What Is the Payment Facilitator Model?
Many software companies are choosing to enable their merchant customers to accept payments through their platform. It’s an appealing way to increase revenue and provide their customers with a complete software and payments experience.
For companies that choose to own the payments function in-house, the process involves becoming what’s known in the payments industry as a payment facilitator.
What is a Payment Facilitator?
Traditionally, businesses that wished to accept electronic payments from their customers were required to get their own merchant accounts with banks or payment processors that enabled access to the payments system. These companies enable payments for companies of all sizes, so their application and onboarding processes were built for larger businesses that handled significant transaction volume.
So, for small and micromerchants, applying for merchant accounts was often very resource-intensive and time-consuming. The applications were long and many of the questions were irrelevant. It could take weeks to complete the process and begin accepting payments. They then would have to take on the expense of obtaining point-of-sale equipment or, if they were online businesses, developing technology connections to their payment providers.
Payment facilitators have emerged as a path to reach these underserved businesses and streamline the merchant onboarding process. Payment facilitators allow merchants to accept payments using their infrastructure. They have removed the friction in the application and onboarding process by simplifying it and tailoring it to the businesses they serve, enabling those businesses to begin accepting card payments more quickly.
Payment Facilitators and the Payments Ecosystem
A payment facilitator works closely with a number of key players:
- Acquiring Bank. A payment facilitator needs a merchant account to hold its deposits. It obtains this through an acquiring bank, also known as an acquirer. This bank is liable for transactions processed through its payment facilitator customers, so it vets potential payment facilitators and dictates many of the rules that they must follow.
- Payment Processors. A payment processor authorizes transactions and routes them to the appropriate card networks. It also handles settling funds from the bank that issued the consumer’s card to the acquiring bank. A payment facilitator must integrate with a payment processor to get transactions where they need to go.
- Sponsor. In many cases, the acquirer and processor functions can be bundled together. The two functions are often collectively referred to as a sponsor. You can learn more about acquirers, processors and their respective roles here and here.
- Submerchants. A payment facilitator’s merchant customers are known as submerchants, because their payment transactions run not through a traditional merchant account, but through a merchant account owned by the payment facilitator.
What do payment facilitators do?
Underwriting and onboarding. A payment facilitator’s submerchants must first be vetted before they can be onboarded – allowed to begin accepting payments. Payment facilitators are responsible for screening submerchant applicants to avoid allowing bad actors into the system, a process known as underwriting.
Underwriting involves following Know Your Customer (KYC) requirements to verify that the businesses are who they say they are. It also involves checking them against lists of entities with connections to crime and terrorism (Mastercard’s Member Alert to Control High Risk Merchants [MATCH] list and a separate list from the U.S. Treasury Department’s Office of Foreign Asset Control [OFAC]).
Payment facilitators often take advantage of technology to streamline this process, making a seller’s path to accepting payments much faster. Software is available to help automate database checks and flag suspicious findings for further examination by a human. This is known as frictionless underwriting.
Once their submerchants are onboarded and accepting payments, payment facilitators are then responsible for providing any needed customer service.
Transaction monitoring. After a submerchant is onboarded, the payment facilitator remains responsible for making sure its payments are legitimate and adhere to card network and government rules and regulations. So, the payment facilitator monitors the transactions that pass through its system for suspicious activity. Similar to underwriting, payment facilitators are able to use technology to watch for anomalies and flag them for risk management personnel.
Funding. Many payment facilitators take on the responsibility of funding – paying out the money their submerchants are owed. While doing so means taking on more liability for fraud and risk mitigation, it is worth that for some, because it helps them manage the experience they are providing for their customers. Because they have more control over when the funding takes place, they may choose to provide quicker access to funds for their customers, a significant benefit particularly for smaller businesses.
Chargeback management. Chargebacks occur when customers dispute charges on their accounts and receive their money back from their issuing banks. The issuing bank will then pass the dispute through the card network to the acquiring bank, which manages the process of recovering the funds from the merchant.
When a payment facilitator is involved, it manages the chargeback process along with the acquirer. It handles documentation requests that might arise from an investigation into whether the transaction was legitimate, and it’s liable for the amount of the transaction if for some reason it is unable to recover it from the merchant.
Today, B2B software companies are increasingly becoming a part of the payments ecosystem. Some of these companies choose to form referral relationships with third parties, enabling their customers to accept payments through their platforms but outsourcing that payments function to another provider. While they earn a referral fee with this arrangement, they give up control and payments revenue to the third party.
For software companies who have chosen to become payment facilitators themselves, however, owning the payments function gives them a new revenue stream and enables them to manage payments as a key piece of their customers’ experience. Companies like Infinicept are enabling software companies to become payment facilitators quicker and easier than ever before by providing all of the needed tools and expertise. To learn more about the benefits and process to becoming a payment facilitator visit Infinicept.com.