Making the Move: Switching From Retail to Wholesale ISO

switching from retail to wholesale iso

July 4, 2022

Independent Sales Organizations (ISOs) operate by a simple formula – they find and service merchants for payment processors, earning a fee on every transaction. However, that’s where the similarities end for most ISOs. There are many different types of ISOs, with varying structures, goals, and services.

What’s the difference between a retail ISO and a wholesale ISO? Primarily risk and profit. Unlike retail ISOs, wholesale ISOs take on underwriting and fraud responsibilities, meaning they are on the hook if fraudulent activities get uncovered or chargebacks incur.

While taking on this level of risk exposure for a retail ISO is a downside of moving towards the wholesale model, many ISOs see this model as a natural path towards growing their business. Generally, this step is not taken lightly, but experienced ISO leaders have a leg up on how to best manage risk within their business due to the additional knowledge compared to the processor that underwrites merchants from a series of different ISOs. Therefore the processor takes a higher cut for taking on this risk.

ISOs however, can use their knowledge to better control risk within their portfolio. For example, a retail ISO focused on boarding doctor’s offices, which are highly academic and require a great deal of registration, are significantly less likely to experience a high volume of bust-out fraud cases since the high barriers of entry in this profession prevent quick wins for fraudsters.

Despite this the additional burden most retail ISOs will benefit from the eventual transition to wholesale. They understand that more risk equals more rewards and that going wholesale means greater profitability over the long-term.

Below we outline the major benefits of switching to wholesale, and how to position your business to make the move.


Retail ISOs vs Wholesale ISOs

ISOs are a bridge between a payment processor and merchants. This business model is the same whether you’re a retail or wholesale but there are still significant differences between how the two operate.


Retail ISOs:

  • Require a less complex business model – operating as resellers, retail ISOs recruit merchants and sign them up to a merchant acquirer’s services. They’re not responsible for vetting or monitoring those merchants. While there are successful ISOs in many sizes, this means retail ISOs can operate profitably on a small scale, sometimes even just a single person.
  • Can operate registered or unregistered – because of their simplified structure, retail ISOs can save themselves paperwork by remaining unregistered.
  • Carry minimal risk – retail ISOs do not generally perform underwriting tasks or manage fraud risks. This is one of the reasons they can stay lean – there’s no need to hire underwriters or invest in risk management.


Wholesale ISOs:

  • Take on risk: This is often an expansion strategy for very successful retail ISOs to naturally earn a bigger piece of the pie as operations mature.
  • Are more complex – wholesale ISOs offer more functions, which means they have a more layered organizational structure. These businesses typically include frontend and backend systems, more technical infrastructure, and their own compliance and underwriting teams.
  • Must be registered – all wholesale ISOs have to be registered with the major card companies to operate as they carry more volume, risk, and responsibilities.
  • Have more control – offering services in-house means wholesale ISOs have more control over their underwriting and approval processes.


The Benefits of Wholesale

The advantages for retail ISOs often fall as the business matures and requires more operational depth regardless of taking on risk. The simplicity of a one-man ISO does not scale with a growing business and eventually, taking on risk is a minor price to pay compared to retaining a bigger piece of the payments revenue in-house.

One of the biggest benefits of scaling up to a wholesale ISO is profit. Wholesale ISOs have more control and, as a result, can charge more, passing on the burden of extra services to the merchant acquirer. By not splitting their fees with the acquirer, wholesale ISOs are generally more profitable than retail ISOs.

Wholesale ISOs also have more flexibility, with the ability to sign a broad range of merchants from different sectors.

Above all, unlike retail ISOs, when wholesale ISOs leave an acquirer, they can take their entire portfolio with them. Having this degree of control means wholesale ISOs effectively own their risk, they can choose how much they’re prepared to take on, and how to manage it.

With greater ROI than retail ISOs, and more control over their risk and pricing models, wholesale ISOs are a more attractive option for potential buyers and partners down the road. Making the switch to wholesale lays the groundwork for future acquisitions maximizing the business valuation buy-outs or even pivoting into becoming a payment facilitator.


Making The Move – Next Steps to Becoming a Wholesale ISO

In business, preparation is everything. Before making the leap to wholesale, make sure you’re ready with market experience, know-how, and a financial plan.

Consider the initial investment needed to scale up to a wholesale ISO and whether you have room for it in your budget. This means taking into account not just projected costs but also any unexpected outlays that could come up.

It’s also important to realistically look at the volume you can comfortably handle. Do you have the staff to manage the extra workload? Do they have the skills you need? Can you comfortably scale up your compliance efforts as you grow? Can you ensure consistency of service when you make the switch?

If you’ve already done this initial mapping exercise, you’re ready to take the next steps:

  1. Get your paperwork in order

    Wholesale ISOs must register with VISA and MasterCard, providing a very comprehensive business plan along with application forms and a background check. They must also be sponsored by a bank before applying to the card companies. While time-consuming, this process is necessary as only registered ISOs can hire sub-agents.

    Preparing for registration will help you clarify your business goals, assess your capabilities before scaling up, and outline your objectives for the future.

  2. Build the right team

    To prepare for taking on extra responsibilities and risk, wholesale ISOs should look at taking on more skilled staff such as compliance experts, underwriters, risk assessors and others. This will help them build a fully operational in-house compliance department to manage the additional risk.

    They’ll also need to build out their tech stack, partnering with the right providers to streamline their operations and maximize efficiency.

  3. Stress test your operations

    Not only is an underwriting program part of your registrations needs, this is the most critical part to get right as you expose your business to risk for the first time. Done right, you are off to the races with a successful start to your new journey. But given the additional compliance and risk responsibilities, it is an absolute must-have to have a robust merchant acquisition process that includes holistic underwriting of each merchant with consistency and thoroughness.

    Integrating automated onboarding and monitoring software solutions into their digital architecture helps wholesale ISOs provide market-leading service without straining their staff or their budget.

    The cherry on top? By automating formulaic tasks within the areas of risk management and merchant monitoring, ISOs can do more with less, easing the burden on underwriting departments and realizing significant time and money savings.

  4. Create a watertight risk management strategy

    Wholesale ISOs are exposed to a lot more risk than their retail counterparts and should therefore be familiar with their regulatory obligations and KYC/AML compliance requirements.

    They’ll also need to develop a clear risk management framework to decide exactly how much risk they’re comfortable taking on, and what tools they’ll use to manage that risk.


Prepare, Plan, Profit

Small and lean can only take you so far. Every business wants to grow and going wholesale gives ISOs the room to do so. Of course, there’s a lot to consider first but the pitfalls of transitioning can be mitigated with careful preparation so it doesn’t have to be an intimidating jump.

Any initial investments made as ISOs move to wholesale can be more than rewarded with a healthy ROI over the long-term. Yes, there’s more risk and more complexity, but there’s also more to gain. But don’t get impatient – this is a huge shift in your business and it will take time. You won’t become a multi-million dollar company overnight, but you will enjoy steady, sustainable growth.

Agreement Express is your go-to partner to help you through the process, providing market-leading expertise, cutting-edge tools, and knowledgeable support. We’ve helped many wholesale ISOs, including Complete Merchant Solutions (CMS) and BlueSnap, realize the untapped potential of their business. Contact us today to see how we can support you.