Merchant Settlement: Pros and Cons of Handling the Funds When You’re a PF

Tedd Huff, VP of Global Product for GlobalOnePay, is slated to speak about funding and payment facilitators at PF WORLD 2018 on Sept. 25 in New York City.

Since its inception, the payment facilitator model has been built on improving the client experience. Reducing and even eliminating onboarding delays to get merchants up and processing payments quickly is a hallmark of the business.

But that focus on experience extends beyond frictionless onboarding. What if you could get submerchants paid more quickly as well?

Many PFs seek to control merchant funding in a bid to better manage that experience. In fact, Tedd Huff, VP of Global Product for GlobalOnePay, said he believes that instant funding – enabling submerchants to be paid instantly or to choose transactions to fund right away vs. the ones that can wait – is the industry’s “next big thing.”

“This is a place where PFs are going to push the envelope,” Huff said. “We can have a submerchant enabled almost immediately; now the industry is moving toward funding within minutes of a transaction being approved – with some PFs looking to compress that timeframe even more.”

However, the more you compress the timeframe from enabled to paid, the more risk gets created.

Within the legacy system, merchants have direct relationships with acquirers and the funds flow from the acquirer to the merchant, Huff said. The players within that ecosystem fit into the regulatory framework for money movement, being insured by the FDIC or compliant with regulatory rules, for example.

“When you start to move into having PFs take possession of the funds, all of it turns very gray. You no longer have FIs or other authorized institutions managing those funds,” he said.

This means that payment facilitators who wish to put themselves into the process must be prepared to take on the risk and compliance aspects of doing so. PaymentFacilitator talked to Huff for his take on the primary ways settlement is handled and some of the pros and cons of each for the PF.

Payment facilitator manages the fund disbursement

Pros:

Managing the funds gives the PF control over the submerchant funding experience, Huff said, enabling them to choose to pay submerchants faster or prioritize transactions.

Cons:

Payment facilitators who wish to handle the transactions must be prepared to handle the logistics of doing so. They must put appropriate processes and procedures – as well as accounting and compliance teams – into place.

According to Huff, this is the most complex model for payment facilitators, requiring them to adhere to banking regulations, comply with card brands and government agencies such as FinCEN, abide by state-by-state licensing and regulations, and deal with tax and insurance implications. It also opens the potential of needing to adhere to money transmitter laws.

PFs also must make sure submerchants are taken care of if something catastrophic happens, Huff said.

“If you have an account and you’re handling the funds yourself, if you go insolvent, the submerchants may not have any claim or may have limited claim to those funds. You must put in a lot of overhead to make sure you have the right type of corporation, bank accounts are set up properly, and the funding flow is set up correctly,” he said.

The ability to manage settlement requires a well-funded payment facilitator, Huff said, one that has the financial ability to make a significant investment in the resources needed to manage the money movement properly, protecting the payments ecosystem and the players involved.

Merchant services provider manages the fund disbursement

As the system has evolved, some merchant services providers have developed ways of dealing with the intricacies of payment facilitation. Some allow PFs to manage fund disbursement, some do not. And in most cases, they come with their own set of requirements for how submerchant settlement will be done.

Pros:

Relying on the merchant services provider to manage the fund disbursement provides the PF with speed to market. By leveraging their existing infrastructure, a PF can get up and serving clients faster. These specialized providers already have the compliance, financial and legal teams, as well as the experience in the space to handle what is required.

Cons:

At the end of the day, the merchant services provider is liable for all of its clients’ transactions, because it is responsible to the sponsor bank. Providers’ efforts to protect themselves may restrict what the payment facilitator is allowed to do, Huff said.

For example, they may have strict guidelines on the types of businesses the PF can serve. They may restrict the frequency and or amount of money released to each submerchant, meaning the PF may not be able to deposit funds the next day. These are things that could impact the experience the PF is hoping to offer.

Experience comes first

Adding to the complexity of these decisions, the industry is changing rapidly.

The recent announcement that the OCC is proceeding with accepting applications for its special purpose national bank charter will likely impact how some payment facilitators choose to manage settlement, Huff said. However, that impact will take some time to materialize, as the agency still has a number of unanswered questions to clarify.

Ultimately, Huff advises a cautious approach to managing settlement.

“Worry about your experience first and figure out which merchant services providers and partners that will get you as close to that as possible. Build up the experience, and then take the next step if you decide that’s right for you,” he said.

Payment facilitators always need to consult with their acquirers and attorneys or other advisers for detailed advice particular to their situations.