VAR, ISV, Next-generation ISO: Outside Payment Facilitator Paradigm

Payment facilitator model is a lucrative option for many present-day companies. Those who implement the PayFac model get their residual revenue share for handling both business and technical aspects of merchant lifecycle. That is why the model seems so attractive for different kinds of businesses with established customer bases and KYC functionality in place.

Traditional ISO model focuses mainly on the business aspect. An ISO brings merchant account applicants to acquirer(s) and gets its share for referral service only. About a decade ago ISO model started to “mutate” and that was when VAR model entered the merchant services vocabulary. VAR stands for value-added reseller. The added value concerned provision of consulting services, troubleshooting, and, occasionally, technical solutions.

An independent software vendor (or ISV) focuses solely on the technical aspect of merchant lifecycle. It provides specific solutions allowing merchants from acquirers’ portfolios to accept electronic payments. An ISV is a FinTech-bound entity, but an ISV does not have to be a market expert.

It looks as if an ISO merges with an ISV, it might make a perfect PayFac.

If not a payment facilitator then what? Survival options for an ISO

Authors of some recent publications have compared ISO to disappearing species. We can regard PayFac model expansion as “survival of the fittest”. However, not every ISO should become a PayFac, and not every ISO can afford to.

A large-size ISO can turn wholesale. If it services a large number of merchants and partners with multiple acquirers, then it still gets its justly earned revenue share. If you are a high-risk merchant, then operating through a wholesale ISO might be the best option for you.

Some ISOs choose to evolve by developing their own merchant solution, i.e. a technology that they offer in addition to referral services. Such ISOs are sometimes called next-generation ISOs.

Finally, if an ISO is not large enough to become a wholesale ISO, and it cannot afford to implement any technological solutions, it can still profit from becoming a merchant services consultant. Knowledge of the market is also a valuable asset, so why not turn it into profit?

If you want to know more about alternative merchant and referral services models, read our new article on Paylosophy blog.