By sean

Oftentimes when looking at your credit card processing bill or your credit card processor’s website you will see language like “XXXX Co is a registered ISO/MSP of XXXX bank”.  For example, look at the bottom of the website of North America Bancard – it says “North American Bancard is a registered Independent Sales Organization/Merchant Service Provider for HSBC Bank USA, National Association, Buffalo, NY and Wells Fargo Bank, N.A.,Walnut Creek, CA”.

What does that mean?  Historically Visa and Mastercard were joint ventures between banks that issued credit cards.  Only banks could participate in the joint venture, which allowed them to both issue credit cards and accept credit card payments on behalf of their business customers.

Over time, however, many banks dropped out of the business of helping business customers accept credit cards.  They were replaced by payment processing networks and the independent independent sales organizations (ISOs) that helped businesses connect to the networks.

Some banks, while not wanting to bother running a processing network or helping businesses connect to those networks, got into the business of renting out their status as a member of Visa / Mastercard to the independent sales organizations that needed access to the network in order to get their business customers paid.  Such a relationship is called “sponsoring”.  The ISO basically provides a list of the transactions and account numbers to their sponsor bank and the sponsor bank is the one who actually pulls the money out of the customer’s account and transfers it to the business customer’s account.

Here is how the relationship is explained in the most recent quarterly financial report filed by Heartland Payment Systems, one of the larger ISOs (Heartland is one of the few ISOs that has developed their own payment processing network, but that is another story altogether):

Substantially all of the Company’s revenue is derived from processing and settling Visa and MasterCard bank card transactions for its merchant customers. Because the Company is not a “member bank” as defined by Visa and MasterCard, in order to process and settle these bank card transactions for its merchants the Company has entered into sponsorship agreements with member banks. Visa and MasterCard rules restrict the Company from performing funds settlement or accessing merchant settlement funds and require that these funds be in the possession of the member bank until the merchant is funded. A sponsorship arrangement permits the Company to route Visa and MasterCard bank card transactions under the member bank’s control and identification numbers to clear credit bank card transactions through Visa and MasterCard. A sponsorship arrangement also enables the Company to settle funds between cardholders and merchants by deliver funding files to the member bank, which in turn transfers settlement funds to the merchants’ bank accounts. These restrictions place the settlement assets and obligations under the controlof the member bank.