Split Funding and Adaptive Payments

on Feb17
Split Funding
Written by
James Davis
Written by James Davis
Senior Technical Writer at United Thinkers
Author of the Paylosophy blog, a veteran writer, and a stock analyst with extensive knowledge and experience in the financial services industry that allows me to cover the latest payment industry news, developments, and insights. Read more
Split Funding
Reviewed by
Kathrine Pensatori
Product Specialist at United Thinkers
Product specialist with more than 10 years of experience in the Payment Processing Industry. I help payment facilitators and PSPs solve their various payment processing issues. Read more

In this article we are going to discuss the concept of split funding and address one of the existing examples of its implementation – PayPal adaptive payments.

Traditionally, in merchant services during payment processing the simple residual revenue sharing model was used. In this model, the cost of transaction processing (processing fee) was collected from the merchant. Part of this amount could be paid to a channel partner in the form of commission. Usually, the funds were distributed between up to 3 parties. Merchants would get their net processed. Merchant fee was retained by the processor or merchant service provider, and part of that fee was paid to Visa / MasterCard as well as to the underlying processor for the actual processing of the transaction. In some cases the part retained by the MSP was additionally split in between the MSP and some sales partner or ISO that helped to set up the account. Some information on merchant services commissions sharing can be found in one of our previous articles.

When the market developed, a set of new requirements to implementation of funds distribution mechanism emerged in the industry. The requirements were produced by new use cases and scenarios, in which the funds needed to be distributed to more parties.

Let us look at the three use cases, illustrating the more sophisticated remittance approach.

Convenience fee

The first use case is the case when convenience fee is used, and one or more third parties need to be paid percentages out of this convenience fee.


A person pays a rent of $1,000, and a payment processing company adds a 3% ($30) convenience fee. The merchant (property owner) expects to get his $1,000. Consequently, a logic is needed, allowing the processor to retain $30 from the total amount of $1,030. The convenience fee may include merchant fees only (in this case the whole $30 will be retained to cover the future merchant fees for transaction processing). Besides merchant fees, the convenience fee may include some additional commission. For instance, $4.99 per payment might be charged by the web payment portal provider on each payment processed. Therefore, the payment portal provider will expect to get $4.99 out of each 3% convenience fee.

Convenience fee / tax / reserve

In this scenario, every transaction amount is automatically split into several parts, due to particular business-related reasons, such as the need to keep taxes and reserves on separate bank accounts.


Let us assume that a $1000 transaction is processed, and we have an 8% tax rate, while a 3% convenience fee is added. Additionally, there is a business need to surcharge an 8% tax and hold 10% of net proceeds as a reserve. It is mandated that tax and reserve amounts must be stored in dedicated bank accounts. Given the explained conditions, the gross transaction amount will be $1,110, which will need to be split accordingly:
$30 – convenience fee;
$80 – tax;
$100 – reserve;
$900 – net remitted to merchant.

Many vendors

In this scenario we have an online retailer is reselling products or services of one or more vendors. The retailer uses a simple pricing model, charging fixed percentage above its wholesale cost.


An online bookstore works with three publishing houses. It has a 10% margin arrangement with the first publishing house, and 5% margin arrangement with the second and third publishing houses, while the remaining amount (90% or 95%, respectively) is remitted to the vendor.
Let us say, an online order for three books with a total amount of $100 is placed. Each book comes from a separate publishing house. The first book costs $50, the second – $20, the third – $30. The total amount of $100 should be split accordingly:
$45 – amount remitted to the first publishing house;
$19 – amount remitted to the second publishing house;
$28.5 – amount remitted to the third publishing house;
$5+$1+$1.5=$7.5 – amount collected by the bookstore.

Adaptive payments

The company that was the quickest to respond to the needs of the market was PayPal with the introduction of their adaptive payments system. As it stands right now, it is designed, primarily, to take care of the last use case.

In essence, adaptive payments allow you to get the payment and automatically distribute part of this payment (such as the abovementioned commission) to one or more PayPal users, according to some rule, embedded in the remittance logic.


Realizing the need for new residual revenue sharing mechanisms on the market, more and more gateways incorporate split funding logic into their remittance engines. If you need this new functionality, ask your payment service provider, if they have it available.

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