Payment facilitation is a service provided by a payment facilitator business, which is essentially about facilitating other businesses so they can start accepting online payment right away.
Why is payment facilitation a necessity?
To really answer this question, we have to understand the process of how a business can start accepting online credit card payments.
Without a payment facilitator, a business must open a merchant bank account and apply for a merchant ID (MID) from an acquiring bank. This can involve a lengthy underwriting process, and not to mention, not all businesses that apply would be approved.
The actual process of setting up online payments without payment facilitation can be very complex, and the business must first prove its credibility while also establishing and maintaining relationships with an acquiring bank, payment gateway, and other parties that might be involved.
This is where payment facilitation comes in.
In a payment facilitation model, a payment facilitator has received its merchant ID, and can aggregate (share) its ability to receive payments to other businesses.
In this model, businesses that receive online payment with the help of the payment facilitator are treated as sub-merchants. These sub-merchants don’t need to undergo the underwriting process with an acquiring bank, only with the payment facilitator, which is typically much simpler and faster.
The Payment Facilitation Model
In a payment facilitation model, the payment facilitator onboards businesses as sub-merchants in essentially five steps:
- The sub-merchant choose a payment facilitator and signs up for an account
- To sign up for an account, the sub-merchant typically needs to provide key information about the business (business name, address, etc.)
- The payment facilitator will verify the information and check whether the sub-merchant is viable. The payment facilitator can do this manually or use an underwriting tool to check the sub-merchant’s data.
- The payment facilitator will either approve or decline the application in real-time
- If the sub-merchant fits the requirements, the payment facilitator onboards the business under its master merchant ID (MID)
What Are The Responsibilities of a Payment Facilitator
A payment facilitator performs several key responsibilities when onboarding the sub-merchants:
1. Underwriting
A very important function of a payment facilitator is to underwrite the sub-merchant. In a payment facilitation model, the payment facilitator assumes the liabilities of the sub-merchant, and they place all sales on the one merchant ID, so it’s essential to ensure the sub-merchant is a legitimate business and is not performing fraudulent activities.
The payment facilitator underwriting procedure involves several important practices:
- Know Your Client (KYC), ensuring the sub-merchant is what it claims to be
- Checking the sub-merchant against lists like MATCH (Mastercard’s Member Alert To Control High-Risk Merchants) and other lists of businesses with connections to fraud, crime, and terrorism.
- Checking the business’s financial capabilities to ensure they can fulfill their financial responsibilities in the future
As discussed, payment facilitators often take advantage of technology to streamline the underwriting process, for example by using an automatic underwriting tool to speed up the underwriting process so it can happen in real-time.
2. Funding
Not always, but many payment facilitators take on the responsibility of funding (paying out the money their sub-merchants are owed). In doing so, the payment facilitator will assume the liability for fraud and other risks but will offer better value for their customers and can potentially attract more clients by providing quicker access to funds.
3. Transaction Monitoring
The payment facilitator is responsible for monitoring the transactions of their sub-merchants to ensure all payments are legitimate and stay in compliance with affecting regulations. The payment facilitator must have a proper system in place to monitor the transactions of sub-merchants for suspicious activity.
4. Chargeback Management
Besides monitoring transactions, payment facilitators are also responsible for managing chargebacks. Chargebacks happen during payment disputes, so the customers receive their money back from their issuing banks.
The payment facilitator must manage the chargeback process along with the acquiring bank (or acquirer) like handling the required documents, and even investigating whether the transaction was legitimate.
5. Maintaining Compliance
The payment facilitator business must ensure the platform stays PCI (Payment Card Industry) compliant. This includes ensuring all sub-merchants’ transactions are also compliant.
Most of the requirements for payment facilitators are enforced by the card networks (i.e. Visa and MasterCard), as well as the acquiring banks, and under these regulations, a payment facilitator must:
- Thoroughly conduct due diligence on each sub-merchant
- Monitor all sub-merchant transaction activities to ensure compliance with the card networks’ standards
- Sign a merchant acceptance agreement on behalf of the acquiring bank
- Only use settlement funds to pay sub-merchants
Conclusion
While payment facilitation can be a lucrative business opportunity for SaaS companies, the process of becoming a payment facilitator can be quite lengthy and complex, including but not limited to:
- Finding an acquiring bank to establish a partnership. The payment facilitator must first get sponsored by the acquiring bank
- Integrate payment gateways/payment processors to provide technological capabilities for sub-merchants to accept online payments
- Obtain certification (level 1) from Payment Card Industry Data Security Standard (PCI DSS)
- If the payment facilitator also supports in-person transaction, must also obtain EMV (Europay, Mastercard, and Visa) certification
This is where payment facilitation services like RPY Innovations can help your business get approved as a payment facilitator with a much higher likelihood of approval.
Payment facilitation companies will help you start a successful payment facilitator business by assisting you in building a payment facilitation infrastructure, setting up required policies, as well as preparing your team for the day-to-day payment facilitation operations.
