What is a Submerchant?
The relationship payment facilitators have with their merchants is at the heart of what PFs do. Working with a payment facilitator makes acceptance simpler for merchants – especially for smaller businesses, for whom setting up individual merchant accounts can often be too cumbersome.
When a company decides to operate as a payment facilitator, it obtains a payment facilitator account from an acquirer and aggregates payment transactions for its merchant portfolio through that account. For this reason, payment facilitators’ merchant customers are known as submerchants.
By allowing submerchants to begin accepting electronic payments, PFs accept responsibility for their activities and the associated risk and potential for consumer harm. PFs are responsible for underwriting and onboarding submerchants, monitoring their transactions, and conducting periodic reviews when needed. In some cases, they also take on the role of settling funds to their submerchants.
Payment facilitators must determine what type of submerchants they will accept, which will be directly impacted by the amount of risk they are willing to take on. Many acquirers, as well as card networks such as Mastercard and, Visa prohibit processing transactions for certain types of submerchants, such as those who are selling counterfeit goods or engaging in deceptive practices.
But even submerchants who are not on the prohibited lists may be considered high-risk because of increased risk of chargebacks or reputational harm. These include categories such as nutraceuticals and metaphysical products. Working with these types of submerchants requires specialized experience and additional due diligence.
When underwriting submerchants, PFs must ensure they are not allowing bad actors to have access to the payments system. This includes verifying the identities of submerchant owners and the legitimacy of their businesses.
PFs also need to check prospective submerchants against government databases to weed out entities with ties to criminal activity, such as money laundering or terrorist financing. And they need to assess their submerchants’ financial situation, determining whether they represent a credit risk or have the financial backing they need to be successful. They are also responsible for making sure that their submerchants comply with the Payment Card Industry Data Security Standard (PCI DSS).
Once they have onboarded submerchants, PFs remain responsible for their actions going forward. This means monitoring transactions for chargeback activity and exceptions to normal processing patterns and ensuring their ongoing compliance with industry requirements such as card network rules.
Thanks to innovative practices and evolving technology that streamlines the processes of underwriting, onboarding and monitoring submerchant activity, PFs are opening the door to enabling electronic payments for thousands of merchants.