A payment facilitator is a company that allows the merchants who they approve to accept electronic payments using the payment facilitator’s infrastructure. Payment facilitators are responsible for underwriting and onboarding merchants – referred to as submerchants in the payment facilitator model – as well as servicing the submerchant once they begin accepting payments.
The payment facilitator model started as an effort to streamline merchant services. In the traditional merchant acquiring model, merchants who wanted to begin accepting credit card transactions needed to set up an account with a merchant acquirer. A merchant acquirer is typically a bank or a bank sponsored firm, such as an independent sales organization (ISO).
One of the issues that merchants experienced with the traditional model is that obtaining a merchant account from an acquirer could often be a time consuming and complex process, impeding their speed to getting up and running as a business. Acquirers used the same application and process for merchants of all different sizes and verticals making the application often confusing and irrelevant for many businesses.
As a result, the payment facilitator model was born. It gives small to medium sized businesses a more simplified way to begin accepting electronic payments. Payment facilitators set up a merchant account through an acquirer and then use this account to facilitate payments on behalf of their submerchants – creating a more frictionless road to credit card acceptance for sellers.
In turn, the payment facilitators benefit from the increased control over the submerchant experience and the new revenue streams generated from facilitating their submerchant’s transactions.
Who Is Involved in the Payment Facilitator Ecosystem?
The payment facilitator is the company that provides the infrastructure necessary for their submerchants to begin accepting credit card payments. They underwrite and onboard the submerchants and then provide them with the technology they need to process electronic payments and receive the funds from those payments.
The submerchant (referred to as merchant in the traditional model) is the businesses that is onboarded by a payment facilitator to start accepting electronic payments. These can either be physical storefronts accepting card-present transactions, or online businesses accepting card-not-present transactions.
The submerchant must be underwritten and boarded into the payment facilitator’s infrastructure, at which point they are then able to begin accepting credit card payments from their customers.
In order for a payment facilitator to get up and running they must enter into an agreement with an acquiring bank or payments institution, which must be a licensed by the card networks. For purposes of simplicity, this entity will be referred to as the acquiring bank. Since the acquiring bank assumes the risk of the payment facilitator, the acquiring bank first underwrites the payment facilitator ensuring they have the necessary infrastructure, technology, policies, and procedures to operate effectively.
The acquiring bank is responsible for monitoring the payment facilitator, making sure they are keeping up with compliance and are underwriting and onboarding submerchants responsibly.
Aside from monitoring the compliance of the payment facilitator, the acquirer is also responsible for receiving the data and money from the card networks, then passing that data and money to the payment facilitator.
Along with the acquiring bank, a relationship with a processor is necessary to operate as a payment facilitator. The processor is responsible for processing and settling the transactions that are initiated by the payment facilitator’s submerchants.
When a consumer uses their card to make a purchase, the processor is the entity that receives the initial authorization request and sends that request to the applicable card network, who sends back the authorization response. Once the transaction is completed, the transactions are settled on a daily basis, and then the cardholder’s bank sends the funds to the acquiring bank.
A sponsor is a generic term and can be referred to as the entity that enables a payment facilitator’s entry into the payments system. It is common for both an acquiring bank and a processor to be bundled together, in which case they are collectively referred to as the sponsor. A business that is looking to become a payment facilitator must apply for an account with a sponsor. The prospective payment facilitator is underwritten by the sponsor, and if approved they are then integrated into the sponsor’s payments technology stack.
The Functions of A Payment Facilitator
Underwriting and Onboarding
In the traditional merchant acquiring model, the merchant must apply for a merchant account through an acquiring bank. This process is full of unnecessary paperwork and can take days or even longer to complete. Payment facilitators are able to speed up the onboarding process while also tailoring the experience and application to their specific niche or vertical, creating a better merchant experience.
Before onboarding a new submerchant, the payment facilitator must first perform the underwriting needed to confirm that the submerchant does not pose a risk or threat to the payment facilitator’s ecosystem. This is done by first conducting the “Know Your Customer” (KYC) practices. This involves performing KYC on the business owner(s) and confirming that the business applying to be a submerchant is a legitimate business that sells the types of good or services that they claim to sell.
The submerchant, both the owner(s) and the business, are also checked against two of the major lists associated with high risk merchants. These are Mastercard’s MATCH list (Member Alert to Control High Risk Merchants) and the list managed by the Office of Foreign Asset Control (OFAC) which contains individuals and entities who have ties to crime or terrorism.
Many payment facilitators employ “frictionless underwriting” which helps to drastically speed up the onboarding of submerchants, allowing submerchants to get up and running quicker than ever. This is done by automating the process for submerchants who are low risk, only necessitating manual review for those that do not pass all of the checks or are a higher risk submerchant. Businesses who are boarded under payment facilitators can now start accepting credit card payments as quickly as a few seconds, rather than days or weeks.
Since payment facilitators take liability for transactions processed by their submerchants, they are responsible for monitoring those transactions to watch for anomalous or suspicious behavior. Typically, software is utilized to easily record and sort through the transactions while using pre-determined policies and procedures to decide which transactions will require further review.
Policies and procedures are also in place, covering investigations of suspicious transactions and appropriate steps for remediation.
Many payment facilitators are responsible for funding their submerchants and reconciling the transactions. When the payment facilitator manages the funding process, they are able to better control the experience for their submerchants. In the traditional model, merchants are funded at whatever schedule the acquirer has set, which often has limitations. For payment facilitators, they are able to manage the funding for submerchants, allowing them to dramatically improve the funding process.
Payment facilitators must adhere to banking regulations and comply with card brands’ and government agencies’ regulations. However, best-in-class sponsors have created a payout structure for their payment facilitators, making it easy to comply with these responsibilities.
Payment facilitators manage the chargeback process along with the acquiring bank. Often, the submerchant that received the chargeback will need to provide further documentation related to the chargeback. The payment facilitator then submits the necessary documentation to the acquirer who initiates the chargeback and transfers the funds back to the cardholder’s bank.
What Types Companies Are Becoming Payment Facilitators?
The biggest influx of companies adopting the payment facilitator model are software companies that have a payment component to their software. For example, the payment facilitator model is very popular among software companies in the invoicing & billing, POS systems, e-Commerce, and healthcare management verticals.
These types of companies benefit from becoming payment facilitators because it allows them to own more of the submerchant experience on their software, while also allowing them to generate revenue off of the transactions their submerchants process. Owning the submerchant experience allows them to control the onboarding process, the reporting and funding process, and adds flexibility to the fee structure for their submerchants, creating an overall improved product.
The payment facilitator benefits from the increased control of the experience it provides its customers, which can often lead to a competitive advantage in the marketplace. By offering an improved product to potential customers with less friction to begin accepting payments, this can result in improved sales and less customer churn. The payment facilitator also charges for the payment processing which brings in an additional revenue stream for the company. Some payment facilitators even show more income from the payments side of their software, as opposed to their software subscription revenue. This improved business model and increased income for software companies also results in higher market valuations, evidenced in payment facilitators like Square and Shopify.
How Does A Company Become A Payment Facilitator?
Determine The ROI Makes Sense
The first step in becoming a payment facilitator is ensuring that you will achieve a positive ROI from doing so.
One of the main appeals of adopting the payment facilitator model is the increase in revenue you get from each transaction processed via your software. However, due to the cost and time investment in adopting the payment facilitator model, any company considering the option should conduct an ROI analysis to ensure the model makes sense financially.
In general, if a software company is processing over $50 million of transaction volume via their software then the ROI makes sense to adopt the payment facilitator model. However, there are many factors that could change this figure. For instance, the margin on payments as well as the amount of revenue share from payments are critical factors that can affect the transaction volume needed to make the adoption of the payment facilitator model have a positive impact on your bottom line.
Use our ROI Calculator to determine whether or not it makes sense financially for your business to adopt the payment facilitator model.
Develop Policies and Procedures
To efficiently and compliantly operate as a payment facilitator there are a few sets of policies and procedures that the payment facilitator must implement and adhere to, two of which are listed here.
The first are the policies and procedures for underwriting submerchants. The payment facilitator customizes the policies and procedures depending on the industry they operate in, the size of the submerchants, what country they are located in, and their general risk tolerance. The underwriting policies and procedures ensure that the payment facilitator has set criteria for items such as:
- How to complete a website due diligence check
- KYC (Know Your Customer) and KYB (Know Your Business) criteria
- When to perform manual review of the application
- How to deal with changes in ownership or business practices
The second set of policies and procedures give the payment facilitator guidelines and guardrails on how to monitor their submerchants ongoing transactions for risk and fraud. Depending on the risk associated with their specific submerchants, these policies and procedures need to be designed to fit the payment facilitator’s verticals. These policies and procedures include items such as:
- Thresholds for when anomalous transactions need to be manually reviewed
- How to review transactions signifying high risk
- Steps to take when investigating a transaction
- How to effectively handle chargebacks
Have the Payments Infrastructure
In order to become a payment facilitator, a company must build out or integrate the technical infrastructure needed to properly onboard and service their submerchants.
The first piece is the ability to underwrite and onboard the prospective submerchants. Many payment facilitators use an online submerchant application where the submerchant inputs all of the information necessary to conduct proper KYC checks. The payment facilitator will benefit from an infrastructure to automatically review all of the information to approve the application or pass the information to an underwriter if it requires manual review. This helps to reduce friction and delays in the underwriting and onboarding processes. Once properly vetted, the payment facilitator needs an infrastructure which can automatically board the merchant to their processor.
Once the submerchant is boarded and live, the payment facilitator must have the necessary infrastructure to monitor the ongoing transactions for anomalies or fraud, calculate the fees for each transaction, fund the submerchants, handle chargebacks, and report transaction data to their submerchants, preferably through an easy to use submerchant portal.
Sign An Agreement With A Sponsor
Once the prospective payment facilitator has the needed policies and procedures and infrastructure in place, the company must then apply for an account with the sponsor (acquiring bank and processor). Once approved, the payment facilitator is set up with a Payment Facilitator ID (PFID) and can begin underwriting, onboarding, and servicing their submerchants.
The massive growth of software companies that will benefit from adding payments to their software and core offering has necessitated a better payments ecosystem. The payment facilitator model helps solve this need by giving companies that adopt this model additional revenue streams and increased control over their customers’ experience. Although there is a significant cost to getting up and running as a payment facilitator, the benefits are clear.
While there are only a few hundred companies today that are payment facilitators, this number is expected to grow tremendously over the next few years as market barriers crumble and the attention increases. This will result in tens of thousands of payment facilitators around the world, which will lead to hundreds of millions of new acceptors of electronic payments.