There was a time when it wasn’t that simple to become an approved credit card merchant. A merchant had to partner with a bank, which allowed them apply for inclusion in each card company’s program. The application and underwriting process was extremely complex, time-consuming, and expensive.
In the early 2000s software companies started to notice what a pain it was for some of their clients (merchants) to process payments. They began to work with banks to create and structure ISO referral programs. This allowed them to connect their clients to organizations that could help them process payments more efficiently. It also provided some supplementary revenue for facilitating sales for the payments partners.
However, software companies quickly realized how limited the ISO programs could be for certain merchants. While it helped to streamline the payments process for merchants, it limited their control over the experience they could provide their customers. Additionally, with so many different vendors involved in their referral process, their costs were also climbing.
Software companies began to explore how they themselves 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 payment facilitation program was not born overnight. It is the result of a process refined throughout the mid-2000s. The official programs were designed and launched by Mastercard and Visa in 2010 and 2011, respectively.
Payment facilitation created an opportunity for software companies to monetize a new service that compliments their existing offering, as well as increase their level of service to their clients (the merchants) by making it nearly effortless to accept payments from cardholders.
Functionally speaking, 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 signs up sub-merchants under the their umbrella. The payment facilitator processes their sub-merchants’ transactions, provides support and service, and generates insightful reporting.
Easier said than done, however. The process to become a payment facilitator can be very complex, time consuming and expensive if not taken with a strategic approach. Before you start the process of becoming a payment facilitator, it’s helpful to understand who the major players in this ecosystem are, what role they play, and how everyone interacts with one another.
The payment facilitator is the central player in this process. Most 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 provide point-of-sale systems may wish to grow their capabilities to allows their clients to process payments through them.
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 creates a great service for sub-merchants because the payment facilitator handles every aspect of the credit card transaction, from processing the payment to delivering the funds to 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, it’s critical that prospective payment facilitators take time to build the right legal, financial, and operational infrastructure.
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. As a prospective payment facilitator, it’s up to you to have the operations, standards, and best practices in place to meet the acquirer’s standards.
If they decide that you’re not up to the task, they can reject a partnership with you and your dreams of becoming a payment facilitator can be put on hold. It’s essential that you take a customized approach to evaluate the right partners, tools and set-up for your business as a payment facilitator.
The merchant is the company who actually 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 facilitation program through a payment facilitator.
In most instances, the sub-merchant will use 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.
Payment facilitation could be a great way for you to add value to your existing services and products. It could increase your value as an organization by creating additional revenue streams and improve customer loyalty as your service to them increases.
However, payment facilitation can be complex, especially when it comes to meeting an acquirer’s standards and providing excellent service to your sub-merchants. Before you move forward, evaluate what the best payments strategy is for your organization. Every company is unique and the way they structure themselves as a payment facilitator should not be considered lightly. Do your due diligence and invest in the infrastructure you need to fill the payment facilitator role in your market.
Stay tuned for more payments strategy guidance
Payments may not be your core business, but it may present a strategic opportunity for you to better serve your customers. Is it the right decision for you?
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