Payment Facilitation Sub-Models and How to Classify Them

In the rapidly changing landscape of the payments ecosystem, staying abreast of the various payment acceptance models can be challenging. Despite being around for over a decade, the industry still needs clarity on the payment facilitation model. Part of the confusion is due to the differing sub-models that payment facilitators employ. To help clarify the differences between these models and develop a shared understanding across the payments industry, the Electronic Transactions Association has engaged knowledge leaders to shed some light on key differences between differing payment facilitation models.

“Industry professionals might believe that all payment facilitators are alike or that payment facilitators can be categorized into just two broad groups,” says CJ Schneller, SVP of Risk and Compliance at MerchantE.  “The reality is that the various payment facilitation models are spread across a spectrum with multiple nuances and overlap across the board. Sometimes, a payment facilitator may have capabilities similar to a full-scale payment processor, and others may operate more like an Independent Sales Organization.”

To make matters more confusing, many companies that refer to themselves as “payment facilitators” are not defined as such by the Card Brands, nor are they sponsored as such by an acquirer. Therefore, in this article, the term “provider” will be used generally, and “payment facilitator” will only be used to refer to entities that are registered as a payment facilitator with the card brands.

To better understand the different models, let’s start with a few broad categories and then dive into each more deeply. While many nuances exist among the various payment facilitation models, the three provider categories below set forth the primary models.

OVERVIEW OF VARIOUS MODELS
Traditional Payment Facilitator

• These providers are registered as payment facilitators with the card brands and have a direct agreement with the sponsor bank.
• Payment Facilitators contract directly with the sub-merchant for processing services and perform key payment activities in-house. For example, payment facilitators typically perform underwriting, boarding, and transaction monitoring. Card Brands also authorize payment facilitators to accept settlement funds on behalf of their sub-merchants, provided they hold the appropriate state and federal licensing and registration to do so.
• payment facilitators also hold the liability with respect to sub-merchant losses and liabilities (including sub-merchant chargebacks and assessments).

Hybrid Payment Facilitator

• These providers are registered as payment facilitators with the card brands. Still, they are distinguished from the traditional payment facilitators described above because they outsource many key payment activities rather than performing them in-house.
• Hybrid payment facilitators contract directly with the sub-merchant for processing services but outsource one or all of the critical payment activities such as boarding, underwriting, and transaction monitoring to a third-party provider.
• Note that hybrid payment facilitators are a concept recognized informally in the industry. Hybrid payment facilitators do not have a separate designation under the card brand rules. Hybrid payment facilitators are subject to all the rules and obligations outlined in the card brand rules that apply to traditional payment facilitators.
• They also hold the liability with respect to sub-merchant losses and liabilities (including sub-merchant chargebacks and assessments).

Payment Facilitator Lite (also referred to as Managed Payment Facilitator or Payment Facilitator as a Service)

• These providers are not registered with Card Brands or sponsored as payment facilitators.
• Instead, they operate as a referral partner of a payment facilitator (or a hybrid payment facilitator).
• From a merchant-facing perspective, these providers look similar to a payment facilitator, but they leverage the support of the registered payment facilitator (behind the scenes) with respect to the processing services.
• Because they do not contact with the acquirer, these providers will not hold the sub-merchant liability directly, however, their payment facilitator/hybrid payment facilitator partner may seek to pass all or some of the liability with respect to the provider’s sub-merchants down to the provider via contract.

In addition to these three variations of payment facilitation, there is also a recent trend of legacy ISOs looking to modernize and compete with these providers by providing certain offerings that were traditionally only offered by payment facilitators. These include features such as auto boarding and a frictionless underwriting experience. These providers may look and feel more akin to one of the provider models described above, but they remain registered as ISOs.

Given all of subtle nuances of the various variations, how do we begin to understand the different types of funding models? To start, we need first to ask the right questions. “When classifying a provider, it’s important to focus on the conduct of the provider as well as the facts and circumstances related to the provider’s relationship with its sponsor bank and the sub-merchants,” says Nicole Meisner, payments attorney and co-chair of the Electronic Payments group at Taft Stettinius & Hollister LLP. She suggests to ask the following questions when looking to classify a provider:  “Is the provider registered as a payment facilitator with the Card Brands? Do the sub-merchants contract directly with the provider for payment processing services? Does the provider hold the risk concerning the sub-merchants with respect to the acquirer? Does the provider perform all or just some payment-related activities such as risk monitoring, chargeback handling, onboarding, and underwriting?”

In identifying the applicable payment facilitator model, it is critical to determine how (and if) the provider is registered. Is the company registered as a payment facilitator, an ISO, or another category? This information is publicly available through the Mastercard Payment Facilitators list or  Visa Global Registry of Service Providers.  A provider’s registration status will indicate whether they are genuinely a Payment Facilitator.

Another essential step in classifying a provider is understanding its role in the transaction flow. The best place to start is with contractual obligations between the provider, their clients, and other parties in the payment ecosystem (i.e., payment processors, sponsoring financial institutions, gateways, and others). For example, suppose the provider is registered as a Payment Facilitator with the card brands and performs underwriting activities, terminal deployment, risk monitoring, customer service, and funding. In that case, they are operating as a traditional payment facilitator. However, if some or all of those activities are performed by a third party, such as the payment processor or a SaaS partner, the provider  will likely be referred to as a hybrid payment facilitator. How the provider operates is the distinguishing factor between the two.

With so many options available, prospective providers may need help determining the best fit for them. However, the decision may be easier than it seems. “The first step for a company looking to become a payment facilitator or other type of payment provider is to understand their current capabilities and the time and resource commitment required to fill any gaps,” says CJ Schneller. “Then the next step is deciding between building the missing capabilities in-house or partnering with another support company to close the gaps. And remember, these decisions do not have to be permanent, as many support companies offer flexibility for the provider to grow their internal capabilities over time and take on more responsibility as they scale.”

Finally, beyond operational considerations, companies must understand how the different business models can impact their regulatory obligations. “Certain laws and regulations that may impact payment facilitators are driven by the specific facts and circumstances of the provider’s conduct.” cautions Nicole Meisner.  This is particularly true when looking at a provider’s role in settling funds to sub-merchants, which could potentially implicate state or federal money transmission laws.  Meisner adds that “payment facilitators that control sub-merchant funding in-house and receive or accept settlement funds on behalf of their sub-merchants will likely find themselves faced with additional legal obligations when compared to providers that rely on the acquirer to conduct funding to the sub-merchants.”

Providers should consider how payment processing fits into their long-term strategic goals in determining the suitable model. If payment acceptance is essential to the company’s core service, it may make sense to invest to build those capabilities in-house.  Alternatively, partnering may be the right approach if payments are only tangential to the company’s core service offering. While confusing, one significant benefit of having multiple payment facilitation models available is the flexibility afforded to today’s technology companies looking to enter the payments ecosystem.