United States
For financial institutions, offering strong merchant services can deepen commercial relationships, increase deposits, generate non-interest income, and give business customers access to the payment capabilities they need.
But how your institution works with a payments provider to offer those services matters. Two common approaches, the referral partner model and the Agent/ISO model, offer very different levels of control, revenue opportunity, operational responsibility, and risk.
At first glance, the Agent/ISO model may appear attractive because your financial institution maintains greater control over the merchant-services program and potentially captures greater economics. The catch is that with that additional ownership comes additional responsibility as well as a greater need for specialized payments expertise.
The real question isn't simply which model offers greater revenue potential. It's how much of the merchant-services business your financial institution is prepared to own and whether you have the payments expertise to sell and support it well enough to capture the opportunity without putting valuable customer relationships at risk.
Referral Partner vs. Agent/ISO: What's the Difference?
In a referral partner model, your financial institution identifies merchant opportunities and introduces those businesses to your payments partner. The payments provider then assumes much of the work required to sell, onboard, support, and manage those merchant relationships.
Your financial institution remains the relationship owner while relying on the payments provider for specialized payments expertise, technology, underwriting, risk management, and support.
In the payments industry, the term “Agent/ISO” means a payments salesperson or Independent Sales Organization that sells merchant services to businesses. In an Agent/ISO model, your financial institution plays a much more active role. It owns more of the discovery and sales process, relies on greater internal expertise around products and pricing, participates in merchant onboarding, manages portions of the merchant portfolio, and potentially serves as a first point of contact for merchants for ongoing support.
That expanded role provides greater control and potentially greater economics. It also requires much greater payments knowledge, stronger internal processes, more resources, and ongoing management.
Understanding that tradeoff is essential when evaluating the two models.
1. Sales and the merchant relationship
One of the biggest differences begins with the sales process.
Under a referral partner model, your financial institution identifies merchants that could benefit from payment services and introduces them to the payments provider. The provider supplies the payments expertise and takes the lead from there.
This allows your bankers and relationship managers to focus on what they already do well: understanding the broader financial needs of their business customers and managing those relationships.
Under an Agent/ISO model, your financial institution becomes more directly involved in selling merchant services. Team members conduct discovery, explain solutions, address merchant questions, and own more of the sales cycle.
That can give your institution greater control over the merchant experience, but it also means developing and maintaining a capable merchant-services sales organization.
That sales capability matters because merchant acquiring is a specialized sale. Understanding a merchant's business model, processing environment, technology, pricing, and workflows requires expertise that traditional banking experience alone may not provide. Without experienced payments professionals inside the organization, an institution can have significant merchant-services opportunity within its existing customer base and still fail to capture it.
In other words, greater ownership doesn't necessarily translate into greater penetration. An Agent/ISO model may offer greater economics per merchant, but those economics only matter if your institution has the expertise and sales capacity to identify opportunities and convert them effectively.
2. Pricing and product expertise
Payments pricing is naturally complex. Interchange rates, processing costs, hardware, software, pricing programs, and other variables can all affect the particular solution presented to any given merchant.
In a referral model, the payments provider generally structures pricing and recommends appropriate solutions. Your financial institution doesn't need every banker or relationship manager to become a payment-processing expert.
An Agent/ISO, by comparison, needs a much deeper understanding of payments products and pricing. Depending on the arrangement, your institution may develop and present savings analyses and help merchants evaluate different pricing and technology options.
That level of payments expertise has to come from somewhere, whether through hiring, training, dedicated payments personnel, or continued investment in institutional knowledge.
3. Onboarding and underwriting
Winning the merchant is only the beginning. Every new merchant must also be stepped through application, documentation, and underwriting requirements.
In a referral partner model, the payments provider manages these functions.
In an Agent/ISO model, your financial institution collects merchant information and documentation, prepares the merchant for underwriting, and works directly with the payments provider throughout the process.
The distinction matters because increased involvement introduces additional processes inside your financial institution that must be managed consistently and efficiently.
4. Risk and compliance
Merchant services introduces risks and compliance requirements that go beyond financial institutions’ traditional banking relationships with businesses.
Payment-card industry (“PCI”) requirements, transactional risk and fraud-monitoring, chargeback management, and other risk considerations all require specialized knowledge and processes.
With a referral partnership, the payments provider manages most of this merchant-services risk and compliance infrastructure.
With an Agent/ISO structure, your financial institution needs a working knowledge of these areas and must have the people and processes necessary to fulfill its responsibilities within the program.
The exact allocation of responsibility will depend on the individual agreement, but the broader principle remains: the more of the merchant-services function your institution owns, the more operational capability it generally needs to support it.
5. Implementation and ongoing support
What happens after a business client says yes to merchant services?
In a referral model, the payments provider generally handles implementation and provides ongoing merchant support. That can significantly reduce the operational burden on your financial institution while still allowing it to offer merchant services as part of the broader customer relationship.
In an Agent/ISO model, your institution is more involved in merchant boarding, training, implementation, and ongoing support. It may even serve as the merchant's first point of contact when payment-processing questions or problems arise. For a financial institution evaluating this model, that raises an important question: Do we have the internal capacity and payments expertise to deliver the level of service our business customers expect?
It’s important to understand that the stakes extend well beyond the merchant-services account. Payments may be only one product within a much larger commercial banking relationship, but the business customer may not distinguish between the bank, and the payments experience the bank sold. If implementation goes poorly, the wrong technology is recommended, pricing creates problems, funding is disrupted, or support falls short, the customer is likely to associate that experience with your financial institution.
That means insufficient payments capability can put more than merchant-services revenue at risk. A poor payments experience can easily erode trust in a broader—and potentially much more valuable—commercial banking relationship.
6. Portfolio management
A merchant-services portfolio requires ongoing attention after accounts have been boarded.
In a referral partnership, the payments provider generally handles portfolio management, reporting, and retention activities.
An Agent/ISO plays a more active role in managing the portfolio. That may provide greater visibility and control, but it also requires people, processes, reporting capabilities, and ongoing attention.
As the portfolio grows, so can the resources required to manage it effectively.
7. Compensation and control
This is often where the Agent/ISO model initially looks most compelling.
A referral partnership typically provides your financial institution with a referral revenue share while the payments provider assumes much of the responsibility for delivering and managing merchant services.
An Agent/ISO arrangement can offer greater control and potentially greater economics because your institution is doing more of the work and assuming more responsibility.
But comparing the two models solely on gross revenue potential can give an incomplete picture. The more useful comparison is the net value of the program after considering the people, training, systems, processes, oversight, support, and ongoing investment required to operate it.
Greater economics doesn't automatically mean greater profitability. An Agent/ISO model may generate more gross revenue for your institution, but evaluating its true return requires accounting for the people, training, technology, processes, oversight, and ongoing management needed to support it.
The True Stakes of Greater Ownership
For some financial institutions, greater control over merchant services is strategically important. An Agent/ISO model may make sense when the institution already has or is prepared to build and continually invest in the payments expertise, sales capabilities, processes, and resources required to support that role.
For many others, merchant services is important primarily because it strengthens the overall commercial relationship, improves retention and acquisition, and grows deposits. In those cases, building or maintaining an extensive internal payments operation may not be the best use of institutional resources.
Consider what greater ownership may require:
- Specialized payments knowledge and ongoing employee training
- Sales and product expertise
- Merchant onboarding processes
- Risk and compliance knowledge
- Implementation and support resources
- Portfolio management and retention capabilities
- Management oversight and continued investment
Those investments aren't necessarily arguments against an Agent/ISO model. For an institution with strong internal payments capabilities, greater ownership can create meaningful strategic and economic value.
But the calculation should extend beyond the direct cost of operating the program. Financial institutions should also consider the opportunity cost of failing to fully penetrate their merchant portfolio and the relationship risk created when the payments experience doesn't meet the standard customers expect from their bank.
The relevant comparison isn't simply referral economics vs. Agent/ISO economics. It's the total value each model is capable of producing given your institution's actual payments expertise, resources, and strategic priorities.
Which Merchant-Services Model Is Right for Your Financial Institution?
There isn't one answer for every institution.
An Agent/ISO model may make sense for a financial institution that wants greater control over its merchant-services program, has or is willing to build significant payments expertise and operational capabilities, and believes the potential economics justify the additional investment and responsibility.
A referral partner model may make more sense for an institution that wants to offer competitive merchant services and participate in the revenue and commercial growth opportunity without building and maintaining the infrastructure required to operate more of the payments business internally.
And choosing referral doesn't have to mean giving up the customer relationship. With the right payments partner, your financial institution can remain the relationship owner while relying on specialized payments resources behind the scenes to serve its business customers.
Ultimately, the right model is the one that aligns the economics of merchant services with the level of responsibility, complexity, expertise, resources, and ongoing commitment your financial institution is prepared to assume.
So the question isn't simply, how much could we earn by owning more of merchant services?
It's also, do we have the payments expertise to sell and support it well enough to capture the opportunity—and protect the broader customer relationships we're trying to strengthen?
What are your business clients really expecting from their payments experience? Explore Payroc’s Voice of the Customer report to hear what businesses want from merchant services—and where financial institutions may be falling short. Read the Voice of the Customer report