define what an ISO is, how ISOs relate to the Associations and their member banks, how they are registered with them and what functions they performs.
What Is an Independent Sales Organization (ISO)?
The payment card industry defines an ISO as an organization or individual that is not an Association member (meaning not a Visa or MasterCard member bank), but which has a bank card relationship with an actual Association member. Such a relationship can involve various things, such as acquiring or issuing functions, soliciting new customers, arranging for terminal purchases or leases, providing customer service, soliciting cardholders, etc.
What Is a Member Service Provider (MSP)?
An ISO is sometimes referred to as a Member Service Provider (MSP), although the definitions of these two terms are not always synonymous. The easiest way to explain the difference between the two is that MasterCard refers to its ISOs as MSPs, defining a Member Service Provider as “a non-member that is registered by the Corporation [MasterCard] as an MSP to provide Program Services to a member, or any member that is required to register, in the Corporation’s sole discretion, and has been registered as an MSP to provide Third Party Processor Program Services to another member.” Members of MasterCard and Visa must register all of their ISOs / MSPs with the applicable Association.
What Are the ISO’s / MSP’s Relations with Member Banks?
It is important to understand that ISOs and MSPs are not banks and that the actual handling of the merchants’ money is done by the acquiring (processing) bank that has contracted with the Independent Sales Organization in question. Each ISO / MSP must be sponsored by such a processing bank, member of Visa and / or MasterCard, in order to be registered by either Credit Card Association.
Typically, processing banks are members of both Associations (in principle it is possible that a bank may choose to be a member of only one of them, but I haven’t seen such an arrangement) and the registration process for each Association occurs simultaneously. An ISO / MSP can be sponsored by multiple member banks. Processing banks can also perform the job of their ISOs / MSPs, but they rarely do so and prefer to concentrate on issuing credit cards and acquiring payment transactions instead. And that is understandable — bankers are not the best salesmen.
ISOs / MSPs must display the name of their sponsor bank on their website and marketing materials. Most disclosures are located in the footer of the ISO / MSP website. Our disclosure notice reads:
“UniBul Merchant Services LLC is a registered ISO / MSP of Wells Fargo Bank, N.A., Walnut Creek, CA”
How are ISOs / MSPs Registered with Visa and MasterCard?
The ISO / MSP registration process is quite rigorous. It starts with the applicant finding a member bank to be its sponsor during the registration process. Prospective ISOs / MSPs then have to prove that they are financially able to perform the duties for which they are applying. The documents applicants are required to submit, along with their application package include:
- Two years business financial statements or personal tax returns (last 2 tax years) for all principals.
- Personal financial statement for each principal.
- Executed Articles of Incorporation / Partnership documents.
- Detailed business plan.
- Copy of sales materials / solicitations.
- Complete list of current ISO employees / agents.
In addition, all principal owners have their credit history checked and evaluated to ensure that they are responsible with credit.
What Are the ISO / MSP Registration Fees?
Upon approval, the applicants must pay registration fees of $5,000 for each Credit Card Association. Every year thereafter, the company has their registration reviewed and additional fees of $5,000 per Association are due upon approval. In other words, you’ll be paying $5,000 for your Independent Sales Organization registration renewal and another $5,000 for your Member Service Provider one.
What Are Agents?
ISOs / MSPs can sign up sales agents to help them sign new merchants. MasterCard defines an agent as “an entity that provides Program Services to a member and is not registered by the Corporation [MasterCard] as an MSP.” Sales agents are not required to be registered directly with the Associations of Visa and MasterCard, but the ISO / MSP is handling the process, which quite straightforward anyway. Furthermore, the registration fees are purely nominal, $50 per year or so. Finally, sales agents can only introduce themselves as representatives of their Independent Sales Organization / Member Service Provider and cannot advertise their own business name as a service provider.
Which Is the Better Option?
So should you go for a full-blown ISO / MSP registration, with all of the associated effort and costs or should you opt for being a sales agent? Well, in my experience at least, the answer to this question depends mostly on how much new processing volume you are adding to your existing portfolio. If I were considering what to do today, I would request as many ISO / MSP sponsorship proposals I could get and then evaluate them very carefully. If it turns out that the better pricing I would get as an ISO / MSP would offset the ongoing expenses, I would go for it.
However, you will have to be very careful indeed when examining these proposals. There often are obscure clauses buried in these contracts, which might well turn out to be very costly for you in the long run and defeat the purpose of the whole exercise. In particular, look out for any minimum fee requirements. Here is what such a clause may look like in your proposed service agreement:
A monthly minimum processing fee of $3,000 shall be assessed after the first six months from the effective date of the Agreement and shall increase to $6,000 six months thereafter, initiated if the total authorization, capture and settlement transaction fees (“Minimum Fees”) are not not equal to or exceed this minimum amount. ISO shall pay an amount equal to the applicable monthly minimum processing fee less the actual Minimum Fees collected to the extent it is unable to meet the applicable month minimum. (Italics added).
These “Minimum Fees” can be quite substantial and can really hurt you. How substantial? Well, to meet the minimum in question, you may well be required to bring in the 50,000 – 60,000 transactions every month. And if you can’t, you’ll be paying for the difference out of your own pocket and you don’t want to be doing that. In fact, why don’t we do some basic calculations, so that you understand what you are dealing with here.
So, for you to appreciate what the above clause means in practice, you will need to know that the total amount an ISO / MSP would be paying in authorization, capture and settlement transaction fees would typically be in the range $0.05 – $0.07 per transaction. That amount would be higher for voice-authorized transactions, but these are very few and far between, as are a couple of other fees that are thrown into the total that makes up the “minimum fees”. But let’s generously assume that the odd fees raise the average by two cents to bring it to $0.07 – $0.09 per transaction. In that case, in order to cover the monthly minimum requirement of $6,000, you would need to have a portfolio of merchants that generates at least 66,600 – 85,700 transactions every month. That’s a lot of transactions for a business that is just starting out!
Now, as indicated above, your sponsor bank will give you a ramp-up period (say, 6 – 12 months) to enable you to build up your volume and meet the minimum requirement when the initial period expires. So if you are confident in your ability to get the new business you will need, by all means you should go for becoming an Independent Sales Organization / Member Service Provider. But you will be well advised to do your math very, very carefully.
Oh, and let me give you an even more frightening example of a “minimum fee” requirement. Be advised that both of these are real-world examples. Here it is:
A monthly minimum processing fee of $4,000 (the “Monthly Minimum Fee”) shall be assessed to ISO only in the event that ISO’s total authorization, capture and settlement processing fees in any given month do not equal or exceed $4,500. Imposition of the Monthly Minimum Fee, if applicable, shall commence after the first six months after the Effective Date of the Agreement, and shall increase by an additional $4,000 on the anniversary date of the Agreement for each year of the Agreement.
Yes, you read correctly, your monthly minimum requirement will be increasing in arithmetic progression for the life of your Independent Sales Organization service agreement, which in the above example is six years. So unless you have a bunch of convenience stores eager to tear up their existing merchant processing contracts just so that they can sign up with your company, don’t ever sign an ISO agreement, which contains such a clause! Otherwise, you will live to regret it. In fact, I would advise against signing such an agreement no matter what. And in case you are wondering why someone would insert such a thing into your contract, the answer is that, yes, the minimum fee requirement is there to make sure that your sponsor bank is making good money from its ISO / MSP, in addition to its merchants.
The Not-so-Good Alternative
Finally, you have a viable alternative in the smaller sponsoring organizations, which typically require no minimums of such kind, that is if you can find them. However, their pricing terms would typically not be quite as advantageous and, more importantly, their service might not be as reliable as those of their larger counterparts, which is what you would need to have if you are to be competitive as an ISO.
Moreover, the smaller guys’ contracts may feature a different type of a minimum requirement and one with an even larger destructive potential — a minimum number of new merchants you would be required to bring in any given month. And if you fail to meet this requirement in any given month, you would lose your entire residual income (the payments industry speak for “commissions”). Here is an example to give you an idea of what such a clause looks like:
Company [that is your sponsor] acknowledges that ISO owns and has the rights to its compensation / income, so long as five (5) new merchant accounts are submitted to Company on a monthly basis and based upon allocated residual income earned under this Agreement for approved Merchant Agreements solicited by ISO. However, BANKS and / or Company own the Merchant Agreements.
Did you get that? You may have built a portfolio of merchants that is earning you, say, $60,000 in monthly residual income and then lose it overnight. How would you like that?
So, all that being said, here is what I would do today, if I were starting out in the payments industry all over again. The very first thing I would do would be to sign up as an agent of several of the bigger Independent Sales Organizations (the biggest ones would not consider you at this early stage) and would do my best to avoid falling into traps like the ones described above. I would then be sending merchants to each one of these ISOs for some period, say a year or a bit longer, until I can be reasonably certain that I have identified the one I liked the best among them.
Once I’ve selected my preferred ISO partner, I would keep working exclusively with that ISO. Then, once my merchants’ combined processing volume has grown enough to justify paying all the registration fees and other expenses, I would inquire with my ISO about their own sponsorship program, as every ISO of such size would have one. But I would also reach out to the biggest sponsoring organizations to find out what they have to offer. I would negotiate the hell out of each prospective sponsor’s terms of service before I have made my decision.
Finally, and this is very important, before I signed any contract, I would have a lawyer with plenty of expertise in the payments industry to carefully review the service agreement and explain the meaning of everything in which I was not completely certain. Only then I would finalize the deal.
Image credit: Landroverfrisco.com.