Why ISOs are eyeing the payment facilitator model
CHICAGO — It's hard to ignore the lure of being able to tell a potential merchant client that you can get them set up to accept digital payments in no time, will charge a flat fee and set them up in a marketplace to attract more customers.
For ISOs, it's even harder to watch someone else deliver those services in their place.
It's an increasingly common scenario in the wake of Esty, Uber, Square and Stripe all finding success in payments processing as facilitators or aggregators on behalf of numerous other businesses.
“If the Etsy marketplace did not exist, a consumer would have to check out at each artisan’s site, rather than going through the single channel for payments,” said Garima Shah, chief business development officer at Priority Payment Systems.
The payment facilitator model essentially came about because of those types of peer-to-peer payments — and the need for an aggregator to help sellers complete their purchases and potentially attract more buyers.
“It would be like if I have an antique, you can buy it from me, but the payment has to go through a payment facilitator, through a single channel, so it can be safe,” Shah told acquirers this week at the annual Midwest Acquirers Association conference.
Still, she added, merchants want to work through a payment facilitator mostly because they hear about the easy onboarding process and the fact they can be accepting card payments in 15 or 20 minutes.
A payment facilitator puts together contracts and handles transactions for a group of submerchants, thus allowing generally smaller merchants to bypass a direct merchant contract with an acquiring bank or an ISO.
In that regard, more ISOs are contemplating becoming payment facilitators. But it doesn’t happen without the ISO being prepared to take on extra tasks and risks, Shah said.
“You have to find a processing partner, and have a pricing strategy and underwriting processes in place,” she added.
As much as anything else, ISOs would have to be well versed in areas they have been warned about in the past — keeping up with technology changes and, most important, being able to provide the PCI compliance guidance and fraud protection.
An ISO not staying abreast with current cloud, omnichannel or integrated payments technology would not fare well being responsible for a group of submerchants operating through a single Merchant Identification Number.
A provider could become a payment facilitator on its own, or could work through another partner or sponsor, including banks that take on that responsibility, Shah said.
“You have to have the ability to do settlements for submerchants,” she said. “And you have to take on the risks of those submerchants.”
It is also important for a payment facilitator to be able provide tokenization technology for the card data, she added.
Those areas can work against ISOs or other providers not ready to take the leap into aggregating payments for large numbers of submerchants. Technology requirements, liability and the fact that there could be additional interchange costs through processors are the downsides of becoming a payment facilitator, Shah said.
“For the most part, pricing is pricing, so if you are thinking you would be paying less in interchange, the answer to that is no,” she said. “However, pay-facs do promote easy onboarding and a flat fee, or simplified pricing, for transactions.”
Ultimately, ISOs have been feeling the pressure brought on by Square, Stripe and others, making them keenly interested in what might be done to change their own models and steady or increase their revenue streams.
“Instant onboarding can’t be the only reason to want to turn to a pay-fac model,” Shah said. “Choosing the right partners, and establishing cost and revenue sharing, and setting merchant pricing are key factors.”