Starting an ISO (Independent Sales Operator) or a Merchant Service Provider (MSP) business can be a lucrative source of income for those who have a clean background and who possess strong sales and management skills. Credit card usage reports also suggest that the credit card industry will remain strong even with the global economic slowdown and all the brouhaha surrounding the 2010 credit card reform act. According to the American Bankers Association in March 2009, credit cards are responsible for more than $2.5 trillion in transactions a year and are accepted at more than 24 million locations in more than 200 countries and territories.
But there is much confusion surrounding how to actually start a business in the credit card processing industry as an ISO or MSP. The following article explains what an ISO and MSP are and lays down the major steps and requirements to start such a venture.
What are Independent Sales Operators, Merchant Service Providers, and ISO Agents?
In order for a business to start accepting debit or credit cards it must first open up a merchant account. The bank that issues this account is referred to as the merchant bank. To minimize their risk, banks are picky when it comes to deciding whether or not to open a merchant account with a particular business. Some kinds of businesses, especially those that are new, small and/or home-based, are inherently more risky and susceptible to credit-card fraud than others. For such businesses, opening merchant accounts directly from a merchant bank can be extremely difficult.
This is where the ISO steps in. Independent sales organizations are third-party entities that establish a partership with payment processors, usually merchant banks, to generate and manage merchant accounts on behalf of high-risk businesses. In return for their services, ISOs receive a higher fee and/or a cut of the merchant's revenues.
ISOs take on the name “merchant service provider” when they offer financial transaction processing services, such as credit card transaction processing or account balance and activity reporting, that assist the merchant with accepting credit cards as payments. By law, ISOs can provide merchant accounts to high risk merchants, and charge more for their services because they are not banks and thus are not subject to the same laws and regulations. But, one of the drawbacks to being an ISO is that it must shoulder much of the inherent liability and risk.
ISOs / MSPs can additionally be designated as “unregistered,” meaning they are not officially registered with Visa or Master Card. An unregistered ISO is basically a sales agent, whereas a registered ISO is typically an independent company. Unregistered ISO’s can not have agents working for them and their interchange rates are generally higher, meaning it is more expensive for merchants to use their services. Moreover, ISO sales agents can only introduce themselves as representatives of their ISO or MSP and cannot advertise their own business name as a service provider.
How Does One Become an Independent ISO or MSP?
Becoming a registered ISO or MSP involves several steps and numerous requirements. Here is a brief rundown.
Step 1: Decide what merchant account services you want to provide or what kind of ISO business you want to run.
As mentioned above, there are several different options for those wanting to work as an ISO. It all really boils down to the amount of investment you want to make as well as the level of responsibility you would like to shoulder. Do you want to support your own Application, Risk, Customer Service and Technical Support Departments? These require a significant monetary investment as well as the hiring and management of several employees.
Step 2: Find a sponsoring processor, registered ISO to resell for.
After deciding what direction to take, you will then need to partner with a suitable merchant bank or a larger, established MSP.
Step3: Complete the application process.
A prospective ISO or MSP must then be registered with Visa and MasterCard. The documents applicants must submit with their application include:
- Two years business financial statements or personal tax returns (last 2 tax years) for all owners.
- Personal financial statement for each owner
- Executed Articles of Incorporation / Partnership documents.
- Detailed business plan.
- Copy of sales materials / solicitations.
- Complete list of current ISO employees / agents.
Moreover, each of the ISO's owners will have their credit history checked and evaluated to ensure that they are credit worthy.
Step 4: Pay the registration fee.
After receiving approval on your application, you will then be required to pay a one time registration fee of $5,000 for each Credit Card Association (i.e. Visa and Master Card; the other credit card companies do not have such a fee). After that, you will also have to pay $5,000 in annual fees to maintain the contract. Though many prospective ISOs may wonder how to avoid this registration fee with Visa or MasterCard, it is an unavoidable requirement put in place to discourage credit card scammers. The only way to trully avoid paying this fee is to become an agent instead of an independent ISO.
In short, starting a new ISO or MSP business can be a profitable venture, but like anything in life, it will only be a good as you make it. Before starting a business in the credit card processing industry, it definitely pays to do your research and be clear about the amount of time, money, and expertise you have to invest.
Sources:
Free Encyclopedia of E Commerce, "Independent Sales Organization"
CreditCardProcessing.org, "Credit Card Processing Introduction"
Merchant Account Blog
Susan Brown - Susie Brown is a small business consultant and freelance writer specializing in business and personal finance.
