Independent sales organizations (ISO) are responsible for acquiring new merchant relationships. They also process credit card transactions for small businesses on occasion - a service that usually occurs in exchange for a fee or percentage of sales. ISOs must equip themselves with the right knowledge and terminology when approaching a merchant, especially if they want to play the role of industry expert or consultant.
Merchants that want to open a credit card processing account for their small and emerging business will typically reach out to ISOs for this need. The ISOs will then sign up a merchant and explain the terms and rates of a cardholder partnership. While the rates may vary per organization, there are a number of similar terms that apply throughout the industry.
Here are eight key terms and phrases ISOs need to know when partnering with a merchant:
- Address Verification System (AVS): An AVS is a security feature that requires merchants to supply address information for the cardholder in transactions where the card isn't present, or online transactions. The merchant's system confirms the entered address matches the same credentials listed with the partnering bank and determines whether that information is valid.
- Compliance: ISOs shouldn't be strangers to this term, or what it takes to become compliant with the Payment Card Industry Security Standards Council. The PCI SSC website offers tips and explanations on what it takes to become compliant. These industry guidelines were created to better protect merchants and cardholders from payment theft. According to a recent Capgemini study, more than half of small merchants were either unsure or entirely unfamiliar with PCI standards.
- EMV liability shift: The Europay, MasterCard and Visa liability shift is coming in October 2015. ISOs must communicate this to merchants, both prospective partners and current clients. Small-business owners may not be aware of the upcoming EMV liability shift. Under the new liability shift, any party that has become EMV-compliant is protected from financial liability for card-present counterfeit fraud losses. It's up to ISOs to make sure their partners are educated and up to date with the new chip-based credit card payment processing technology.
- "ISOs sign up a merchant and explain the terms and rates of a cardholder partnership." Interchange Fee: This fee is charged by MasterCard and Visa to complete a payment and deposit the money into a merchant's account. It's based on credit card regulations and capturing the appropriate data, some of which includes the address, electronic signature and the swipe itself. Capgemini said the Federal Reserve recently cut the interchange rates by 45 percent and is now capped at 21 cents per transaction.
- Loyalty solutions: Loyalty solutions, commonly known as customer loyalty, is a growing focal point in many industries, as its benefits have been found to dramatically improve bottom-line revenue. ISOs must educate merchants on various types of payment processors and back-end loyalty programs, both of which could improve customer retention and therefore profitability. A recent Goldman Sachs merchant acquirer and ISO survey found roughly two-thirds of respondents felt offering loyalty-based solutions could open new revenue streams and lower attrition. Most believed merchants would be willing to pay two to four times as much the average merchant discount rate for these solutions as well.
- Point-to-point encryption (P2PE): Point-to-point encryption is provided by a third party solution provider. It is a combination of secure devices, applications and processes that encrypt data from the point of sale until the information reaches the solution provider's end. In essence, P2PE safeguards against data breaches for merchants and service providers. Payment processors are designing equipment with security in mind, which is a great selling point for ISOs.
- Various processing methods: Thanks in part to the rapid rise of digital technology, consumers now have different ways to complete a transaction. The traditional means of swiping a credit or debit card at the point of sale are still viable, but recent industry developments, such as mobile wallets and NFC payments like Apple Pay, are enabling digital, seamless transactions. Merchants must prepare for the former and latter types of payment processing, or card-present and card-not-present transactions. Card-present payments are transactions where the merchants can read a customer's data electronically when the customer swipes or inserts their card into a terminal. Card-not-present payments are transactions where the cardholder's information is entered manually or provided through a separate gateway or portal.
- Pay-Per-Use Model: A pay-per-use model is a type of payment structure where merchants have access to a wide variety of resources but only pay for what they use. Volume of business may have an impact on which partners merchants end up choosing since the merchant will likely want to choose a partner that best fits their needs. Instead of spending significantly on a fully comprehensive IT network, Capgemini suggests acquirers should partner with processors who earn their margin by sharing the infrastructure with multiple members who can take care of the end-to-end acquisition lifecycle. In doing so, acquirers can leverage the cost advantages that occur due to size, output and scale of operation. In essence, businesses are saving money with increased levels of production, improved efficiency and cut costs. A massive upfront investment takes time to get to market; a pay-per-use model can end up being mutually beneficial for both parties.