In the previous article we touched upon the topic of merchant funding, which is particularly important for payment service providers. This article is also targeted at PSPs, also known as third-party processors or payment facilitators. In the article we are going to address such important aspects of merchant funding (remittance) as withholding of merchant fees.
As mentioned in the previous article, one of the challenges faced by PSPs in connection with remittance and funding processes is that, regardless of the pricing structure, it is desirable to keep the process of withholding of fees as clean and as transparent as possible.
One of the crucial questions to be addressed in the context of merchant funding is “how” and “when” to take out merchant fees.
How to take out merchant fees?
Deducting fees from subsequent remittance
One way is to take the fees out of the subsequent remittance. For instance, if at some point a merchant owes $100 in fees and has just processed $1000 worth of transactions that merchant will be funded $900 instead of full $1000.
The advantage of this approach is that it is easier to spot\detect the situation when a merchant has no funds to cover the fees.
The disadvantage of the approach is that if a merchant discontinues processing, or if a merchant’s processing volume drops, there may not be enough money to cover the fees already accrued.
Withdrawal of merchant fees as a separate transaction
The second approach involves issuing a withdrawal (usually, as an ACH transaction) either from the same deposit account, or from a separate bank account that was designated by the merchant for withholding of the fees.
The disadvantage of the approach is that this type of withdrawal may result in ACH returns, which might be difficult to track, and, thus, it becomes more problematic to see the outstanding balance of the merchant (in contrast to the first approach).
Under the first approach the actual balance of the merchant is always clear, while under the second approach there is always a risk of arrival of ACH return up to 60 days from the day when fees where taken from the merchant.
When to take out merchant fees?
As mentioned above, another important question to be considered by a PSP is “when” to take out fees. As in case of “how”, there are two options.
Withholding of merchant fees at the time of a deposit
One approach is to take out merchant fees at the time of the deposit.
This approach is often used in conjunction with the on-demand remittance model (when funds are disbursed fixed number of days after transaction processing – see the previous article for details). If a PSP is funding transactions and taking out merchant fees right away, it can have fees deducted taken from the remittance. Such combination is quite a common one.
The advantage of the approach is that the PSP has higher chances of collecting the fees.
The disadvantage of the approach is that it makes daily reconciliation more complicated for the merchant. For instance, if a merchant processed $1000, it will not get the full $1000 (as fees are taken out), so the described approach makes it really difficult for merchants to reconcile, as they always have to consider the fees.
Withholding of merchant fees based on time cycle
Another approach is to take out money at the end of a processing cycle, which is, generally, a calendar month.
This second approach is often used in combination with withdrawal of merchant fees as a separate transaction discussed above.
The advantage of the approach is that this approach makes reconciliation easier for merchants, as they only have to reconcile the fees part at the end of the month.
The disadvantage of this approach is that it requires the PSP to potentially float its own funds, if PSP is funded net of fees by the underlying processor. Another disadvantage for the PSP is that at the time it attempts to collect the fees, the funds may not be in the account.
In the next article we are going to address the handling of transactions that occur outside the normal processing cycle, namely, ACH returns and chargebacks.