In this article we are going to focus on an important category of merchant services industry players, called payment facilitators. We are going to explain the history of their emergence in the industry and list the challenges they face at the present-day market.
Before payment facilitators
Traditionally, merchant services market dealt with the following types of intermediary entities (players) who helped merchants get and manage their merchant accounts:
- Third-party processors
Aggregators, as a rule, helped to solve the problems of micro-merchants or merchants having trouble with getting their own merchant accounts, particularly for recurring billing, bill payment and other transactions of similar kinds.
Third-party processors were often represented by payment gateways, which, generally, worked in collaboration with ISOs in order to simplify transaction processing for merchants (especially when legacy processing platforms were involved).
A traditional ISO played the role of a sales agent (intermediary). ISOs helped merchants to prepare documentation for processor’s underwriting departments, but, generally, did not participate in the underwriting process, merchant on-boarding, and subsequent merchant funding/remittance.
Over time, the so-called super-ISOs emerged. These were larger ISOs, which had greater involvement in the underwriting process, but, generally, tried to stay clear of any risk.
Recently the role of ISOs as one of the key merchant services industry players (an intermediary selling merchant service accounts) has become less important than before. The most likely reasons include:
- market consolidation
- the need for a consolidated business and technology offering
- the challenges of acquirers around management of underwriting, on-boarding and fraud monitoring for many small-size merchants.
As online payments gained popularity, merchant services industry evolved, and many new small and medium-sized merchants emerged on the market. With the emergence of such multitude of small-sized merchants (as well as merchants with some particular business needs) it became more difficult for acquirers to handle underwriting and merchant management.
Consequently, several important trends became prominent in the merchant services industry, and the need for the so-called payment facilitators became apparent.
Emergence of payment facilitators
Acquirers found it difficult to work with smaller-size merchants, because, from underwriting, processing, on-boarding, and funding perspectives, administrative effort required to service a merchant is the same across all merchant sizes. Same administrative procedures are needed to service a micro-merchant and a merchant processing millions of transactions, although server load and transaction volumes, surely, differ. As a result, the practice of working with the so-called payment facilitators became more popular and frequent.
From ISOs to payment facilitators
In a sense, a payment facilitator can be defined as a product of ISO’s evolution. In contrast to pure ISOs, payment facilitators do perform merchant underwriting themselves, and, thus, free the acquirer (underwriter) from the need to perform administrative procedures, necessary for merchant account approval. In some cases, the also facilitate funding of their sub-merchants. Consequently, a payment facilitator goes through the so-called underwriting process for payment facilitators in order to provide the insight to the acquirer about the procedures, which are going to be used for merchant screening and merchant underwriting-related decisions.
In exchange for cheaper access to transaction processing (emerging from the opportunity to purchase services from the acquirer “wholesale”, and, thus, pay less), payment facilitators take the underwriting-related risks, handle initial underwriting, merchant funding, and general support of merchants from their portfolios (customer service). Lower transaction processing costs provide the basis of payment facilitators’ profit margins.
Software companies as payment facilitators
Many software companies, which initially worked through such payment gateways as Authorize.net or Stripe, realized that they were losing a considerable share of revenue because they paid to third parties for merchant and gateway services, which they were capable of providing themselves. At the same time, plenty of these software companies had considerable experience and histories of working with merchants who used their services (such as software development for fitness centers, tanning salons, restaurants, supermarkets etc).
It became obvious to these companies that they could also act as payment facilitators, because at some point in payment processing cycle all transactions had to go through their software products, and they had control over transaction processing.
Aggregators as payment facilitators
Many aggregators switched to the described model, where payment facilitators represented the intermediary link between them and the merchants, according to provisions of the new legal regulations. Another numerous group of aggregators decided to perform the role of payment facilitators themselves, because this step made them more compliant with the most recent regulations, imposed by the associations, and also formalized their screening process, thereby, reducing the possibility of potential fraud.
Now that we’ve reviewed the process of payment facilitators’ emergence, and listed the key entities performing the role of payment facilitators, let us look at what it takes to become one. While it seems like a cool idea for many companies, in fact, it is a challenging process, and it is important to account for all the aspects of this process.
Becoming a payment facilitator
In order to become a payment facilitator, a company needs to take care of several important aspects:
- Some form of a contract with the acquirer (processor, underwriter). To sign a contract, the company needs to present some proof of its financial viability, including all the necessary legal documentation, such as financial statements, all the necessary insurances etc.
- Some CRM system allowing to manage prospective merchants.
- A mechanism for merchant background verification. These include credit history check, background checks by LexisNexis, TransUnion, or similar companies.
- Some software or payment gateway solution, needed to physically process transactions. Payment gateway software must be integrated (have established relationship) with the respective processor (acquirer).
- Appropriate PCI certifications. PCI audit allows the candidate to obtain all the necessary PCI-compliance-related documentation.
- Selection of a merchant funding strategy. Merchant funding can be performed either through the acquirer, or the necessary functionality must be implemented in the company’s own platform.
- A set of consumer fraud and merchant fraud prevention instruments. Typically, these instruments are embedded in the company’s own platform. Some articles on our blog provide descriptions of consumer and merchant
fraud prevention mechanisms, as well as merchant services reserves.
Ideally, a prospective payment facilitator needs a unified platform capable of managing the whole lifecycle of the merchant and the merchant’s transactions.