By Adam Atlas
Attorney at Law
One of the challenges of getting involved in acquiring or payment processing is soaking up all the jargon. I am always mindful of overusing jargon, because it changes over time, and it does not always mean the same thing to everyone.
It might help you to hear about several key players in acquiring and payment processing and perhaps pick up some of our industry's jargon along the way.
Traditionally, a payment network, such as Visa, Mastercard or American Express, often serves two key roles. First, it operates a digital network over which transactions are communicated and processed between issuers, acquirers and merchants. Second, the network advertises itself so that it becomes commonly accepted by all participants including consumers, merchants, issuers and acquirers.
If a network is unknown, consumers are less likely to carry cards bearing its name, and merchants are less likely to make the effort to accept payments from that network. The term "network effects" is especially true of the traditional payment networks. They really have succeeded because they have been used a lot, and the more they are used, the more they become successful in attracting new users.
Networks used to be called "associations." They used to be not-for-profit associations between banks that existed for the main purpose of allowing transactions to occur between thousands of issuing and acquiring banks. The networks are now for-profit, and they are slowly evolving to be more than just service providers to banks.
Issuers are banks and other financial institutions that issue cards to cardholders. In the United States, all issuers are banks, but in the UK and Europe there are non-bank card issuers, and that concept might come to the United States in the foreseeable future.
Issuers earn the bulk of all fees in the cards and payment business. First, the issuers earn interest on unpaid balances. Second, issuers earn a majority of payment processing interchange fees paid by merchants to receive payment from cards.
Ordinary ISOs and their sales teams don’t often spend a lot of time thinking about issuers. ISOs should be very appreciative of their "cousins" in the issuing business. If there weren’t millions of cards issued to consumers, ISOs would not earn any residuals for helping merchants acquire payment from those cards.
Some payments businesses get involved in the issuing business by operating or selling card programs to businesses or individuals. The revenue from that business consists of the issuer sharing in their interchange (paid by merchants) on card transactions.
An acquirer is a bank or other financial institution that has a license from a payment network to acquire funds for merchants from cards. In the United States, acquirers are all banks and they usually engage in various kinds of banking services, acquiring being only one of them.It is noteworthy that banking law in the State of Georgia permits for the creation of Merchant Acquirer Limited Purpose Banks (MALPB), meaning a bank that exists for the sole purpose of acquiring. As of this writing, there haven’t been any MALPBs incorporated in Georgia.
Every card transaction processed in the United States goes through an acquiring bank. Directly or indirectly, every ISO depends on an acquiring bank for its livelihood. If you scroll through disclosure on ISO websites, you are likely to find the payment-network-rule-mandated disclosure about the name of their sponsor bank (that is, acquiring bank). While acquiring banks are necessary in payment processing of cards, they are rarely involved in the day-to-day of soliciting and closing merchant processing agreements. That activity is outsourced to processors, ISOs and their agents.
The term "processor" has a number of meanings. It usually refers to a large business that has taken on the responsibility of administering the acquiring activity of a bank.
These include marketing merchant services, submitting the authorization request to an issuer through a payment network, capturing authorizations from the issuers, communicating the same to merchants, and then providing settlement instructions to the acquiring bank for card transactions processed. Absent the outsourcing of risk to an ISO, processors will often assume the risk of chargebacks and other losses by merchants.
Note that a processor can be retained for the limited purpose of only administering transactions between the merchant, the acquirer, the issuer and the ISO, without carrying the risk of chargebacks and unauthorized transactions.
An ISO is an independent sales organization, sometimes called an MSP or member service provider, and the role is essentially to sell merchant services (processing) of an acquiring bank and a processor.
An ISO is registered when a sponsoring bank (acquiring bank) has sponsored (that is. supported) the ISO to become registered as an ISO with the payment networks. This process takes time and involves fees. The key benefit to being a registered ISO is that the ISO can then sell merchant services (of the acquirer) under its own name and brand.
The registration requirement to using one’s own company name helps add accountability in the system. If a given bank has a hundred ISOs, and one of them misled a merchant or group of merchants, the fact of the ISO's name being registered with the networks and the acquiring bank helps the networks and acquiring banks identify and render the correct ISO responsible for the wrongdoing.
In very general terms, an unregistered ISO is an ISO that is not registered with the payment networks. Note, however, that the term ISO is used very loosely in the industry. Many ISOs refer to themselves as an ISO and even use their own names in sales and marketing without actually being registered with the payment networks.
An agent is really just another term for an unregistered ISO, but it usually refers to an individual or smaller business that refers merchants to an ISO for processing in exchange for residuals.
There are many more terms than those I've discussed here, but these are key players, and it's helpful to understand them at any stage in the payment processing business. 
In publishing The Green Sheet, neither the author nor the publisher are engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law email: atlas@adamatlas.com, Tel. 514-842-0886.
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