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We are are SaaS point-of-sale and website company that is interested in handling payments ourselves. We’re starting to get a better idea of the differences between PSPs, PayFacs, and ISOs but can’t find much information on the risks associated with each one. What are the risks involved in becoming a PSP, PayFac, or an ISO and which is the least risky financially?
Thanks for an interesting and relevant question.
Financially, in the short run, becoming an ISO is the least risky option. It does not call for large upfront costs, and an ISO is not financially responsible for merchants’ operations. The main risks are as follows: 1) an ISO has to have profound knowledge of the market to be able to refer future merchants to acquirers smoothly and efficiently; 2) ISOs face fierce competition from payment facilitators, because the latter offer much wider range of services to merchants. That is why many ISOs resort to becoming whole-sale ISOs, next-generation ISOs (VARs), or merchant services consultants.
Becoming a PayFac or a PSP is more financially lucrative but, at the same time, more risky. The risks include 1) tedious procedure of getting underwritten as a PayFac; 2) ensuring higher-level PCI compliance; 3) FINANCIAL LIABILITY for operations of your sub-merchants (including fraud, chargebacks, refunds etc).
As a SaaS company, you might already have many of PayFac-specific functions already in place, so it might be a bit easier for you to become one. Also, if you are not ready to face the new costs and responsibilities all at once, you can start with implementation of white-label PayFac option.
Here is a link to a free white paper on the subject, that should be helpful.
