The introduction of credit cards in the 1950s allowed individuals and businesses to use a card as a form of payment at any business that had a relationship with the card company. It’s now common to pay with your credit card anywhere you shop. But for businesses who wanted to “come online” and accept credit card payments decades ago, the path wasn’t apparent.
There was a time when it was a real challenge for businesses to accept credit card payments. In the world of financial services, the technical term for this is ‘to become an approved credit card merchant’. A merchant had to partner with a bank; the application and underwriting process was extremely complicated, time-consuming, and expensive. Usually, this process made sense for larger merchants. Smaller merchants who didn’t have the time or resources for the lengthy and costly requirements for credit card acceptance stuck primarily to cash or cheque.
ISOs & Integrated Payments
In the early 2000s, as the world of digital commerce began to take root, software companies noticed how hard it was for some of their clients to process payments. With the rising trend of digitization (see the rise of PayPal), the attitude towards credit card acceptance for merchants of all sizes shifted from want to immediate need. This urgency prompted software companies to work with banks to structure Independent Sales Organization (ISO) referral deals. These companies were then able to offer software products with ‘integrated payments’ and serve as an intermediary between their clients (the merchants) and the organizations they partnered with (the banks) to help merchants process payments more efficiently. Software companies with integrated payments were often able to earn substantial revenue via their ISO referral agreements with the banks and were referred to as Value Added Resellers (VARs).
But the ISO programs were limiting. While they helped to streamline the payments process, they made it difficult to control the merchant onboarding experience businesses could provide to their customers. And with so many different vendors involved in their referral process, the costs for the merchants were also climbing.
Software companies started to explore how they could help simplify this experience for their clients by processing the payments on their behalf. And thus, the payment facilitation program started to form.
The birth of payment facilitation
Like the integrated payments model, payment facilitation created an opportunity for software companies to monetize a service that complemented their existing offering. But payment facilitation increased the level of service software businesses could offer to their clients (the merchants) by making it nearly effortless to accept payments from cardholders. The first official programs were designed and launched by Mastercard and Visa in 2010 and 2011, respectively.
Here’s how it works:
A payment facilitator partners with a bank, which allows them to apply for a merchant ID with the credit card networks. Once approved, the payment facilitator then can sign sub-merchants up under their umbrella. In some cases, this removes the requirement for merchants to have their own merchant ID (MID). Although the payment facilitator is using their own MID, they are not considered the merchant of record, the sub-merchant is.
The payment facilitator then processes their sub-merchants’ transactions, providing support and service. Additionally, they generate insightful reporting, help manage disputes, and send funding instructions to ensure sub-merchants get their earnings from each day. It’s a clear choice for growing companies who are in search of a comprehensive payments solution designed to meet the specific needs of their customers.
Four major groups comprise the ecosystem -- acquirers, processors, payment facilitators, and merchants. Before starting the process of becoming a payment facilitator, it’s helpful to understand the ecosystem and how different organizations within the payments environment interact.
An acquirer is a financial institution (typically a bank) who approves, endorses, and underwrites payment facilitators. Generally, an acquirer must have the resources and financial stability to support a payment facilitator’s processing operations. For example, Visa mandates all acquirers to meet a $100 million minimum equity requirement.
The acquirer is also responsible for performing due diligence on prospective payment facilitators and ensuring that payment facilitators are performing due diligence on their sub-merchants. Prospective payment facilitators must have specific operations, standards, and best practices in place to meet the acquirer’s qualifications.
Payment processors have relationships with acquiring banks and, through a bank’s sponsorship, are responsible for routing payment authorizations, transactions and settlements to the payment networks (i.e. Visa, MasterCard, NACHA, etc) on behalf of merchants. You may be familiar with PayPal, Square, and Stripe, companies commonly referred to as payment processors when in fact they are most accurately considered Payment Service Providers (PSPs). Instead, companies like Worldpay by FIS, First Data (now Fiserv), and Elavon are some of the largest payment processors in the US.
Payment facilitators are the central player in this process. Many payment facilitators are companies that already provide a service or solution that is related to credit card processing. For example, software-as-a-service (SaaS) companies that offer point-of-sale systems may wish to grow their capabilities to allow their clients to process payments through them. But today, more companies are deciding to become payment facilitators that initially offered something very different than payments–wine inventory management software, for example.
Payment facilitators act like merchant aggregators. All of a payment facilitator’s clients, known as sub-merchants, operate through the payment facilitator’s MID. This relationship provides sub-merchants with a responsible party for every aspect of credit card transactions; from processing payments to delivery of funds, and even handling refunds and chargebacks.
The payment facilitator is also responsible for providing their sub-merchants with the support, service, and reporting needed to manage their respective businesses. Because of the central role the payment facilitator plays, potential payment facilitators must take time to build the right legal, financial, and operational infrastructure.
The merchant is any company who accepts credit card payments for goods and services. A merchant could accept in-person payment in a physical location (known as card-present) or electronic payments online (card-not-present). Merchants become sub-merchants when they enroll in a payment service provider, which allows for them to have their payments processed by a third party. When enrolled in payment facilitation program, merchants process their payments in-house.
When sub-merchants become payment facilitators by bringing their payments in-house, the sub-merchant often uses other services provided by the payment facilitator, such as point-of-sale systems or software. The payment facilitator provides the sub-merchant with streamlined service, transparent reporting, and a simple customer experience. This efficiency also creates more straight-forward pricing for all involved parties.
A payments model made for the future of digital commerce
For growing businesses, bringing departments in-house signals success. Business owners understand the clear benefit of bringing engineering, marketing, and design in-house. Why not payments?
Consumers, now more than ever expect seamless payment experiences -- rapid release of funds, same-day disbursements, immediate access, and a myriad of other customer-centric payment benefits. Companies who hope to compete in the future world of digital commerce will need an internal, fully integrated payments experience that meets those needs. So, should you become a payment facilitator? For businesses who desire to innovate and rapidly iterate in the payments space, the choice is clear.
Payment facilitation is the full value add payments solution. This model gives companies complete control of their payments customer experience, thereby improving customer loyalty. Not only can software companies who become payment facilitators improve customer satisfaction, but they can add value to existing services and create additional revenue streams.
Get in touch with Finix to learn more about becoming a payment facilitator.
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