Payment Provider Types
On this page
Before choosing a provider, understand:
- Buying Payments - Full selection guide
- Processor Fees - Fee structures
- Holds and Reserves - Cash flow impact
The payments ecosystem has confusing terminology. Gateway, processor, ISO, PayFac, acquirer, PSP, MoR - vendors use these terms interchangeably (incorrectly) to sound sophisticated. Here's what they actually mean and which ones matter to you.
Most provider types work for both card-present and card-not-present. The key difference: CP requires terminal hardware (which may be bundled or separate). CNP is software-only. Merchant of Record is CNP-only.
The Short Version
| If You're... | You Probably Need | Examples |
|---|---|---|
| Starting out, under $100K/mo | PayFac (aggregator) | Stripe, Square, PayPal |
| Growing, $100K-$1M/mo | PayFac OR ISO + processor | Stripe, or ISO referral to direct processor |
| Established, $1M+/mo | Direct processor relationship | Adyen, Worldpay, direct to acquirer |
| Selling globally, want tax handled | Merchant of Record | Paddle, FastSpring, Gumroad |
| High-risk or complex | Specialist ISO | Industry-specific ISOs |
The Players Explained
Payment Gateway
What it is: Software that securely transmits payment data from your checkout to a processor.
What it does:
- Encrypts card data
- Routes transactions to the processor
- Returns approve/decline responses
- May provide tokenization
Think of it as: The secure tunnel between your website and the payment network.
Examples: Authorize.net, Braintree (gateway function), NMI
Do you need to think about this separately? No. Modern PayFacs and processors include gateway functionality. You only think about "gateway" separately if you're using a legacy stack or need gateway-level customization.
Payment Processor
What it is: The company that actually processes the transaction with the card networks.
What it does:
- Communicates with Visa, Mastercard, etc.
- Routes transactions to the right issuing bank
- Handles authorization and settlement
- Manages the money flow
Think of it as: The engine that makes the payment actually happen.
Examples: Fiserv (First Data), Worldpay, TSYS, Adyen, Stripe (processor function)
Relationship to gateway: The processor needs a gateway to receive your transactions. Many processors provide their own gateway. Some don't, requiring you to use a third-party gateway.
Acquiring Bank (Acquirer)
What it is: The bank that holds your merchant account and receives funds from card networks on your behalf.
What it does:
- Underwrites your merchant account
- Takes on risk for your transactions
- Receives settlement from card networks
- Deposits funds to your bank account
Think of it as: The bank behind your ability to accept cards.
Examples: Wells Fargo Merchant Services, Chase Paymentech, Elavon
Relationship to processor: The acquirer is the financial institution; the processor is the technology. Sometimes they're the same company. Sometimes they're different. You don't interact with the acquirer directly - your processor or ISO handles that relationship.
ISO (Independent Sales Organization)
What it is: A company that resells payment processing services from acquirers/processors.
What it does:
- Sells merchant accounts on behalf of acquirers
- Provides customer service and support
- May bundle additional services (terminals, software)
- Earns a spread on processing fees
Think of it as: A reseller/broker for payment processing.
Why they exist: Acquirers and processors don't want to sell to every small business directly. ISOs handle sales, onboarding, and support for smaller merchants.
Examples: Payment Depot, Dharma Merchant Services, thousands of smaller ISOs
When to use an ISO:
- You want someone to shop rates for you
- You need industry-specific expertise
- You want local/personal service
- You're in a niche that needs specialist underwriting
Watch out for: ISOs have huge variance in quality. Some are excellent, providing real value. Others are just middlemen adding fees. Always compare the ISO's all-in rate against going direct.
PayFac (Payment Facilitator) / Aggregator
What it is: A company that processes payments for multiple merchants under a single master merchant account.
What it does:
- Onboards you instantly (no traditional underwriting)
- You're a "sub-merchant" under their account
- They handle compliance, risk, and payouts
- Flat-rate pricing (2.9% + $0.30 standard)
Think of it as: A shortcut to accepting payments without your own merchant account.
Examples: Stripe, Square, PayPal, Shopify Payments
Pros:
- Instant setup (minutes, not weeks)
- No underwriting paperwork
- Simple pricing
- Built-in fraud tools
Cons:
- Higher rates than direct processing
- Less control over holds/reserves
- Account stability risk (the "PayPal freeze")
- Volume caps ($1M-$10M/year before you need to graduate)
The PayFac model: Stripe doesn't give you a merchant account. They give you access to their merchant account. You're one of millions of sub-merchants under Stripe's relationship with their acquirer. That's why setup is instant but you have less control.
Merchant of Record (MoR)
What it is: A company that becomes the legal seller of your product, handling payments, taxes, and compliance.
What it does:
- They sell your product (legally)
- They collect payment from customers
- They handle sales tax, VAT, compliance
- They pay you a royalty minus their fees
Think of it as: Outsourcing your entire commerce operation, not just payments.
Examples: Paddle, FastSpring, Gumroad, Lemon Squeezy
How it's different from PayFac:
| PayFac | Merchant of Record | |
|---|---|---|
| Who sells? | You | They do |
| Sales tax/VAT? | Your problem | Their problem |
| Chargebacks? | Your problem | Often their problem |
| Customer relationship? | Direct | Through them |
| Pricing control? | You set | Some restrictions |
When MoR makes sense:
- Selling internationally (they handle 100+ country tax compliance)
- Selling software/digital goods (their specialty)
- Small team, don't want back-office complexity
- Value simplicity over margin optimization
When MoR doesn't make sense:
- Physical goods with complex fulfillment
- High volume where fees hurt margins
- You need direct customer billing relationship
- You want maximum control over checkout UX
Typical MoR fees: 5-15% of revenue (much higher than PayFac, but includes more)
PSP (Payment Service Provider)
What it is: A catch-all term for any company providing payment services. Basically meaningless.
In practice, PSP means:
- A PayFac (Stripe, Square)
- A full-stack processor (Adyen)
- Sometimes an ISO
When someone says "PSP": Ask them to be specific. Are they a PayFac? Processor? ISO? The term itself tells you nothing.
How They Relate
┌─────────────────────────────────────────────────────────────┐
│ CARD NETWORKS │
│ (Visa, Mastercard, etc.) │
└─────────────────────────────────────────────────────────────┘
↑
│
┌─────────────────────────────────────────────────────────────┐
│ ACQUIRING BANK │
│ (The bank behind the scenes) │
└─────────────────────────────────────────────────────────────┘
↑
│
┌────────────────────┼────────────────────┐
│ │ │
▼ ▼ ▼
┌─────────────┐ ┌─────────────┐ ┌─────────────┐
│ PROCESSOR │ │ ISO │ │ PAYFAC │
│ (Direct) │ │ (Reseller) │ │(Aggregator) │
└─────────────┘ └─────────────┘ └─────────────┘
│ │ │
▼ ▼ ▼
┌─────────────┐ ┌─────────────┐ ┌─────────────┐
│ GATEWAY │ │ GATEWAY │ │ (Built-in) │
└─────────────┘ └─────────────┘ └─────────────┘
│ │ │
└────────────────────┼────────────────────┘
│
▼
┌─────────────┐
│ YOU │
│ (Merchant) │
└─────────────┘
Decision Framework
Just Starting (Under $50K/mo)
Go with a PayFac. Stripe or Square for most use cases.
- Setup is instant
- Pricing is predictable
- Focus on your product, not payments
- You can switch later when you have leverage
Growing ($50K-$500K/mo)
Stay with PayFac OR evaluate ISO/direct.
Questions to ask:
- Is your current effective rate above 2.7%?
- Do you have reserve/hold issues with your PayFac?
- Do you need features your PayFac doesn't offer?
If yes to any, get competitive quotes. If no, stay put.
Established ($500K+/mo)
You have negotiating power. Options:
- Negotiate with current PayFac - Stripe offers volume discounts
- ISO referral - Get quotes through an ISO
- Direct processor - Adyen, Worldpay, direct acquirer relationship
At this volume, the difference between 2.9% and 2.3% is real money. Worth the effort to optimize.
Selling Globally with Tax Complexity
Consider Merchant of Record if:
- You sell to many countries
- Sales tax/VAT compliance is overwhelming
- You'd rather pay 10%+ and have it handled than build tax infrastructure
Don't use MoR if:
- You have tax expertise in-house
- Your margins can't handle 10%+ fees
- You need full control over customer billing
High-Risk or Niche Vertical
Find a specialist ISO. Generic PayFacs will either:
- Decline you outright
- Approve you then freeze your account later
Specialist ISOs know underwriters who work with your category. They cost more but keep you processing.
Common Misconceptions
"Stripe is my processor"
Technically, Stripe is a PayFac. They aggregate many merchants under their processor/acquirer relationships. You're a sub-merchant, not a direct merchant. This is fine, but understand you're one layer removed from the actual processor.
"I need a gateway"
You need payment acceptance. Whether that includes a separate gateway depends on your setup. Modern PayFacs include gateway functionality. You only think about gateways separately with legacy or enterprise stacks.
"ISOs are middlemen who add cost"
Some are. Good ISOs provide value: shopping rates, handling underwriting complexity, providing support your direct processor won't. Bad ISOs just add markup. Evaluate individually.
"MoR means I lose control"
You lose some control (they're the seller). You gain simplicity (no tax compliance, no chargeback fights). It's a tradeoff, not universally good or bad.
Test to Run
If you're unsure about your current setup:
- Calculate your all-in effective rate - Total fees / Total volume
- List what's included - Gateway, fraud tools, tax handling, support
- Get one competitive quote - From a different model (PayFac vs ISO vs direct)
- Compare total cost and complexity - Not just rate
A 2.5% rate with no support is worse than 2.7% with dedicated account management when things break.
Where This Breaks
High-risk MCCs: PayFacs won't touch you (adult, CBD, firearms, nutraceuticals). You need a specialist ISO who knows underwriters in your category. Expect higher rates and reserves.
Rapid scaling: PayFacs freeze accounts when volume spikes unexpectedly. If you're growing 10x in 6 months, get ahead of it - notify them, provide documentation, or graduate to direct processing before they notice.
International complexity: "International support" from a US PayFac means cross-border processing (expensive). True international support means local acquiring in each region (cheaper). Know which you're getting.
Token lock-in: If you store cards with a PayFac and want to leave, ask about token portability before you sign. Some make it easy. Some make it impossible.
Next Steps
Just starting out?
- Sign up with a PayFac - Stripe or Square, don't overthink it
- Understand your fees - Know what you're paying
- Monitor your holds - Watch for reserve surprises
Outgrowing your PayFac?
- Calculate your effective rate - Know your true cost
- Get competitive quotes - Compare ISO and direct options
- Check token portability - Can you leave with your stored cards?
Going international?
- Evaluate MoR vs local acquiring - Tradeoff analysis
- Check provider coverage in your target markets
- Understand FX and settlement timing
Related Resources
- Buying Payments - How to select and negotiate
- Processor Fees Guide - Understanding fee structures
- Interchange - The base cost that applies to all models
- Processor Management - Ongoing relationship management
- Holds and Reserves - How reserves work across provider types
- Going Global - International considerations
- Reading Statements - Understanding what you're paying