Mike Cottrell, senior vice president, Global Sales and Marketing, ProPay
If your company is exploring becoming a PF, it is important to understand the relevant drivers behind becoming a PF as well as the impact your decisions have on the operations of your business.
Registering as a PF is not a panacea for making payments easier, and in fact, can be a drain on the resources within your organization.
You already know you want something more than a traditional merchant processing referral relationship. Identifying what you are trying to accomplish with a PF model while analyzing the various options to meet those needs, rather than focusing on simply becoming a PF, is a valuable exercise.
The question then becomes whether you need to be a PF, or you are a PF wannabe. A PF wannabe is simply a software provider wanting access to all the tools and capabilities of a PF without all the overhead and responsibility. So how do you decide?
What are some of the reasons software providers want to become PFs?
- Frictionless boarding – use of a short-form merchant application, including embedded terms and conditions, with a consistent look and feel of the brand.
- Minimized fixed processing costs – elimination of fees such as FANF and other monthly fees charged by processors for traditional merchant account processing.
- Underwriting control – ability to board the users of my software without cumbersome underwriting processes from the acquiring bank.
- Funding flexibility – funding that allows me to maintain funds to manage risk as well as collect fees for service charges, convenience fees and other items prior to settlement.
- Branding and service control – the ability to become the brand and maintain control of all service-related items.
Let’s take a deeper look at the reality behind these reasons.
Numerous companies provide instant onboarding through APIs with click-to-agree terms embedded or linked to your services agreement. These can take place within your environment all without having to register as a PF, providing a consistent look and feel without requiring your organization to take on the infrastructure to support it.
Part of the gold rush for PFs was the elimination of fixed service fees by the card brands. Over the last several years, the card brands have somewhat equalized the fixed fees between a PF model and traditional acquiring. Meaning, there may be less financial advantage to becoming a PF than what has traditionally been in place. Understanding your costs from the card brands is as important as understanding the service provider costs. Becoming a PF does not simply negate fees.
A falsehood that continues to perpetuate in the market is that once a company becomes a PF, boarding and underwriting is at their complete discretion. This is just wrong and dangerous. A PF is responsible for not only transactional fraud, but all of the processes and procedures for underwriting. This includes regulatory compliance with the card brands and federal, state and local regulations as well as those of the sponsor bank.
As you explore becoming a PF, take the time to fully understand the impact of underwriting and risk on your business and your desire to own it all as opposed to relying on those for which this is part of their core business.
Years ago, an advantage of becoming a PF was that the provider could collect the receivables and ACH deposits due to their submerchants without depending on the acquiring bank. Now, many companies provide funding to submerchants that allows for collection of fees without the software provider needing to take possession of all the funds. Further, many states have money transmitter laws that would prohibit receiving of funds and sending on behalf of another party.
Don’t simply assume you need to have the funds because that’s how you’ve constructed your business model. Explore providers that can help you achieve your funding goals and implement solutions designed to be in compliance with the governing bodies.
While there are many reasons to register as a PF, there are two primary benefits of branding when registered as a PF. First, the consumer’s statement descriptor will show the PF name. For many, this is in fact a determining factor in favor of registration. The second is that the actual terms and conditions will reflect the name of the PF rather than their provider.
If the consumer does not need to recognize the PF brand and terms and conditions can be embedded in your service agreement, perhaps the remaining branding issue is service control. Search for offerings from providers that give you the tools and infrastructure to service your submerchants in a manner consistent with your brand.
Registering and maintaining compliance with the rules around operating as a PF can run tens of thousands of dollars just to get started – let alone the ongoing operational costs, including personnel, compliance management and routine audits.
If you are just starting the process of exploring a PF registration, consider what your business is and whether you really need to be registered as a PF. Can you accomplish your business goals by partnering? Are there card brand rules that require you to register? Are money transmitter issues a legitimate issue?
Take the time to analyze all your options to make an informed business decision as to registering as a PF, because in reality, you can likely achieve most of your goals in a “wannabe” environment.