ETA Expert Insights: The New Gold Mine: How to Get Started With Payment Facilitation

By Adi Ekshtain, Amaryllis
ETA Payment Facilitator Committee

The precious metal known as gold has attracted civilizations for thousands of years. It has provided wealth as well as inspired wars. In addition to its natural beauty, gold is perhaps the most useful of the world’s metals. It does not tarnish or oxidize, and it conducts electricity well. Gold is extremely malleable and, at the same time, unbreakable.

‌Throughout the years, gold has become a medium of exchange, which is of no surprise given its intrinsic value. What’s truly remarkable, however, is that different civilizations at different times discovered gold independently and valued it equally, thus allowing gold to become a global standard with worldwide acceptance.

In the 16th century, when the Spanish explorer Hernán Cortés conquered Mexico, he discovered an indigenous Aztec civilization that had little in common with his band of conquistadors. However, one thing they did share was the same concept of wealth: gold.

THE HISTORY OF DIGITAL PAYMENTS
Unlike gold, digital payments in general (and credit card payments in particular) have been in place for only a century.

‌The credit card as we know it can be used to purchase goods at multiple vendors and was first introduced by the Diners Club in 1950. In 1958, Bank of America initiated the BankAmericard plan and, in response, an alliance of several regional bank card associations founded the Interbank Card Association (ICA). The BankAmericard would become Visa in 1976, and the ICA would become Mastercard in 1979.

‌According to Visa’s operational performance data, in the third quarter of 2020 alone, Visa processed more than 49.6 billion transactions worldwide, totaling over $2.3 trillion. For the same time period, Mastercard’s operational performance data shows that Mastercard processed 29.8 billion transactions worldwide, totaling over $1.2 trillion.

‌One can travel the world today with a credit card in their pocket and transact almost anywhere, much like Cortés did with gold 500 years ago.

PAYMENT FACILITATION
If the above numbers of worldwide payment transactions are not staggering enough, get this: In the third quarter of 2020 alone, Visa’s earnings release shows net revenues of $4.8 billion, and Mastercard’s earnings release shows net revenues of $3.8 billion.

It’s not just the credit card networks. Various players are part of the payment processing value chain: issuing banks, acquiring banks, payment processors, and independent sales organizations (ISOs), to name a few.

‌A few years back, some entrepreneurs and forward-thinking payment professionals took notice of this payment processing gold mine and found a way to get a piece of the pie. They started the trend of software companies, online marketplaces and startups becoming what is known as payment facilitators.

‌These companies embed payments as an organic part of their offerings to their merchants. They also assume some of the risk associated with those payments, but they get to earn a portion of the payment processing fees in return.

‌How much can they earn? Take Shopify, for example — one of the industry-leading trendsetters and a provider of an ecommerce platform that helps more than 1 million businesses worldwide sell online. In 2020, according to its financial results, Shopify’s total revenue was nearly $3 billion, out of which $2 billion came not from subscription services but from merchant solutions. That is to say that 66% of Shopify’s revenue is derived from its merchant solutions, which include payment processing fees.

CONSTRUCTING A PAYMENT FACILITATION GOLD MINE
Becoming a payment facilitator, like operating a gold mine, is a complex process. Both require significant time, financial resources, and in-house knowledge and expertise. A payment facilitator must plan and construct the appropriate technical infrastructure, put in place business processes, and obtain permits and licenses before they are allowed to process payments on behalf of their merchants — much like gold-mine development.

Here are three steps to launch as a payment facilitator:

1. Determine the payment facilitation model that is most suitable for your business.
There are a few payment monetization models to choose from, including a referral model, a managed payment facilitation model, and a full payment facilitation model. When considering the best model for your business, take into account the expected volume of payments, the industry in which you are operating, the degree to which you want to maximize profitability, and whether you are willing to assume the risk associated with underwriting merchants. It is also advisable to consult an attorney who understands the nuances of these different models.

2. Set up the sponsoring and payment processing relationships to support that model.
A payment facilitator must obtain the permit of a sponsoring bank to accept payments on behalf of its merchants. A payment facilitator must also register with Visa and Mastercard payment facilitation programs. Both charge annual fees and impose regulatory obligations and ongoing compliance with their policies and procedures, as well as compliance with the PCI Security Standards.

3. Implement new business processes in accordance with the rules and regulations of your banking partners.
A payment facilitator must implement business processes to support the following frameworks: merchant underwriting, payment acceptance, billing, payouts, reporting, reconciliation, dispute management, and risk management. To do so requires an investment in modern technology, recruitment of employees to fulfill the new roles, training of existing employees, and assigning those employees with new responsibilities.

BECOME A PAYMENT FACILITATOR
Although gold has a long history as a standard of value in our monetary system and is the most useful metal in the world, there are risks associated with gold mining. There are also risks to becoming a payment facilitator. A payment facilitator gets to generate a new revenue stream and increase their business valuation. In return, they assume the risk associated with their merchants and the goods and services that they sell.

Exploration and discovery of gold deposits takes years, and excavating the ore is a lot of hard work. It is done underground, in the dark, with limited fresh air and various other health risks. Enabling payments is highly profitable, has a lower capex and, most importantly, is done in the sunlight above ground.