Payment Facilitator, ISO & MoR Flashcards
Payment Aggregator - Process
- They don’t give you a specific Merchant ID (MID)
- They are simply issuing you a separate account to use theirs
- You become what is called a sub merchant
- In a way, they are giving you a license to process payments through their merchant account, not going directly to the bank yourself
- You will never have access directly with the bank
Payment Aggregator - Benefits
- Simple to set up
- Instant solution
- Minimal documentation required
- No background checks
- No formal approval process
- They don’t know what your business is selling
Payment Aggregator - Risk Strategy
- Providers can spread the risk across many different users of their platform to offset losses like chargeback or fraud
- Fraud happens since there is little to no underwriting process
Payment Aggregator - Account Freeze
These service providers all have their own risk algorithm
They can hold or freeze your funds if volume changes or chargebacks occur. Anything that they think is suspicious
True Merchant Account
- You get a merchant IS number that is exclusive to your business and nobody else
- There is a vetting and formal approval process
“The Acquirer actually gets to know you a little bit”
ISO vs Payfac
While an ISO resells merchants to an acquiring bank, the PayFac is an intermediary who sits between the merchant and acquiring bank
Payfac Functions
- Direct relationship with the merchant
- Responsible for onboarding
- Compliance
- Liable for those merchants transactions and activity
Payfac Model
The PayFac acquires customers - the PayFac is the ‘master merchant’ and its customers are the PayFac’s sub merchants
Funds Flow Payfac
- As the master merchant, the PayFac receives funds from the Acquiring Bank during the settlement process.
- The PayFac then redistributes funds to its sub-merchants, and handles any future refunds or chargebacks
Benefits of Using a PafFac
- Cool hardware
- Fast setup (because of sub merchant status)
- Simple pricing
- Fraud management provided by Payfac
- Often additional SaaS services
Drawbacks of using a Payfac
- Being a submerchant (the name of the payfac will appear on bank statements)
- Blend pricing can be more expensive
- Funds settlement delay
Payfacs have significantly simplified the delivery of merchant services to its sub merchants in two ways:
- Utilizing sub-merchant aggregationto streamline the credit application, underwriting, and onboarding process.
- Re-uniting merchant services under asingle point of contactfor the merchant.
Independent Sales Organization (ISO)
- Not a card scheme member (principal or affiliate)
- Has developed partnerships with card scheme acquiring members to provide merchant accounts
- Acquiring bank will typically be responsible for merchant underwriting, although some ISOs may take on some of the process
Payment Facilitator
- Not a card scheme member (principal or affiliate)
- It provides their customers with the infrastructure necessary to accept card payments and receive the funds from those payments
- Payfacs underwrite and onboard their “sub-merchants” directly and may be liable for associated merchant risk and provide a link between the merchant’s environment and one or more acquirers
Acquirer Onboarding
“This step is about ascertaining whether the merchant’s potential commercial value is worth the risk, and therefore the cost”
- Acquirer has to perform Customer Due Diligence (CDD), Know Your Customer (KYC), and Enhanced Due Diligence (EDD)
- Which may involve asking a merchant for official documentation and further information about their business (e.g. location, company structure, tax information, industry, annual sales volume)
- Typically, when an ISO onboards a merchant, they may have a lighter underwriting process, but this will depend on where the liability rests
MCC
The MCC is used to classify a business by the types of goods or services they provide
- Large merchants may have their own specific MCC (3005 for British Airways)
- A merchant might have multiple MCCs, for example when a merchant operates a restaurant as well as a night club
- Giving a merchant the wrong MCC is a breach of card scheme rules
Merchant ID (MID)
“When onboarded by acquirers or ISOs, the merchant will also be given a customer identifier”
- This is, in effect, their customer number and is a unique code linked with the merchant’s bank account
- The MID identifies a merchant to their acquirer
ISO Responsibilities
“Acts as a one-stop shop for the merchant”
- Sales & Marketing - Acquirers benefit from this arrangement, as they are essentially gaining an extra sales force
- Contracting & Risk Assessment (typically lighter than what would be performed directly by an acquirer). In Europe, the acquirer will onboard the merchant. In the US, this may be outsourced to the ISO. Since the merchant has a MID, the acquirer will process and settle the transaction in the usual way to the merchant account (Europe) or the ISO account (US)
- In the US, ISOs may onboard merchants directly and may operate an aggregator model similar to a payment facilitator
- ISOs often offer value-added services such as a CRM to become a one-stop-shop
- ISOs support their merchants with chargebacks and exception processing
“This construct can be considered a sales and servicing outsourcing arrangement in Europe, and a form of merchant aggregation in the US”
PayFac Model 2
“Merchant uses a Payfac for payment processing and the Payfac is responsible for payments and associated liabilities, such as collecting sales tax, processing refunds and chargebacks, and ensuring compliance with standards and regulations”
- The Payfac buys the goods/services from the merchant and sells them to the cardholder, who will see the Payfac’s name on their card statement. Essentially, the Payfac acts as a reseller of the goods or services, and the merchant’s only client is the Payfac. In this construct, the Payfac is called a Merchant of Record (MOR). For example, PayPal is a MOR for many of its customers
Merchant of Record
- Another form of merchant aggregation
- When you pay for an Uber, you will see “Uber” on your card statement, whereas the actual merchant is the driver
What is a merchant of record responsible for?
- Transaction processing
- Regulatory compliance
- Sales tax management
- Fraud management
- Customer data management
- Reporting and reconciliation
PayFac vs. MoR
“An MoR takes on more comprehensive responsibilities and liabilities in the transaction process compared to a payfac”
- Marketplaces don’t have to be MORs, in which case they are platforms: eBay started as a platform (with buyers and sellers transacting directly), and then evolved into a MOR marketplace
Is Stripe a Merchant of Record?
When businesses use Stripe to process payments for regular direct transactions, the business itself remains the MoR while Stripe acts as a payment processor or payment gateway
- This means that the business is responsible for transactional compliance, tax obligations, and managing refunds and chargebacks—while Stripe handles the technical aspects of transaction processing
Stripe Connect - Direct Charges
Buyers transact with sellers, often unaware of the platform’s existence. The platform may take fees from the transaction. Example: A buyer makes a purchase from a store that is built on Shopify’s platform
- Individual businesses will be the merchant of record
Important Points
- The charge is stored on the connected account (the sellers Stripe account)
- The connected account is responsible for paying Stripe processing fees, handling disputes and refunds
- Removes the onboarding burden from the platform, as sellers manage their own accounts
- Customers transact directly with the seller
Stripe Connect - Destination Charges
Buyers transact with the platform, which transfers funds to the seller after collecting its platform fees. Example: A buyer books a ride using the Lyft app. Part of each charge is transferred to the Lyft driver
- The platform will be the merchant of record
Important Points
- The charge is created on the platform’s Stripe account, which acts as the intermediary between buyers and sellers
- Customers transact with the platform for products/ services provided by the seller
- The platform has more control over the the payment flow but also more involvement in managing funds
Summary: Stripe Direct vs. Destination Charges
Direct charges simplify transactions between buyers and sellers, while destination charges allow the platform to have more control and involvement in the payment flow, at the cost of more responsibility
Merchants can be recruited in 3 ways:
- Directly by an acquirer
- Direct contract with acquirer
- Merchant has a proper merchant account
Example: Adyen
- By an ISO
- ISO might have relationships with multiple Acquirers
- Merchant will have a contract with the ISO but still with the Acquirer as well
- Merchant has a proper merchant account
Example: ReaCard
- By a PSP/ Payfac
- Merchant will have a contract with the PSP only and will be known as a submerchant
Merchant Recruited By An ISO
- Merchant will almost only interact with the ISO throughout their lifecycle
- Merchant still has a contract with the acquirer
