Not quite true. First, some fraud gets eaten by the processor. Second, the merchant underwriter is on the hook for a merchant who goes bust before fulfilling what has been paid for.
Actually, if you want me to make it detailed it goes like this.
card issuer(bank) ---> processor (square) ------> ISO ------> merchant ---> customer
| | |
V V V
card network underwriting bank
the only way the processor will ever eat the cost is if the ISO couldn't cover the loss, bankrupt. The only way the ISO can't collect from the merchant is the same or if the merchant stops processing. If the merchant can't beat the chargeback and isn't fraudulent, their only option is to sue the customer for fraud. But usually the ISO will take the merchant to collections. Disputes are like hot potatoes, everyone keeps tossing it till there's no one to catch it.
With that said the underwriting bank doesn't eat any of the chargeback on behalf of the merchant. The underwriting bank will only eat loss that they underwrote for a processor or an ISO acting like a PayFac
At least this much I know from my side of the industry, perhaps you work for a bank that eats the cost. I do like to know their name and become a customer!
Do you have a source for any of that? I don't believe ISOs take on any risk. They are "independent sales organizations" and they are a dime a dozen.
They are signing up companies directly to the merchant banks each with their own underwritten merchant account. And they are a dime a dozen. They aren't taking on any risk. Just the effort to onboard new customers.
I believe I mentioned ISOs that are Payfacs. Some ISOs want to act like processors, if they do, then they assume the risk. Some ISOs have their own underwritten, most banks are too conservative and will lose your business by being too cautious, you can underwrite yourself if you are big enough. I work in this domain ;) and have interacted with the plumbing from onboarding all the way to account closure.
You've confused me as well. An ISO is sort of definitionally not the merchant underwriter ("Independent Sales Organization"). Maybe you're saying some underwriters/processors who sell direct? What is an example of an ISO that is a PayFac? There aren't many players in the business so naming names might help the general understanding.
