The economy is in an upswing. Workers feeling more confident about their job prospects are quitting at the highest rate ever. Consumers, with record savings and pent-up demand for purchases, have been emboldened to demand the best service and comfort in how they wish to pay, be it by debit card or their smartwatch. Last year saw a reversal of a long-term slump in new business starts with entrepreneurs starting 4.4 million new businesses, an increase of 24% from the year prior.
All this bodes well for merchants who are looking to attract business and want to cater to consumers ready to spend. This also poses a challenge for many merchants. Cash is no longer king. Three out of ten consumers don't use any cash in any given week. And that statistic is two years old and most likely outdated with the surge of cashless transactions in the last year. Are merchants prepared to cater to these needs?
As more businesses realize that setting up a merchant account is a necessity, they will look to explore their options and get a better understanding of who to work with in the industry. Especially since 10% of millennials are adamant about not using cash at all, a trend that is likely to proliferate. Below we have highlighted some main areas to which merchants should pay close attention before picking an ISO that best suits their needs.
What are ISOs and why do you need them?
An Independent Sales Organization (ISO), also known as a Member Service Provider (MSP), represents an issuing bank, that is the bank that sets up, or issues, the merchant account for businesses. The ISOs become a part of the issuing bank's reseller program and are then allowed to resell the payment processing services on behalf of the issuing bank based on specific terms.
ISOs are required to arrange an upfront payment to the issuing bank to be included in the reseller program. This program allows an ISO to be included in a network that offers the banks payment processing services at a low buy rate.
How do ISOs make their money?
ISOs make their money having a low buy rate by being included in the issuing bank's reseller program. The buy rate is the rate you buy the merchant account service from the issuing bank. The ISOs then tack on their commission onto this rate, resulting in what is then offered to a merchant.
A simple example of this in dollar terms is that the buy rate from the issuing bank would be 1.5% + $0.05. The ISO would offer merchants a rate of 1.9% + $0.15. The 0.4% + $0.10 is the commission the ISO earns.
There are a lot of benefits merchants can derive from their ISOs. They can start processing debit and credit card transactions, or transactions paid for by an ever-growing list of digital wallets, such as Apple Pay, Google Pay, Samsung Pay, Facebook Pay to name a few.
ISOs have pre-existing partnerships that they can leverage to offer an all-in-one solution. They'll get a merchant set up with payment processing, point of sale (POS) terminals depending on the business/industry needs, a website, an online shopping cart, a virtual terminal, and a payments gateway.
Some of the best ISOs are at the top of the heap because they are customer-centric and have best-in-class customer support to offer. This is vital when you're trying to get someone on the phone to understand your frustrations that a POS isn't working just as you're trying to process a thousand dollar transaction, and work with you to fix the problem.
All this with a transparent breakdown of what fees they will charge you, rates for swiped versus keyed in transactions, monthly minimums, batch fees, statement fees, tax documentation fees. They should make clear disclosures about PCI compliance, early termination fees, and any fees associated with chargebacks, etc.
Finally, one of the most important factors in considering ISO is the structure of payment processing fees. An interchange-plus pricing plan is one of the most preferred methods of pricing for merchants. Interchange-plus passes through the published costs of a payment network plus a markup of the ISO. It is far more transparent than tiered pricing and gives a breakdown of what a payment network charged and the ISO's markup for every transaction that was processed in a billing cycle.
And the bad
Don't take customer service for granted. There is a significant amount of training and financial investment required to establish a strong support department. As a result, poor customer support proliferates as one of the most-cited complaints among merchants.
Some ISOs will look to lock in merchants into long-term contracts that carry hefty early termination fees. Another pitfall is POS systems that are proprietary and function with ISOs own services only. They also come with exorbitant lease payments, amounting to times the cost of the equipment, also locked into noncancelable long-term agreements.
Another drawback is that sales staff are often opaque on the contract details and don't disclose all the pricing details or fees associated with an ISO agreement.
Finally, the pricing structure; tiered pricing. This is an alternative to interchange-plus marketed for its simplicity. The pricing plan also oversimplifies exorbitant pricing. Tiered pricing bundles all the interchange rates into three tiers; qualified, mid-qualified, and non-qualified tiers. Each tier has a specified rate for all transactions that fall into that tier. Since transaction rates can vary based on the card you use, a debit card has a lower interchange rate than a corporate card. However, with tiered pricing, different cards with different rates get charged the rate applicable to the tier they are in. Furthermore, there's seldom any transparency on which cards are bucketed into which tier. In the end, merchants are overpaying, and ISOs pocket higher profits.
Both merchants and independent sales organizations are experiencing tremendous growth. Shifts in spending habits and their effects are rippling through to businesses and onto the payment processing industry. As ISOs are at the forefront of helping merchants seize the opportunity by helping in pivot their payment acceptance methods, it is important for merchants to better understand who they will be working with.
Merchants should know how these counterparties make money, what are some pitfalls they can fall prey to, and how businesses can make informed decisions after assessing both the pros and cons of working with ISOs.