With the increasing digitalization of all aspects of our lives, some interesting business models have emerged in payment processing, which aim to enable merchants reach more customers. In this article, I will explore some of these new approaches to payment processing – payment facilitators and marketplaces.
After a brief introduction into the basics of these models, the emphasis will be on what they practically mean for businesses (merchants), as well as their customers, and why they are so important in the increasingly digitalized today’s world. I will discuss some important differences between payment facilitators and marketplaces, considering some use cases when appropriate.
Merchant onboarding as a challenge
Merchant onboarding is the process of taking on a new merchant as a client of a payment processing provider, enabling the merchant to accept credit cards or account information as means of payment, thus giving them the access to electronic commerce. The benefits of e-commerce for the merchants go without saying, but it is this entry process that often poses the biggest obstacle on that path.
Merchant onboarding is a sort of a screening and certification process of the merchant by the payment service providers. Merchants usually apply for payment services through third-party providers of these services (so-called independent sales organizations). Either way, merchant onboarding is meant to provide the payment processor with enough information so they can make the decision whether to start servicing the merchant or not. Every new merchant brings on a risk, which comes from various factors. These can be:
- the number of customers asking for refunds (for whatever reason) or
- unauthorized charges of customers, which can lead to chargebacks, etc.
The onboarding process weighs this risk against the potential new revenue. This is why information that the merchant can be asked for is extensive. It can contain detailed information about the company itself, about its customers and know-your-customer policies, account information, and more.
Now imagine you are a small-time merchant, trying to make use of the great World Wide Web to get your goods or services to a wider audience. This process does not only sound intimidating, but it is time consuming and, if you are a really a small merchant without a lot of credentials, there is a chance you will get rejected even if you have always done business in good faith.
Making merchant entry process less painful
Introducing these two payment processing models can help merchants take control over their entry processes:
I Payment facilitators as a solution
Enter payment facilitators. Payment facilitators are companies “standing in” for merchants in this whole process. Instead of signing up for services directly with the payment processor and getting their own credentials to use in communication with them, merchants do business with the payment facilitator. This makes them so-called sub-merchants. A payment facilitator will represent their sub-merchants in front of all involved parties in the online payments processing. This means merchants do not have to worry about the cumbersome onboarding process and similar bureaucracy.
On the other hand, payment facilitators take on a lot of risk by enabling merchants to plug into the online payments systems quickly. They have to handle above-mentioned risky situations a merchant can get into. Of course, disputes will be forwarded to the merchants in the end. Nevertheless, this requires some resources by the payment facilitator. Ultimately, benefits outweigh the risks for payment facilitators. Apart from the obvious revenue increase, payment facilitators can also offer other integrated services to the merchants using their sub-merchant platform and improving their sales even more.
II Marketplaces – a not so similar variation
Marketplaces are a very similar model to payment facilitators, though there is one stark difference. When purchasing something on the marketplace, customers do business with the marketplace itself, not with the sub-merchant who is providing goods on it. During one purchase on a marketplace, customer can buy products of many sub-merchants, whereas when paying through a payment facilitator, the customer buys only from one merchant. In fact, in most cases, the customer will not even be aware of the existence of the payment facilitator. Since customers are buying goods from the marketplace (usually on their own website or in their application), marketplaces not only sell goods, but also promote the products, sometimes do branding as well, etc.
When it comes to payment or goods’ disputes, they are addressed to the marketplace. Marketplace may then resolve problems with its third-party suppliers, but as far as the customer is concerned, they will raise issues with the marketplace. If payment facilitators “stand in” for their merchants in the payment processing, marketplaces are “standing in” even more. Not only because of the liability for disputes, but also because they usually offer their merchants with much more than just access to online payments services. They can help merchants ship goods by offering some logistics solutions or they can help them keep a stock of their products, etc. Since they are the ones vouching for their sub-merchant’s products, marketplaces take on even more risk (for example, in case a merchant does not operate to the standards or in case there are issues in the supply chain), but Amazon and AliExpress are the prime examples of how successful this model can be.
Required technical changes
The technical changes these models require are smaller than the legal and organizational challenges, given integrations with payment processors are fully set-up and operational. One of the changes required, which my team worked on, is that some additional information need to be passed on to the payment processor.
Because the merchants are not getting their own identification and are using the payment network credentials of the payment facilitator, the transaction data will contain the name and other information of the payment facilitator.
That means that the cardholder, who made the purchase, will see the name of the payment facilitator on their credit card or account statement. This can lead to unnecessary chargebacks or confusion, because they will see a company they have probably never heard of and with which they have never done any business. Because of this EMV mandated passing of the sub-merchant information to the processors, this can be shown with other transaction data and easily recognizable by the cardholder. Payment processors modified their integration APIs to collect the name, identification, address information of the sub-merchant, and pass it on to acquirers and issuers.
Apart from these changes, which were required by the payment networks, payment facilitators and marketplaces are a great use cases for automated merchant boarding. Since payment facilitators try to simplify this process for the merchants, they need to make use of automated processes to make it as fast as possible. In general, this might consist of an API or a portal through which merchants upload their documents, and a server which processes and validates them. This implies some constraints (for example, the format of these documents), but merchants would have to go through the onboarding process anyway and I think it is a win-win to go through some extra steps to have it all done quicker in the end.
The payment facilitator model can be found in some surprising real-world use cases. For example, Uber is a payment facilitator. Of course, it facilitates much more than just the payment, because it puts together drivers and passengers and it is a big brand, as well. However, when it comes to payments, it enables the payment of their sub-merchants’ (drivers’) services with a commission. While this might be an interesting example, I think the biggest impact of these models can be seen with small merchants. For example:
Your local beekeeper can sell honey online using a payment facilitator or a marketplace. They obviously need to integrate their online shop with the payment facilitator, but payment facilitators usually give a lot of support with this (some even offer complete solutions), knowing that these small merchants are their important customers.
In my opinion, bringing e-commerce to more people is not only about increasing merchants’ sales by reaching more customers or about increasing revenue of companies offering payment processing services, but simply a logical evolutionary step in a highly digitalized world. These two models are examples of solutions for some specific problems, which aim to optimize this whole process. As a developer, I am a big fan of optimization. Even though there are not many technical challenges, which arise from these business requirements and which would probably be more interesting to talk about from a developer’s perspective, it is still very interesting to be part of that constant evolution of e-commerce.