The Payment Facilitator

February 23, 2017

The Payment Facilitator

Behind the Payment Facilitator

There is no one-way to process card payments. We always have a fundamental model of card processing: a terminal, a merchant account, and the party’s own bank account. Let’s define these terms.

Terminal Any electronic interface designed to receive card data to pass fraud checking.
Merchant Account An account facility that moves money between two accounts.
Bank Account A business or personal account that one uses to withdraw and deposit money.

A terminal might come in the form of a virtual terminal for merchants to take telephone payments. It might also come in the form of an e-commerce payment gateway or a handheld card machine.  The terminal is ever evolving. The way it interacts with other devices and software (such as Contactless, MasterPass and iDeal) creates a competitive demand on terminal providers.

The merchant account really has only two forms, the merchant account, and the sub-merchant account. But what’s the difference?

Merchant ID and Sub-Merchant IDs

Getting a merchant account can be difficult for start-up businesses new to accepting card payments. Platforms such as Shopify are well suited for online start-up retail organisations and applying for a merchant account for every business may be difficult. Instead, they may use a payment facilitator (aka PF or PayFac) such as Stripe. The payment facilitator has their own merchant ID and can board new merchants under it with a sub-merchant ID, with less security and KYC checks.

Pros and cons

There are clear benefits to having the freedom of signing up merchants at your own discretion:

  • Quick gateway setup;
  • Small businesses can start processing payments faster;
  • PCI Compliance handled by PF;
  • Typically simpler pricing structure.

Still, convenience is never without cons and some conditions given to merchants can be considered cons:

  • Higher pricing;
  • Sub-merchant accounts can be closed, or frozen at PayFac’s discretion;
  • The PayFac is subject to financial and reputational risks from the business it provides payment processing for.

The Logic behind the Payment Facilitator

Essentially, an ISO can be considered the harbinger of a payment facilitator. An ISO is an Independent Sales Organisations that resells merchant accounts in agreement with an acquiring bank.

As card payments became more popular, smaller merchants were becoming difficult to provide for: because of turnover and risk [1]. Namely, underwriting processes didn’t represent a good return of investment. As a result of this, payment facilitators emerged because of market demand for readily available card payment methods.

The Payment Facilitator’s Perspective

Becoming a payment facilitator is not an easy feat, nor without its charges. Registration through the card schemes to become a principle member is $5000, and the same again as an annual fee from Visa and MasterCard. Moreover, there will also be costs associated with transaction fees as well as any setup fees the acquirers may levy, which are different between the acquirers you could set up with.  In fact, the acquirer will expect the applying business to have a strong business case and financial projections.

In terms of risk, the acquirer will have their own risk appetite, which your sub-merchants must adhere to. However, you will have your own terms and conditions in place that govern acceptable business practices. It is recommended you have a full and detailed conversation with the acquirer. Finally, Visa expects merchants doing in excess of $100,000 to have a direct agreement with the acquirer. Similarly, MasterCard has criteria of dealing with the acquirer directly, although this value is $1,000,000.

Cardstream and Payment Facilitators

Cardstream are experts on card payments and all the entities, jargon and leaders in FinTech. Indeed, our knowledge and experience lead to the development of the only independent white label payment gateway. Payment facilitators and Cardstream go together like grandparents and proverbs.

If you are a payment facilitator, then you also need an online terminal to take card details for you to process the funds. Cardstream have developed their payment gateway specifically to accommodate one-to-many relationships. I mean that you resell the Cardstream gateway to your merchants and keep transaction revenue for your business while offering fraud prevention tools and modules designed for you. Contact us for a terminal for your payment facilitator project. I’ve left some links below for further reading.