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So You Want To Be Your Own ISO?

By David H. Press

Integrity Bankcard Consultants, Inc. gets calls every week from Merchant Level Salespeople (MLSs) and individuals who want to branch out, spread their wings and become ISOs. They dream of making the big money. They all want to get the best deals. Most don't want just a portion of the residuals-they want it all.

For most of these callers, it's time for a reality check. Many of them are not ready to make the jump to the level on which they envision themselves to be. One key factor: They don't have the money to register as an ISO with the card associations. (See my article, "Visa's Agent Registration in a Nutshell," The Green Sheet, Nov. 10, 2003, issue 03:11:01.)

They don't have the resources to fund a processor's initial reserve account upfront. Most processors require that the ISO establish a deposit account when they're initially executed, to secure the performance of the ISO. These accounts are typically funded as follows:

  • The ISO funds the reserve account in an initial amount upon execution of the agreement.
  • Each month, the processor debits from the compensation payable to the ISO and deposits into the reserve account the amount necessary to maintain that reserve account. The amount is equal to the initial amount, plus a certain number of basis points of the gross dollar volume of the aggregate merchant transactions processed during the preceding two months.

Many of these prospective ISOs don't have a formal business plan. However, most processors require that a detailed business plan be submitted as part of the application process.

Often an underwriting guide and a risk monitoring guide are also required, particularly if the ISO will be taking on the risk. It's important that the principals of the ISO have good credit, as a personal guarantee is usually necessary.

We have found that many of the potential ISOs who call for information want the minimum commitment fees lowered. Most direct deals require a minimum amount of fees to be generated by the ISO's portfolio in each processing year (including year one).

The ISO is required to and shall pay the processor for services sufficient to generate aggregate fees at least equal to the minimum fee in the agreement. Suppose an ISO signs an agreement with a first-year minimum commitment of $150,000. If the merchants placed by the ISO during that first year time frame generate only $90,000 in fees, the ISO will owe the processor $60,000, putting the already under-funded ISO pretty much out of business.

Some of these big dreamers even want to be able to approve merchant applications themselves, but they don't have sufficient experience to properly underwrite the applications or to monitor the risk.

They should understand that processors follow an application review and risk analysis process that generally covers, at minimum, the following areas:

  • Determining whether the merchant is an acceptable type of business (often using Tier listings based on industry experience and the risk tolerance of the member bank)
  • A review of projected sales volumes and processing methods
  • Determining whether the merchant has been placed on the Member Alert to Control High-risk Merchants (MATCH) or Terminated Merchant File (TMF) lists
  • The personal guarantor's (owner, officer or principal) credit history
  • Conducting an inspection of the merchant premises per MasterCard and Visa rules
  • Verifying that all paperwork is properly completed and all required signatures are properly affixed
  • That all required documentation was properly filled out and submitted with the merchant application and verified

If the ISO takes on the underwriting and risk, it is still unlikely that the processor and member bank will allow the ISO to process for all types of businesses and for high volume/high risk businesses. While the ISO will likely receive increased residuals if it does the underwriting and takes on the risk, the processor will want an increased reserve.

The ISO's initial operating costs will increase substantially due to the increased labor costs involved in taking on the underwriting and risk monitoring processes.

For most MLSs with limited capital seeking to go out on their own, the best advice is to start small. Initially, they could become an agent for a larger ISO. This could be as an Independent Sales Organization (ISO), which allows the agents to market in their own name, or as an Independent Contractor (IC) with lower card association registration fees. They could then develop a portfolio that will generate a monthly residual income stream.

The ideal arrangement would allow them the portability to take the merchants with them later on when they decide to take the next step and work directly with a processor. They should try to avoid programs where they can't move the merchants and can't sell their residual stream.

They should always make sure when signing any agreement that they will continue to get paid. An agreement at this level should not include any liability for merchant chargeback losses.

MLSs and agents should consider the following when evaluating a program's flexibility:

  • It should not be an exclusive relationship
  • It should not include a covenant to not compete, which can be a barrier to taking the next step
  • There should be no geographical boundaries. An agent should be able to work and sign up merchants anywhere
  • There should be no mandates on equipment sales. An agent should be free to determine what credit card processing equipment to sell
  • It should offer a high approval rate on hard-to-place clients, if that is part of your marketing plan
  • It should include an open-book policy. The agent should have access to monthly statements to ensure that residuals are being properly computed and paid
  • An arrangement that allows the agents to run their businesses as they see fit Going out and becoming your own ISO is a big step for any MLS. Invest the time to find the best arrangement for your situation and to help you reach your goals.

It's essential to make sure that any agreement will not limit your growth, but instead will help your progress toward the next level.

While the road to success is littered with the bodies of those who have failed, there are many who learned from failure and found success.

David H. Press is Principal and President of Integrity Bankcard Consultants, Inc. Reach him by phone at 630-637-4010, e-mail to or visit

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