As a software platform looking to take your payment strategy to the next level, becoming a PayFac can seem like the natural next step. 

It’s easy to get caught up by the success of PayFac giants like Shopify and Stripe. But is this path really the right one for your business? Will it actually help you increase revenue from payments, and onboard customers more easily?

The truth is, you don’t have to become a PayFac to compete effectively and grow your business. In fact, in most cases, we would say becoming an ISO can be a better option for most SaaS platforms.

In this article: 

• Why becoming an ISO is better for most SaaS platforms
• When is it worth becoming a PayFac
• How Fiska help SaaS platforms become an ISO or PayFac

Looking for a payment partner to help you take your payments to the next level? Book a call with our experts 

Why becoming an ISO is better for most SaaS platforms 

We believe that the ISO model is better for most SaaS businesses looking to elevate their payment strategy, for these four reasons: 

1. Becoming an ISO is a lot less resource-intensive to set up and maintain

Becoming an ISO significantly reduces resource burden compared to becoming a PayFac. The initial setup costs for ISOs are generally much lower, allowing you to avoid the hefty registration fees and compliance costs associated with PayFacs. Operational overhead is also significantly reduced for ISOs. You won’t need a large team to handle underwriting, risk management, and monthly compliance reporting. Reducing operational demands allows you to focus your team’s energy on creating innovative software.

Compliance requirements are generally simpler, as your sponsor bank handles much of the regulatory burden, freeing you to focus on business growth rather than managing complex compliance tasks.

There are different types of ISO, so you can easily tailor how much payment responsibility you want to assume. If you’d prefer to do the underwriting yourself, you can choose to work towards this (although it comes at a higher operational cost). 

2. Doing the underwriting after a merchant is already onboarded (as Stripe does) can lead to frozen funds and unhappy customers

One of PayFacs’s most commonly cited benefits is the ability to onboard merchants in real-time. As the master merchant, adding a Merchant Identification Number (MID) to your account is quick and frictionless.

But PayFacs still need to underwrite each sub-merchant and meet compliance and risk requirements, such as anti-money laundering (AML) and Office of Foreign Assets Control (OFAC) checks.

PayFacs typically underwrite after the merchant has already set up and processed payments. But if the merchant doesn’t pass the required checks or the PayFac needs more information, this can lead to frozen merchant funds.

Imagine you’re a PayFac, and one of your merchants runs a sports camp with a $1,000 registration fee. As a PayFac, you can issue this merchant account immediately and perform the underwriting later, often during the monthly reporting for Visa and Mastercard.

The sports camp merchant starts taking registrations and collects $10,000. When the monthly report rolls around, you perform a background check and discover a low credit score. As a result, the funds are frozen and put on hold while you request more information from the merchant.

As you’re holding onto the merchant’s hard-earned funds, they are unable to access those funds for business expenses like payroll and infrastructure. This leads to a very unhappy customer and potentially losing their business.

As an ISO, the process works in reverse. Underwriting happens first (either from the bank or from the software company if they’re an ISO with liability), and issues like a low credit score would be immediately identified. While this might seem like more friction because you’re asking for more information upfront, underwriting first prevents headaches, unhappy customers, and churn down the line.

3. When you’re a PayFac, one bad merchant can have a significant impact on your entire portfolio 

If you’re a PayFac and one of your merchants experiences a high number of chargebacks, it can negatively impact the chargeback ratio for your entire portfolio. 

For example, if you’re a PayFac with a portfolio of ten merchants and nine are performing well while one experiences frequent chargebacks, your overall chargeback ratio will be impacted. A high chargeback ratio might prompt your sponsor bank to reassess their liability, which could result in you having to ask the well-performing merchants to sign new contracts.

Asking existing merchants to re-sign new contracts due to a changed risk ratio can create frustration and distrust. Merchants performing well might feel penalized for issues they didn’t cause, leading to strained relationships. 

Monitoring risk is crucial for PayFac and requires substantial time and experience in the payment industry. As an ISO, you don’t have to shoulder this responsibility because each merchant has their own merchant account. This means one problematic merchant won’t cause issues for you or the other merchants in your portfolio.

4. As a PayFac, each customer can only process up to $1 million, then they need their own merchant account

PayFacs handling large sums of money can raise concerns for banks regarding visibility and control. Banks may question how the PayFac manages and transfers these funds, potentially leading to delays and other issues.

To mitigate these risks, sponsor banks require merchants exceeding the $1 million limit to switch to their merchant accounts.

This transition involves signing a new contract, which can damage the relationship and defeat the purpose of becoming a PayFac in the first place. You’ll have to set up a new merchant account for these customers anyway, just like you would if you were an ISO.

As such, if you’re dealing with larger merchants, it might be better to operate as an ISO. Setting up separate accounts for your merchants from the start introduces a bit more friction initially but saves them from having to transition later. This approach ensures a smoother experience for both you and your merchants in the long run.

When is it worth becoming a PayFac?

While we think that an ISO is better for most SaaS businesses, PayFac is still a great model.

The main benefit of being a PayFac is that it provides the quickest customer onboarding experience and generally more flexibility.  But at what cost?

Becoming a PayFac might also be worth the resource cost if you want to manage merchant funding.

As a PayFac, you operate as one big merchant account. This means you receive proceeds from all sales through your master merchant account and then redistribute the funds to your sub-merchants as you see fit. This setup provides more flexibility with the pricing and funding cycles you wish to charge your clients. For example, you can fund your customers weekly instead of daily.

All of these factors contribute to an excellent merchant experience. However, in our experience, the financial and resource costs of becoming a PayFac often aren’t worth the payoff for businesses that have yet to reach critical mass. 

For most software companies, we recommend starting as an ISO. This allows you to build up your portfolio and payment experience first. Once you have reached a high volume of transactions and the cost and resources required to become a PayFac are justifiable, you can graduate to a PayFac to make your merchant experience as seamless as possible.

Set on becoming a PayFac? Learn what’s involved: How to become a PayFac

How Fiska help SaaS platforms become an ISO or PayFac

Making payment decisions, such as whether it’s better to become an ISO or PayFac, requires a payment partner with expertise. You probably don’t want to hire an entire payments team to help.

At Fiska, our mission is to help you transform payments from an obstacle into an enabler for your business. We understand that payments are complex and that as an ISV, you need guidance to understand how best to implement payments. When you first work with us, we’ll conduct workshops to help you understand the implications of each payment channel and provide guidance whenever you make key decisions. We’ll help you decide whether becoming a PayFac or an ISO is better for your business. 

You can think of us as your “Fractional Head of Payments.” We can help you create a roadmap, select the best pricing strategy, and design and improve your customers’ user experience.

We can also help you:

Simplify payments with our unified API: Fiska manages everything from certifications to compliance, allowing you to accept in-person and online payments seamlessly. Capture and tokenize payment data, ensuring security and avoiding data breaches. Fiska’s modern API simplifies integration, reduces risks, and shortens your time to market. Our SDKs are easy to use, enabling quick deployment of new payment features as you scale.

Set custom pricing and onboarding: We offer flexible merchant onboarding and custom pricing based on public interchange costs, letting you add markup for profit. You can use your own branding and custom fields in the onboarding process.

Access multi-channel support with level 2 merchant support: If there’s a payment problem, your merchant will come to you with complaints, and you need a resolution fast. We offer multi-channel support, so you can call or Slack us with any questions. We are hands-on and help you set priorities when making decisions. If you don’t have the technical knowledge to fix an issue, even after talking with us, we’ll step in directly and help your merchant get back on their feet.

At Fiska, we’re committed to helping you navigate the complexities of payments, whether you become an ISO or a PayFac. Our comprehensive support and expertise ensure that you can focus on growing your business while we handle the intricacies of payment processing.

Read more: A guide to picking the right payment provider as a SaaS

For most SaaS platforms, become an ISO and build your merchant portfolio before considering PayFac

For most SaaS businesses, starting as an ISO is the best approach. 

Becoming an ISO means avoiding the complexities of compliance and risk management associated with PayFacs while you build your merchant portfolio. It allows you to onboard already underwritten merchants, pay less in maintenance fees and not take on more liability than you can manage.

As your portfolio and total transaction volume grow, you can then consider becoming a PayFac to maximize your merchant experience.

If you’re looking to take your payment strategy to the next level—whether that’s as an ISO or as a PayFac—book a call with our experts.