This article is, primarily, addressed to payment service providers, also known as third-party processors or payment facilitators. Its goal is to familiarize PSPs with the concept of merchant funding (remittance) and challenges associated with it.
One of the issues faced by payment service providers is that of organizing the remittance process in the most efficient and competitive way. The remittance process is the process of sending money back to merchants for transactions they processed. The process of remittance is very closely related to merchant funding process.
There are several challenges faced by PSPs in connection with remittance and funding processes.
- In many cases it is only possible to send the money after the payment service provider has been funded by the underlying processor.
- Reconciliation process for a payment service provider and for a merchant, receiving the money, needs to be as simple as possible.
- Regardless of the pricing structure, it is desirable to keep the process as clean and transparent as possible.
To satisfy the listed criteria, PSPs can choose from among several merchant funding models, incorporating different remittance mechanisms and fee withholding strategies.
Merchant remittance can be organized in several ways.
The simplest way to fund merchants is based on a time cycle which usually is a calendar month. Under this approach the money is sent once or twice a month (commonly on the1st and the 15th). Each remittance covers all transactions processed from the previous remittance up until now.
The advantage of this approach is that reconciliation (by merchants) tends to be simple and only has to be done once or twice a month.
The disadvantage of this approach is that if the remittance happens on the 1st and the 15th and the merchant processes considerable volume of transactions, for instance, on the 3rd, the money is not available to the merchant for the next twelve days.
The cycle-based approach is more common when some form of follow-up/collections process is performed as an add-on service to the straight processing.
Under the so-called “on-demand” approach, money is sent to the merchant fixed (agreed upon) number of days (usually, one or two) after the original transaction was processed.
For example, transaction processed on Monday gets funded on Wednesday.
The advantage of the “on-demand” approach is that money is available to the merchant sooner.
The disadvantage of the approach is that the reconciliation becomes more complicated, especially, if a merchant is processing transactions every day, as funding from one day can overlap with funding from another.
There are two ways in which the “on-demand” approach can be implemented.
Remittance based on transactions’ funding date
When this approach is used the funding of a transaction happens after a fixed time period counted off of the date when the transaction is funded by the underlying processor. (The funding date in this case is the date when the PSP actually gets the money from the processor.)
The advantage of remittance based on the funding date is that PSPs don’t have to float any money themselves.
The disadvantage of the approach is that it might become extremely complicated when funding is performed by different institutions (banks, processors of different types) with different time schedules. However, if all underlying funding happens on the same schedule, using this approach is not a problem.
For example, if funding period equals to two business days, transaction processed on Monday will be funded by the processor on Wednesday, and the merchant will receive the funds on Friday.
Funding-date-based approach is, technically, recommended for situations when all of the funds are received by PSPs with the same time delay.
Remittance based on transactions’ response date
When this approach is used, the funding for a transaction happens after a fixed time period counted off of the response date of the transaction. (Response date is the date when the response to the transaction (approval/decline) is received from the underlying processor, and, thus, it is known whether the transaction got approved or declined.)
For example, if funding period equals to two business days, transaction processed on Monday will be funded on Wednesday, regardless of when the PSP receives the funds from the processor.
For PSPs who have multiple underlying funding institutions, which operate on different schedules, the solution is to fund all transactions based on response date. This does make reconciliation more complicated for the payment service provider and potentially requires floating of funds, but it simplifies reconciliation for the merchant (as all of the funds are consolidated into a single deposit) and gives the payment service provider a very important competitive advantage.
A merchant submits a file containing ACH, Visa/MasterCard and Amex transactions. Let us assume that ACH transactions are funded back to PSP the next day, Visa and MasterCard transactions – two days after and Amex – four days after the submission (which is not uncommon in the industry today). For example, the file is processed on Monday. On Tuesday ACH transactions will be funded back to the PSP. On Wednesday the PSP receives the funds for Visa/MasterCard transactions, and on Friday Amex transactions get funded.If funding (remittance to the merchant) is based on response date with a two-day delay period, then on Wednesday the merchant will get all the funds for the transactions processed on Monday, but the PSP will have to float the funds for Amex transactions.
If transactions are funded based on the date of their funding by the underlying processor (with the same two-day delay period), then the merchant will get the money for ACH transactions on Thursday, for Visa and MasterCard transactions – on Friday, and for Amex – next Tuesday. While under this model the PSP never has to float its own funds (send them to the merchant), the reconciliation for the merchant is rather complex, especially if processing happens daily.
In the next article we will continue developing the topic of merchant funding (remittance) process for PSPs. Particularly the article will cover the process of handling merchant fees.