Payment Facilitator or marketplace: Which one should you be?
In recent years, a number of newer business models (often in e-commerce) have found themselves having difficulty fitting into the traditional classifications of the payment networks and card schemes. The focus of today's article will be Payment Facilitators (PayFacs) and marketplaces.
A brief history lesson
Credit cards (in the form we are familiar with today) were introduced in the 1950s. For the longest time, setting your business around these credit cards meant you needed to fit squarely within one of few narrow categories:
Issuing bank (you issue cards with your brand name or sometimes for a 3rd party)
Acquiring bank (you offer merchants accounts to receive card payments)
Merchant (you sell things to customers)
Around the late 1990's right around the dot-com bubble, online businesses were growing faster than the traditional banking system could keep up with. Legacy merchant underwriting processes kept smaller startup companies from accessing the credit card system, leaving them to rely on cash transactions and bank transfers. Rushing in to fill this void were companies who offered you software with "payment capabilities" built-in. They were known as independent sales organizations (ISOs). These software solutions worked but it soon became apparent that while the ISO faced their clients, they had very little control over how the banks onboarded them.
Rolling into the early 2000s a new type of solution emerged, those ISOs from the 1990s would just register themselves for a merchant account and begin processing payments on behalf of other "sub-merchants". It was around ten years later where Visa and Mastercard caught on, introducing their first official PayFac programs to better regulate these new arrangements.
While similar in many ways, PayFacs and marketplaces are treated differently across card schemes. For example, Visa has very recently designed a specific program for marketplaces making it easier for pure marketplaces (especially the new app-based startups) to get set up. Mastercard on the other hand doesn't have a special marketplace program yet, and largely treats marketplaces as regular merchants, only in some cases requiring the business to register as a PayFac.
Is there really a difference? Can't I be both?
In most instances, the short answer is "no" although its entirely possible to have different registrations for separate arms of your business. The reason for this is that each type of registration comes with its own set of rules to follow and significantly different responsibilities towards end-users (i.e. cardholders).
An analogy we use to easily explain PayFacs would be to think of a food court (the PayFac) in a shopping mall, with a centralized cashier system where multiple stalls (sub-merchants) are visible to the customer and they only see the cashier counter (the checkout technology offered by the PayFac) when they're about to pay on their way out. The customer interacts with the stalls directly when ordering a bowl of noodles, picking up the tray with food on it, or complaining that it was too spicy. In the PayFac situation this is exactly the same, the sub-merchant handles their own customer service, inventory management, order processing, and dispute resolution while leaving nothing more than fund collection and disbursement to the PayFac.
This is in contrast to a marketplace is more analogous to a department store. Customers see the store brand as the merchant they are shopping with from browsing to checkout, with the individual suppliers (who supply the goods on display) being relatively invisible in the whole process. In the event of a problem with the product or service rendered, a customer would naturally look to the department store for help or a refund, rather than the person who put the goods on display.
Okay so which one should I pick?
Well, that would depend entirely on what your business goals are:
If it is to be known as "the place to shop", then being a marketplace is right for you. You take on the intricacies of inventory management, logistics, marketing, customer service, and dispute resolution in exchange for building your own brand name in the e-commerce space. Your primary market would be smaller e-commerce players who are more concerned with reselling goods, than with building a brand name for themselves.
If it is to become a "known player in the payments business", then a PayFac setup would be much more suitable. In exchange for letting your clients build their own brand names in the e-commerce space, your business would take a back-seat and function similar to an acquiring bank, but serving a niche of your choice who would otherwise be left out of the payments space.
Still not sure how to proceed?
Dicorm can help you figure out how to best structure the payments side of your business and set up your internal processes to match. With better risk management and card scheme compliance, you can spend your time where it matters - building your business. Contact us today for a no-obligation chat about your payment setup.