After a credit or debit card is swiped to accept payment, many entities may be taking a cut of your money from that transaction. You might think that the card brand—such as MasterCard, your processor and the bank issuing the card—are all taking cuts, and you would be correct. However, many others that are almost always hidden from merchants may also be taking a cut.
These entities (or “middlemen”) might be independent sales organizations (ISOs), contractors, trade associations, non-processing banks, gateways or the network software providers. Often the frontman calls himself a processor, but the real processor is someone in the background who is doing all of the work at a fraction of what you are paying the middlemen.
Middlemen do not authorize or settle transactions. They may call themselves “processors,” but all that many of them process is the money they collect from your deposit before it hits your checking account. Middlemen inflate costs and hinder communication. If you were sick, wouldn’t you feel more comfortable communicating with and directly paying your doctor than with someone who takes part of your money and then pays the doctor?
The payments industry newsletter The Green Sheet defines a card processor as any entity physically processing a card transaction from swipe to settlement through its own processing networks.
Many well-known names—Heartland Payment Systems, Chase Paymentech and First Data—are direct processors for pay-at-the-pump transactions. There are few, if any, others. These three are in the background doing all the heavy lifting. Each is in charge of the authorization and settlement of a transaction.
An ISO can be any company engaging in selling bank-card services under its own name, registered with Visa and MasterCard. It sets terms of its own merchant contracts and mark-up fees. Most ISOs are solely sales organizations that act as middlemen. A processor can be an ISO, but an ISO is rarely a processor.
Who Are the Middlemen?
▶ Non-processing banks: What do Bank of America, Wells Fargo and SunTrust have in common? They are not credit-card processors but customers of First Data. Their customers only think that they are processing with their banks.
▶ Independent sales organizations (ISOs): There are thousands of these unregulated resellers. Amid PCI requirements and government mandates, it is becoming increasingly difficult for ISOs to keep up with the complexities of the payments industry. They rely on their processors to do that as well.
▶ Software providers: Many POS vendors convince their customers to “process directly” with them. This added step is an income stream for the POS vendor, sometimes earning them more money than their own POS sales.
▶ Other entities: Costco, Sam’s Club and even trade associations promote card processing as a member benefit, but they are also middlemen. Their “deal” can’t be that great because they have to make money, and so do the processors they work with (Elavon at Costco and First Data at Sam’s).
Stuck in the Middle
Businesses processing with middlemen are usually the last to know when it comes to industry changes. Poor communication results in issues for businesses who may not get sufficient notice for rate changes, PCI mandates or changes to their processing methods. A business processing with a direct processor benefits from a professional team that will look out for the best interests of the owner.
Because middlemen are usually contractors, processors have little control over their practices, creating opportunities for conflicts of interest. Middlemen often work for multiple processors, using the one that is best for their profits. Middlemen may shift a merchant from one processor to another, creating confusion for the business and additional income for the middleman.
Middlemen rarely offer 24-hour support. They may have their processor handle it and, in most cases, contract to a call service on nights or weekends that may handle only minor troubleshooting questions, leaving the business “hanging” until the next business day.
There are many benefits for a merchant working with a direct processor, and many risks associated with working with a middleman.
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