Learn about payments and the payment facilitator model from our team of experts
Payment Facilitator Funding Options
Owning the Merchant Experience: Payment Facilitator Funding Options
One of the main reasons many vertical software providers choose to become payment facilitators is the control the model gives them over their merchant experience.
As providers who know their customers’ operations well, payment facilitators are better able to craft dynamic, flexible underwriting and onboarding procedures, and they can integrate payments capabilities with their software solutions in ways that uniquely meet their customers’ needs.
Payment facilitators also enjoy more control over funding – how and when the merchant gets access to the money from their sales.
In the traditional payments model, merchant funding is handled according to the acquirer’s schedule. Funding schedules can be largely dependent on fraud and risk mitigation processes, and they can often be the same across a merchant portfolio, regardless of business model or risk profile.
For many software companies, however, controlling how and when merchants get paid is a fundamental goal that they’re uniquely qualified to meet. For example, software providers may be able to rely on their detailed customer knowledge to overcome risk mitigation barriers and get funds paid out more quickly, improving cash flow for the businesses they serve.
Options for merchant funding
Most often, payment facilitators handle funding for submerchants through “for benefit of” (FBO) accounts.
FBO accounts are accounts at the acquiring bank that segregate the submerchant’s funds from the PF’s funds. While the PF can control the merchant experience by directing how the funds are to be paid out, it does not have direct access to the account. The bank retains control over the money in the account, paying it out according to the instructions from the PF.
In this way, FBO accounts allow PFs to manage the payout experience while also protecting submerchants. Because PF and submerchant funds are never commingled, there is no danger of submerchants losing their money if, for example, a PF happens to go out of business.
Less commonly, the PF may obtain a money transmitter license to distribute funds directly, or they may make arrangements through a third party that has a money transmitter license.
Money transmitter laws differ from state to state, but essentially, a money transmitter is someone who receives funds for the purpose of transferring them to someone else. Licensing as a money transmitter can be challenging because of a lack of consistency across state lines.
When evaluating funding options, it is important for PFs to rely on professional advice from attorneys and payments experts to help navigate logistical and compliance issues.
No matter the option they choose, having the ability to dictate when funds are distributed is yet another way payment facilitators can help meet the needs of their customers more effectively.