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Glossary: ISO, PayFac, and Merchant Processing Terms

Understanding the terminology is crucial in the payments industry. Here’s a quick-reference glossary of the most important concepts.

🔑 Core Terms

ISO: Independent Sales Organization – sells merchant accounts and earns monthly residuals.

PayFac: Payment Facilitator – allows sub-merchants to process under a shared master account (like Stripe or Square).

Merchant Portfolio: A group of merchants generating residual income for an ISO.

Residuals: The recurring revenue from a merchant’s credit card processing.

📈 Valuation-Related

Churn Rate: % of merchants lost over time. Lower is better.

Statement Access: Visibility into merchant performance – critical for diligence.

Earnout: A payout structure tied to future portfolio performance.

💸 Fee Terms

Interchange: The base rate charged by Visa/MasterCard.

Basis Points: 1/100th of a percent, used in pricing residual splits.

Buy Rate: What you pay the processor.

Sell Rate: What you charge the merchant.

🧠 Bonus Acronyms

VAR: Value Added Reseller – adds software or POS on top of payment services.

NMI: A popular white-labeled gateway.

ACH: Bank-to-bank payments outside of card rails.

How to Start a Merchant Services Business in 2025

Starting a merchant services business — also known as becoming an ISO — is one of the best ways to build recurring income while serving Main Street businesses. Here’s how to launch and grow your payments business from scratch.

🧱 1. Understand the Industry Structure

You act as the bridge between the merchant and the processor. When businesses accept card payments, you get paid a small cut (residuals) each month.

🏁 2. Set Up Your Business

Form an LLC or Corporation for compliance + credibility.
Get a business bank account and track your income + expenses.
Register with a Processor or sell under a larger ISO umbrella.

💳 3. Choose a Processor or Platform

Partner with companies like Fiserv, TSYS, Elavon, or a white-labeled gateway like NMI.
Some agents also join PayFac-as-a-Service platforms like Tilled or Finix.

📈 4. Learn How Residuals Work

You earn a % of each merchant’s monthly volume (called a “markup over interchange”).
Average: $30–$100/month per merchant = recurring income for years.

🚀 5. Build a Book of Merchants

Start by targeting local businesses:

Restaurants, doctors, trades, eCommerce, SaaS
Cold outreach, local BNI groups, POS resellers
Bundle services like POS, loyalty, invoicing, cash discounting

📦 6. Keep Clean Records

Track merchant volume, churn, and residuals
Retain copies of contracts and statements

💼 7. Exit Optionality

Once your portfolio reaches $3K–$10K+/month in residuals, you can sell it — often for 3–6x trailing 12-month cash flow.

Want to get your portfolio valued? Get a free valuation here.