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Payment Ecosystem

Prerequisites

This is a foundational page. No prior knowledge required.

If you're already familiar with the basics, skip to:

Before you can optimize payments, you need to know who's taking a cut and why.

The payment industry has a lot of players with confusing titles. This page maps the territory.

On this page

The Four-Party Model​

Every card transaction involves four parties (plus the networks that connect them):

The Four Parties​

PartyWhat They DoExamples
CardholderThe customer paying with a cardYou, your customers
IssuerBank that issues the card and extends credit/debitChase, Capital One, your local bank
AcquirerBank that provides your merchant accountWells Fargo Merchant Services, Elavon
MerchantBusiness accepting the paymentYou

The Networks​

Card networks (Visa, Mastercard, Discover, Amex) connect issuers and acquirers. They:

  • Set the rules for transactions
  • Route authorization requests
  • Facilitate settlement between banks
  • Set interchange rates

Amex and Discover are different: They're both network AND issuer for most of their cards. This is the "three-party model" (they play two roles).

Where All the Other Players Fit​

The four-party model is clean, but real life is messy. Here's where the other players fit:

Processor​

What they do: Route transactions between you and the acquiring bank.

Key points:

  • Connects to card networks on acquirer's behalf
  • Provides the technology layer (APIs, SDKs, dashboards)
  • May or may not be the same company as your acquirer

Examples: First Data (Fiserv), TSYS (Global Payments), Worldpay, Adyen

Gateway​

What they do: Securely transmit payment data from your website/app to the processor.

Key points:

  • Handles the technical integration (JavaScript libraries, APIs)
  • Encrypts and tokenizes card data
  • Often bundled with processing (Stripe, Square)
  • Sometimes separate (Authorize.net with separate processor)

Examples: Stripe (bundled), Authorize.net, Braintree, NMI

ISO (Independent Sales Organization)​

What they do: Resell processing services from acquirers/processors.

Key points:

  • Sales and support layer
  • May mark up pricing
  • Wide variation in quality and pricing
  • Your contract is often with the ISO, not the acquirer directly

Examples: Many local payment companies, "merchant services" providers

PayFac (Payment Facilitator)​

What they do: Let you start processing quickly by putting you under their merchant account.

Key points:

  • You're a "sub-merchant" under their master account
  • Fast onboarding (often same-day)
  • Higher rates, less negotiation
  • They handle compliance, you get simplicity
  • If they terminate you, you may land on MATCH

Examples: Stripe, Square, PayPal, Shopify Payments

The Key Distinction: PayFac vs. Direct Processor​

FactorPayFacDirect Processor
OnboardingMinutes to hoursDays to weeks
Your merchant IDSub-merchant under theirsYour own MID
PricingFixed (2.9% + $0.30 typical)Negotiable
ContractMonth-to-month typical1-3 year terms
SupportSelf-service / chatDedicated rep (maybe)
Compliance burdenLower (they handle much)Higher (you handle more)
Termination riskHigher (faster decisions)Lower (more process)
Best forStartups, small businessesMid-market, high volume

The tradeoff: Simplicity vs. control and cost.

How Money Flows​

Authorization Flow (Real-time)​

When a customer swipes/taps/enters their card:

Time: 1-3 seconds total

Settlement Flow (Daily)​

After transactions are captured:

Time: 1-3 business days typically

Fee Flow​

Everyone takes a cut. Here's who gets what:

Fee Breakdown​

Fee TypeGoes ToTypical Range
InterchangeIssuer1.5-3.5% (varies by card type)
AssessmentNetwork0.13-0.15%
Acquirer/Processor markupYour processor0.2-1.0%+

Why This Matters​

  1. Interchange is the biggest chunk and set by networks. You can't negotiate it directly, but you can qualify for lower tiers (see Interchange Optimization).

  2. Processor markup is negotiable for higher volume. If you're paying 2.9% + $0.30 and doing $1M+/year, you can probably do better.

  3. Bundled pricing hides the breakdown. Flat-rate pricing (2.9% + $0.30) is simple but doesn't let you see where money goes.

Understanding Your Stack​

Who Am I Actually Working With?​

Many merchants don't know who their acquirer is. Here's how to figure it out:

ClueWhat It Tells You
Who signed your contract?Might be ISO, PayFac, or processor
Who deposits your money?Usually the processor or acquirer
Who handles disputes?Processor or acquirer
What's on your statement?May show acquirer name

Common Stack Configurations​

ConfigurationExampleWho's Involved
PayFac (all-in-one)StripeYou → Stripe (PayFac + Processor + Gateway) → Wells Fargo (Acquirer)
TraditionalRestaurant with ElavonYou → POS system → Elavon (Acquirer + Processor)
SplitEnterprise e-commerceYou → Custom Gateway → Processor → Bank acquirer
ISO layerLocal payment providerYou → ISO (reseller) → Processor → Acquirer

Why This Matters for You​

For Negotiations​

Knowing the layers helps you negotiate:

  • Can you go direct to the processor instead of through an ISO?
  • Are you paying PayFac simplicity fees when you've outgrown them?
  • Is your interchange actually what you're being charged?

For Troubleshooting​

When things break, knowing who does what helps:

  • Transaction declined? Issuer's decision.
  • Settlement delayed? Processor or acquirer issue.
  • Dispute? Processor routes it, network rules apply.

For Compliance​

Different players have different requirements:

  • PCI compliance flows up the chain
  • Network rules apply to everyone
  • PayFacs handle some compliance for you

For Risk​

Understanding relationships affects your risk:

  • PayFac termination = potentially MATCH listed
  • Direct processor = more control, more responsibility
  • ISO in between = another layer that can change or fail

Glossary Cheat Sheet​

TermMeaning
AcquirerBank that provides your merchant account and settles funds
IssuerBank that issued the customer's card
ProcessorCompany that routes transactions between you and acquirer
GatewayTechnology that transmits payment data to processor
ISOReseller of processing services
PayFacPayment facilitator (you're under their merchant account)
NetworkVisa, Mastercard, Amex, Discover
InterchangeFee paid to issuer on each transaction
AssessmentFee paid to network on each transaction
MIDMerchant ID (your account number with acquirer)

Test to Run​

Map your payment stack:

  1. Who provides your gateway? (The JavaScript/API you integrate with)
  2. Who is your processor? (Who shows up in your dashboard)
  3. Who is your acquirer? (Who actually holds your merchant account)
  4. Are you on a PayFac or direct? (Check if you have your own MID)

If you can't answer these, ask your account rep or check your contract.

Scale Callout​

VolumeWhere to Focus
Under $100k/moPayFac is fine. Don't over-optimize.
$100k-$500k/moConsider direct processing. Run the numbers on IC+ pricing.
$500k-$2M/moDefinitely evaluate direct. Negotiate rates. Consider multiple processors.
Over $2M/moOptimize everything. Multi-processor. Dedicated support. Custom pricing.

Where This Breaks​

  1. PayFac termination. If your PayFac terminates you for chargebacks or fraud, you may be MATCH listed and have trouble finding a new processor.

  2. ISO instability. ISOs come and go. If your ISO goes out of business, your processing may be interrupted.

  3. Acquirer compliance. If your acquirer decides your business is too risky, they can hold funds or terminate you, even if you're technically compliant.

Next Steps​

Just starting out?

  1. Pick a PayFac → Buying Payments
  2. Understand your fees → Reading Your Statement
  3. Learn the basics → Authorization & Capture

Scaling up?

  1. Evaluate direct processing → Processor Comparison
  2. Negotiate rates → See Buying Payments
  3. Optimize interchange → Interchange Optimization

Troubleshooting?

  1. Map your stack → Use the questions above
  2. Know who to call → Different issues go to different parties
  3. Understand the layers → Each has their own rules and timelines

See Also​