For ISOs And Other Acquirers, Picking a Sponsor Bank Entails Understanding Banks

Independent sales organizations can’t do much without a sponsor bank, also known as an acquiring bank, to get them access to the payment card networks. As with most business endeavors, the complexity of finding a sponsor bank has increased. It’s a challenge that attendees at the 2023 Midwest Acquirers Association conference learned isn’t likely to lessen any time soon.

More regulation, more speculation, and constant card network scrutiny are some of the challenges faced by sponsor banks—so called because they sponsor ISOs to the card networks—said Phil Ricci, senior vice president of payment solutions at Pathward N.A., a Sioux Falls, S.D.-based bank that had been known as MetaBank until 2022.

This might suggest sponsorship would move down the chain to smaller banks, “which would have sounded really exciting and great for a lot of smaller banks if three months ago we didn’t have a massive crisis of faith in the industry,” Ricci on Wednesday told the MWAA audience, referring to the failures of Silicon Valley Bank and Signature Bank earlier this year.

The result? Stricter regulation, more speculation, and more enforcement, while a lot of small players offering cheap prices to get into the market have started having problems, added Ricci.

“When you look at all those things, why are they important to you?” Ricci asked. “Because the days of going to a sponsor bank, churning and burning, getting in for the least amount of cost possible, getting all your deals put through and when they annoy just jumping to the next one, [are] going to start coming to a close,” he said. “There are not many small banks that can afford to be merchant acquisition acquiring banks. It takes a lot of money to do it and it takes a lot of focus…It takes a lot of work and if you do it wrong you will get in trouble, especially now.”

Against this backdrop, how should ISOs view sponsor bank relationships now? Ricci said it’s about the partnership with the bank. “This is about understanding what a sponsor bank is and why it’s valuable,” he said.

The sponsor bank does more than forge access to the card-brand networks, said Fadi Cheikha, founder and chief executive of US Alliance Group, a Rancho Santa Margarita, Calif.-based parent company to three payment firms. “It’s your partner,” Cheikha said.

It has legal, reputational, and financial risks associated with the ISOs it sponsors. “You have to figure out what the bank needs,” he said. “They need deposits.” Banks famously make money by lending money at a higher rate than their costs of accepting funds. He suggests attempting to persuade processing merchants to move their accounts to sponsor banks to add value to the ISO-sponsor relationship.

And, he advises being prepared to make a pitch to all levels of a bank’s organization, including to its board of directors. He also suggests having more than one sponsor bank and using one that is a nationally chartered bank, because it makes lending matters a little easier.