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The A to Z of the payment aggregator models

By considering how these models function, businesses can decide which model best suits their needs

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Image: Asian Entrepreneur

As the fin-tech payment sector rapidly evolves, many companies within this structure are struggling to identify the procedure that suits their businesses the most.

Start-ups and service providers are finding it difficult to understand various card brand types for merchants (e.g. a marketplace, payment facilitator and staged digital wallet), and likewise the banks and processors struggle to understand how to classify, onboard and support different sorts of platform and aggregator consumers.

This article portrays the primary differences between the categories and the major challenges for those business models. Eventually, the companies will require to consider the goal, purpose, and resources of the business carefully, to identify the platform that serves the business the best.

Merchant of Record Model

The Merchant of Record (MOR) is the company that offers products or services to the cardholder.

A MOR is defined as:

  • A seller of goods or services to the cardholders.
  • A company that uses own name to identify itself to the cardholders.
  • A business that offers an alternative to the cardholders in case of a dispute.

There are some other factors to identify a company as a MOR. Under payment-related laws, the MOR model has few issues, including a low risk of money transmission if structured properly. There are also some other legal and operational challenges:

  • The MOR is responsible for various aspects of transactions, as a seller. These aspects involve the return and refund policies, liability for disputed products, and poor services.
  • MOR is also responsible for the activities done by the sellers or service providers, which comprises false product descriptions or any damage or injury.
  • The MOR is liable for maintaining relationships with the sellers and service providers, including issues between labor and employer.

The Payment Facilitator Model

Under the card brand rules, a payment facilitator is permitted to submit the transactions of a recognized group of third-party sub-merchants. From a wider view, a payment facilitator is not the MOR, rather the sub-merchants are the MOR for their own transactions.

Payment Facilitators are liable for on-boarding sub-merchants and monitoring whether or not their activities are compliant with the card brand rules and other applicable laws. A Payment Facilitator Solution is very similar to the traditional payment processor, unlike the other aggregator models.

While this model has the power to monitor the compliance of the sub-merchants, the sales transactions of the sub-merchants are not set by it. Additionally, it is not responsible for refunds, returns, and the delivery of the goods and services.

Key challenges that payment facilitator may come across:

  • Underwriting sub-merchants, and an obligation to its processor for sub-merchant chargebacks and any other loss.
  • Processing the settlements and solving money transmission compliance issues.

Marketplace Model

The marketplace is a newly emerged concept, defined by Visa, which provides an electronic commerce website or app to bring the consumers and sellers in the same platform. Also, it manages payments in aid of the retailers on a marketplace.

A marketplace is very similar to the payment facilitator, under Visa rules. However, a marketplace requires the receiving and distributing of settlement funds to the retailers on its platform, whereas the payment facilitator is flexible enough to have their processors settle directly to sub-merchants. There are also certain customer service and dispute resolution liabilities that are imposed on the marketplace by Visa. Your MarketPlace Payment Partner should help navigate complexities.

The challenges that a marketplace can face are:

  • Resolving issues related to money transmission compliance.
  • Offering the money-back guarantee to the cardholders funded by the marketplace itself.

Staged-Digital Wallet Operator Model

A company that stands upon the Staged-Digital Wallet (SDWO) model offers digital wallet service. The services offered include a transaction facility that can be made via credit/debit card to the SDWO, and processed through the account of its merchant. Also, it offers a separate transaction from the SDWO to the merchant, which may not include the use of the card.

While SDWO provides funds transfers and stored value services, there is a chance of having licensing and compliance problem in this type of aggregator. SDWO allows cardholders to make funding for the wallets in advance, for future transactions. The most significant thing is that SDWO is the only model, which provides consumer-to-consumer transactions by using debit or credit cards.

The risk factors of SDWO include:

  • Under federal and state laws, SDWO may run at high risk of being a money transmitter, which may need a compliant anti-money laundering program to get rid of.
  • As it is a consumer-facing model, it requires to set the terms and conditions of the services.

By considering how these models function, businesses can decide which model best suits their needs.

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