Payment Provider Types
- PayFac (Stripe, Square) makes you a sub-merchant on their master account. Fastest onboarding, no underwriting. They can also freeze your funds with little notice
- A direct merchant account is your own relationship with an acquiring bank. Slower setup, real underwriting. More control, and better recourse when something breaks
- ISO and acquirer get confused constantly. An ISO resells merchant services and owns no settlement. An acquirer owns the bank relationship and the risk
- Merchant of Record services like Paddle take tax remittance, compliance and chargebacks off your plate. For digital goods sold internationally, the 5-6% is often worth it
Gateway, processor, ISO, PayFac, acquirer, PSP, MoR. Vendors swap these terms around to sound sophisticated, and they use them wrong. Here's what each one means and which ones matter to you.
Most provider types work for both card-present and card-not-present. CP needs terminal hardware, 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
Software that securely moves 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 bundle the gateway. You only think about it separately on a legacy stack, or when you need gateway-level customization.
Payment Processor
The company that actually runs 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 bring their own. Some don't, and then you bolt on a third party.
Acquiring Bank (Acquirer)
The bank that holds your merchant account. It takes in funds from the 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 one company, sometimes two. You never deal with the acquirer directly. Your processor or ISO handles that.
ISO (Independent Sales Organization)
A company that resells payment processing from acquirers and 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: Quality varies wildly. Some ISOs are excellent and earn their spread. Others are middlemen who add fees. Always compare the ISO's all-in rate against going direct.
PayFac (Payment Facilitator) / Aggregator
A company that processes for many merchants under one 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. Published US examples, verified 2026-08-02: Braintree 2.89% + $0.29 online, Square 2.6% + 15c in person and 3.3% + 30c online on the Free plan, PayPal Checkout 3.49% + $0.49
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 theirs. You're one of millions of sub-merchants riding Stripe's relationship with its acquirer. That's why setup is instant. It's also why you have less control.
Merchant of Record (MoR)
A company that becomes the legal seller of your product. It handles 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)
A catch-all 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 your current PayFac. Square's fee page invites custom pricing above $250,000 a year. That's about $21K a month, so you're long past it. Stripe publishes no threshold at all, so asking costs nothing
- ISO referral - Get quotes through an ISO
- Direct processor - Adyen, Worldpay, direct acquirer relationship
- Price a published interchange-plus provider as your floor. Helcim publishes interchange + 0.25% + 7c in person, + 0.35% + 20c online, at $100K-$500K a month. No monthly fee. Nobody can beat a rate you could sign up for online this afternoon? You've learned something
At this volume, 2.9% against 2.3% is real money. On $500K a month that's $3,000. Worth the effort.
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"
Stripe is a PayFac. They aggregate merchants under their own processor and acquirer relationships. You're a sub-merchant, not a direct merchant. That's fine. Just know you're one layer removed from the actual processor.
"I need a gateway"
You need payment acceptance. Whether that means a separate gateway depends on your setup. Modern PayFacs bundle it. Separate gateways come up on legacy and enterprise stacks.
"ISOs are middlemen who add cost"
Some are. Good ones shop rates, handle underwriting complexity, and give you support a direct processor won't. Bad ones just add markup. Judge them one at a time.
"MoR means I lose control"
You lose some control, because they're the seller. You gain simplicity. No tax compliance, no chargeback fights. It's a trade, not a win or a loss.
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 loses to 2.7% with a real account manager. Ask again when something breaks.
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 without warning. Growing 10x in 6 months? Get ahead of it. Tell them, send 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