PF Confusion May Yet Endanger This Embryonic Market

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Confusion regarding the term payment facilitator poses a great risk to the PF community. It is only a matter of time before a registered PF goes belly up due to a lack of understanding of the risk associated with taking liability for sub merchants and meeting the rules of the card brands. When a PF does go belly up, there is a real risk of stifling innovation due to increased regulations.

SAAS providers, community heads and point-of-sale providers all need payments and view a PF license as the panacea to their challenges in processing payments. Investments are at stake and an expectation of get to market reigns supreme. Yet many providers, in their quest to get to market fast, don’t have sufficient information to make an informed decision as to what it means to be a registered PF. The notion of simply signing a merchant agreement and paying $5,000 to register seems all too easy. The liability, regulatory requirements, audits, PCI and flexibility take a back seat in the go-to-market strategy.

Before becoming a registered PF, it is important to explore the immediate business needs and have a discussion as to whether becoming a payment facilitator is the right choice. Explore what is needed to get to market fast, with an understanding of how and when to pull the trigger on registering. Often, the right choice is using the platform of an existing PF to enable the business needs.  Not in any particular order, the common needs amongst the parties seem to be the following:

  • Frictionless online, real-time application and boarding of sub-merchant accounts using a short-form merchant application
  • The ability to board sub merchants based upon preset underwriting criteria (board who they want and when they want)
  • A simple streamlined integration process and ability to process the major payment types
  • Revenues from payment processing
  • Ownership and control of the sub merchant relationship
  • Branding of the payment process

Each of these needs can be accomplished by partnering with a service provider without registering or taking on the responsibilities of a payment facilitator. ProPay, WePay, Digitzs, Stripe, Adyen, and most of the major players provide integrators with all of the above, with each of offering different models from which to choose.

Straight forward sub merchant application processing that allows sub merchants to begin processing in real time, or near real time is available off the shelf from many providers. Depending on the models, the provider can integrate terms and conditions into their environment or operate a white label experience. Finally, by choosing a company that already provides application processing there is often no need to integrate separate KYC, OFAC and other regulatory checks of the sub merchants. By partnering the provider achieves their goal of real time boarding, without having to undertake the liability or effort required for managing the required background checks.

Underwriting is perhaps one of the trickiest tasks to implement as a payment facilitator. There is a false notion that as a registered payment facilitator the company is allowed to board any and all sub merchants since they are the merchant of record. Sadly, this is not the case.

When registering as a payment facilitator, it is necessary to establish pre-set underwriting criteria with the sponsor bank that all parties agree to and are comfortable with. This includes ticket sizes, merchant dollar volumes, category codes of the merchants and a process for handling exceptions and processes as the sub merchants grow their business.

There are also periodic audits as to adherence to the plans presented. As a payment facilitator, the company can take on this role, but it is a fallacy that there is a blank check from the sponsor. With this in mind, most partners are willing to work with the software provider to establish parameters around which underwriting results in near 100 percent approval rates and they can often be more flexible as new programs are launched or industries explored.

A common complaint I hear is that “such and such processor held my merchant’s funds and we could not help, and ultimately lost the customer.” The rationale is that by becoming a payment facilitator, a company can control all risk decisions and that the sub merchants would never be in a situation where they could not help them. They own the relationship.

Often, a payment facilitator does indeed have full control of merchant funding and risk decisions (within predefined parameters established with the bank). However, partnering with a provider that views the sub merchant as a mutual customer where customer service, information exchange and support is a joint function, can accomplish the same goal as becoming a payment facilitator. It is important to understand the account management, tier1 and tier2 support structure with the service provider, ensuring that the sub merchant is never left wondering why funds were held.

Finally, the desire to be branded as a payment facilitator emerges as one of those that kind of makes me shake my head. What does it really mean to be branded as a payment facilitator? If I am a software provider, my sub merchants are familiar with my organization and I can place all sorts of processing information at their fingertips. The actual merchant account is a means to an end.

For the vast majority of those exploring registration as a payment facilitator, there is not a lot of benefit from a branding perspective, as the consumer making the purchase is familiar with the sub merchant. Not the software company.

Consider a downloadable restaurant iPAD POS system. Does the consumer need to see on their merchant statement JPO*Al’s Beef and Steak? Or is Al’s Beef and Steak sufficient? I would argue the latter and that the consumer doesn’t even care. Al probably doesn’t even care, so long as it’s easy to deploy and he is serviced well. However, if a payment facilitator is the name customers know, such as Uber, RunFast or Placefull, then, of course, registration and branding makes sense.

How do you determine whether registering as a payment facilitator is right? I always suggest focusing on the appetite for regulatory risk and compliance, and whether the company could sustain losses should a sub merchant go under and result in lost chargebacks.

Question whether branding is truly an issue and if there is an infrastructure in place to truly “own” the merchant relationship and the back office functions of payment processing.  If payment processing is a small subset of the total offering, focus on the core and leverage the capabilities of the payment experts. There are plenty of providers out there willing to provide software providers and platforms the capabilities of a payment facilitator without the liability, extra costs or operational needs.  Don’t be afraid to keep looking until you find a partner that can fill your needs and where short, prioritize according to your business plan and market needs.

Mike Cottrell is the director of sales and marketing at ProPay.

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