Comments: Protecting the Card Acceptance Ecosystem

ETA’s Payment Facilitator Guidelines offer a framework for best practices

By Amy Zirkle

The payments industry has witnessed significant changes as a result of technology. Across all segments of the ecosystem, technology has served to create efficiencies, further innovation, foster development of new products and services, and expand market opportunities. For the merchant acquirer community, the changes taking place in the sales channel are significant and demonstrate the role that technology can play to drive innovation.

Evolution of the Sales Channel

The evolution of the sales channel brought about by technology is significant and has given rise to a host of new entrants into the payments arena. The traditional ISO model is no longer the exclusive means for the enablement of commerce. Utilizing technology to add value by way of additional products and services has been part of the sales channel transformation. ISOs have given way to the presence of value-added resellers (VARs), integrated software vendors (ISVs), and payment facilitators.

In part, the changes occurring in the sales channel are a byproduct of the changes taking place in payments and commerce more broadly. The growth of online payments has led to further advancements in the merchant services industry. Online, and the expansion of digital, commerce has facilitated growth and enabled small and medium-sized merchants to expand their presence in this market.

With ISVs offering a range of software-based products and services to merchants across a wide range of verticals, the natural evolution is for an entity operating as an ISV to add payments acceptance as part of the services offered and transition to becoming a payment facilitator. By doing so, an ISV can provide merchants with a wide array of service offerings, as well as offer accompanying accounting and billing systems management.

Significant Market Potential

The potential for the payment facilitator market is significant. According to research conducted by Double Diamond Group, the growth of the ISV/payment facilitator market is expected to outpace the growth of the overall acquiring industry in terms of industry revenue generated. Further estimates by Double Diamond reveal that, by 2021, these companies will be processing more than $700 billion in gross payment volumes annually.

Moreover, the potential for existing ISVs to transition to payment facilitators is significant as well. According to Double Diamond, estimates indicate that there are more than 23,000 companies supporting software as a service product—with more than half of those currently operating in the payment space. Thus, there is a natural progression to seize the market opportunity through expansion as a payment facilitator.

ETA Guidelines Foster Growth

While the market potential for payment facilitator growth is significant, the potential to ensure long-term success is contingent on the establishment of compliance guidelines and rules that minimize risk across the payments ecosystem.

Recognizing the significant opportunities for the growth of this market—and the vital role played by the sales channel—ETA developed its Payment Facilitator Guidelines. These guidelines serve as a framework for aspiring payment facilitators to properly incorporate risk and compliance practices into their businesses to reduce risks that could emerge as these entities transition deeper into the payments arena.

By establishing accepted industry principles and best practices, ETA offers members vital business tools that provide clarity, offer guidance, and establish recommended approaches to ensure compliance and risk management. The association undertook this effort with respect to the broader areas of merchant and ISO underwriting and risk monitoring in ETA’s Guidelines on Merchant and ISO Underwriting and Risk Monitoring, which was released in January 2016.

In that same vein, ETA’s Payment Facilitator Guidelines were developed in collaboration with member companies that have a keen interest or presence in the payment facilitator space. Across the payments ecosystem, there is interest in this segment from acquirers, financial institutions, processors, ISVs, ISOs, and VARs. Moreover, ETA worked hard to gain input and insight from those member channels—as well as from the card networks—to provide a thorough and comprehensive document that offers relevant guidance from each network’s perspective.

In short, the guidelines offer effective tools for protecting consumers, submerchants, and, as a result, the broader card acceptance ecosystem. Through their use, ETA members help foster an environment that can support and sustain further growth of the payment facilitator market.

Areas of Focus

As a stand-alone document, Payment Facilitator Guidelines covers so many relevant matters related to risk management, underwriting, and compliance that it provides the necessary tools needed by payment facilitators to effectively succeed in developing a robust underwriting and risk management program. While the guidelines do not address all possible risk mitigation practices to be considered, they do represent a significant step toward established benchmarks that can enable the development of reasonable risk management practices.

The following list reviews some of the notable points raised in the Payment Facilitator Guidelines:

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The guidelines offer details that align with the flow of the risk life cycle for payment facilitators to manage the transaction and risk life cycle for submerchants. Beginning with the necessary steps to ensure adequate underwriting for submerchants’ accounts—along with recommended activities, such as noting that submerchants have acceptable credit or bank card processing histories—accompanied by an understanding of how submerchants are selling or distributing their products and services, the guidelines will aid to support underwriting objectives.
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The guidelines suggest standards that should be adhered to as part of underwriting efforts. Included are matters such as defining reasonable time frames for underwriting based on an assessment of submerchant type and risk evaluation. Additionally, periodic reporting of exceptions to policy should be considered. There may also be a need to define submerchants that pose greater risk for payment facilitators and, as such, should be approached with additional care and may warrant specialized expertise or steps to further monitor activity and control risk.
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Because payment facilitators often support submerchants in the e-commerce world, the guidelines provide extensive details with respect to internet submerchants and the card-not-present space and necessary steps for underwriting due diligence.
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Apart from the necessary elements of underwriting, payment facilitators would greatly benefit in developing a program to ensure comprehensive submerchant risk management. The guidelines suggest useful standards tools and strategies to support establishment of an effective and successful submerchants risk monitoring management program. Recommendations are 
proposed to suggest reasonable time frames, when adverse actions may be needed, and how best to determine circumstances where escalated approval may be called for. Further, the guidelines offer suggestions for tools and strategies to be incorporated for daily exception monitoring, as well as propose guidance for submerchant account changes.

Given the significance of chargebacks, the guidelines provide significant instruction concerning chargeback reporting thresholds and overall management reporting. In addition, the guidelines focus on effective tools and strategies to guide review and action related to chargeback exceptions.

This list is by no means exhaustive of the topics covered in the guidelines, but it does highlight a few of the focus areas and shows how the guidelines support an effective risk program for payment facilitators.

What the Future Holds

The ETA Payment Facilitator Guidelines present new entrants into the payments ecosystem with the key components necessary to incorporate risk management and compliance practices. As the sales channel continues to transform—and ISVs, payment facilitators, and new startups enter the payments space—this document provides the essential elements to further continued market growth, while reducing risk in the system. The guidelines are intended to be a living document, and, as such, ETA will revise them regularly to ensure that they reflect, consider, and address the latest changes within the card acceptance ecosystem that might impact payment facilitators.

Amy Zirkle is Vice President, Industry Affairs for ETA. Reach her at [email protected].