INDEPENDENT SALES ORGANIZATION (ISO)

Since the overwhelming majority of e-commerce transactions involve credit cards, the ability to accept credit cards as a form of payment was essential for e-commerce proprietors (also known as merchants) in the early 2000s. In order to obtain this capability, merchants had to apply for special merchant accounts with acquiring banks. After such an account was established, acquiring banks accepted funds from card-holding consumers on behalf of the merchant. Although a number of different steps and variables were involved in this process, this essentially involved monies being transferred (from the bank that issued the credit card to the consumer) to the acquiring bank, and ultimately to the merchant.

For good reason, acquiring banks are selective about the businesses to which they provide merchant accounts. Some kinds of businesses—such as online wagering or adult entertainment sites and those that are small, home-based, or not yet established—are more prone to risk and credit-card fraud than others. For these kinds of businesses, obtaining merchant accounts directly from acquiring banks can be difficult. Independent sales organizations (ISOs) are third-party organizations that partner with acquiring banks to find, open, and manage merchant accounts on behalf of such businesses in exchange for a higher fee, or for a percentage of the merchant's sales. ISOs also are called merchant service providers (MSPs) when they offer financial transaction processing services. ISOs are able to offer merchant accounts to riskier merchants, and charge higher fees, because they do not fall under the same laws and regulations that actual banks do. Along with the acquiring banks they work with, ISOs also assume much of the liability and risk that comes with this service.

AuctionWatch explained that in the early 2000s, merchant account industry sources indicated ISOs and MSPs were responsible for opening roughly 80 percent of all merchant accounts, with banks accounting for the remainder. Although the exact number of ISOs and MSPs was hard to come by due to lack of regulation within the merchant account industry, Auction-Watch placed the figure between 700 on the low end to as many as several thousand, with fewer than 200 representing legitimate operations. This latter point indicated a cause for concern and caution on the part of merchants. It was not uncommon for businesses to file complaints against malicious ISOs that advertised low rates to get their business and then levied additional excessive fees or inflated charges for credit-card processing equipment. Although it generally cost merchants more to obtain merchant accounts through ISOs, the fees and other costs involved varied considerably, which caused confusion. Additionally, according to Workz.com, "To confuse matters further, ISOs often refer to themselves as merchant account providers even though they do not provide the account. This is a matter of semantics which has not been clarified or enforced by any governing body."

FURTHER READING:

Buscher, Ranae. "Merchant Account Provider Types Defined." Pinnacle WebWorkz Inc. November 29, 2000. Available from www.workz.com.

Neville, Kate. "Qualifying for a Merchant Account—Do You Meet the Criteria?" Pinnacle WebWorkz Inc. November 29, 2000. Available from www.workz.com.

Roe, Andy. "Merchant Beware." AuctionWatch, February 18, 2000. Available from www.auctionwatch.com.

SEE ALSO: Acquiring Bank