The terms payment service providers (PSP), payment facilitators, and payment aggregators can have slightly different meanings depending on the region, but they refer to similar types of entities. Anyway, the three different concepts do exist, no matter how you might call them.
The purpose of this article is to explain the differences between three crucial concepts that define some of the important players in the merchant services industry. Let us now provide a more detailed explanation of the differences.
Payment Service Providers
A payment service provider (PSP) is an organization that offers individual merchant accounts, or, in other words, traditional merchant services to its clients.
Such a company works with a group of merchants, however it, generally, does not participate in the process of merchant funding.
A PSP facilitates merchant underwriting and payment processing, but merchant funding is, generally, done directly by the acquirer. Subsequently, a payment service provider can derive certain residual revenue only from the processing fees collected by the acquirer.
Payment Facilitators and Aggregators
A payment facilitator is similar to a PSP. However, in contrast to a PSP, a payment facilitator does fund the merchants directly. However, the entities which conduct sub-merchant funding can be further subdivided into two groups.
The first group includes classical payment facilitators. In this case each business (merchant) is treated as a sub-merchant of the payment facilitator. This means that there is a separate MID, that is issued for each merchant involved in processing.
The second group consists of aggregators. In the aggregator model the same MID is used for all sub-merchants. Recently, the concepts of PayFac and aggregators have started converging.
Independent sales organizations (ISOs) and resellers of merchant services are examples of payment service providers in the industry. Almost every bank nowadays has a department dealing with merchant services. A restaurant software (gym software, club management software, or any POS software) company is an example of a classical payment facilitator. Each restaurant using the software can get the merchant account through the POS development company. In this case the payment facilitator (being the software and financial services company) is going to review the account, collect the proper information from the customer and register it as a sub-merchant in their payment facilitator’s portfolio.
Another example includes such companies as lodging services (for instance, Airbnb) or marketplaces. A person renting accommodation through Airbnb does not have his own MID. A general aggregate MID is used for the whole service. The aggregator funds the apartment owners, and ensures that appropriate payments are deposited to respective apartment owners’ accounts.
One key difference between payment facilitators and aggregators is the size of businesses or merchants they work with. Payment facilitator model is suitable and effective in cases when the sub-merchant in question is a medium- or large-size business. Classical payment aggregator model is more suitable when the merchant in question is either an individual or a small business. Consequently, sub-merchants of classical aggregators must follow certain constraints of maximal processing volumes. When transaction volumes of a merchant become larger, this merchant can be obliged to have its own MID, or even become an independent business.
Challenges of Prospective Payment Facilitators
Some companies have better chances of becoming payment facilitators than others. The top candidates include SaaS companies, venture capital companies and investment firms, online marketplaces, and franchisors. These companies have establishied customer bases and customer background verification logic. So, they are a few steps closer to PayFac model implementation than others. Still, in order to become full-fledged payment facilitators, they need to go through a complex process. The key phases of this process inculde:
- getting registered as a PayFac by a card network through an acquiring bank;
- signing an agreement with an acquirer/processor to get a point of entry into the banking system;
- being underwritten as a PayFac by an authorized acquiring bank;
- meeting insurance requirements, specific to payment facilitators;
- setting up merchant onboarding and compliance systems;
- setting up merchant management, monitoring, and funding systems
- developing or integrating with an existing payment gateway platform;
- getting level 1 PCI certified;
- developing consumer and merchant fraud prevention mechanisms.
To provide payment facilitation services, your business must find an acquiring partner that supports your desired payment types and MCC codes. Understanding the payment facilitator model and merchant lifecycle (including onboarding, funding, reporting, chargeback handling, and other functions) will help you generate new revenue streams from payments and avoid costly mistakes along the way.
Between ISOs and Payment Facilitators
Accoding to statistics, ISOs are gradually vacating the space for payment facilitators. So, is a payment facilitator always a better option than an ISO? Let us compare the two models. How do ISOs make money? They resell merchant accounts, issued by acquiring banks, to prospective merchants. How do payment facilitators make money? They handle merchant lifecycle and improve payment experience for customers of their sub-merchants. At the same time, PayFacs assume higher responsibility than ISOs. However, in reward they get their rightful share of merchant services fees.
More and more businesses are looking for partners which would allow them to start processing payments as soon as possible and make this processing experience smooth and seamless. Payment facilitators offer them such an option.
Options for ISOs
So, are there any other options allowing ISOs to stay afloat, beside becoming payment facilitators?
- An ISO can become a merchant services consultant, as it is, usually, an expert in the industry.
- Another option for an ISO is to become a wholesale ISO. Wholesale ISOs have diversified customer relationships and acquirer partnerships. Another advantage is that chargeback rates for wholesale ISOs are calculated as average across all their merchants. As a result, many high-risk merchants find it beneficial to operate “under an umbrella” of a wholesale ISO.
- Next-generation ISO (or next-gen ISO) is a relatively new conept, defining a business that not only refers prospective merchants to acquirers, but also offers a value-added technological solution. Therefore, just like many PayFacs, next-gen ISOs fall within the category of value-added resellers (or VARs).
As we can see, the flavors of referral services models are quite diverse (although the official term used by banks and card networks is, usually, “payment service provider”). You can find more information about these flavors in our respective article.
If you’re considering becoming a payment service provider or payment facilitator, as the demand for these services continues to grow, you need to clearly understand all the aspects of the process. It is important to identify the specific model that you want to follow and ensure that you have necessary banking relationships, procedures, and software to handle the needs of the respective market segment.
Visit the UniPayGateway website if you are interested in the diagram illustrating this topic. You are also welcome to watch a short videoguide and download our free white paper for merchants that want to become payment facilitators.