A payment facilitator’s relationship with its sponsor bank is a critical one. When the bank’s own operations are going smoothly, transactions flow freely and the PF is free to concentrate on growing its business and serving its customers.
But any disruption at the bank has the potential to impact the PF’s business as well.
While most payment facilitator / sponsor relationships operate without incident, there remains the potential for interruption. If regulators determine that the bank is handling aspects of its business improperly, that could lead to changes in its relationships with payment facilitators. In extreme cases, the bank may be required to exit its payment facilitator business completely, meaning that the PF would have to seek out a new banking partner.
Beyond regulatory intervention, internal bank changes have the potential to disrupt payment facilitator relationships as well.
New board members or management could change direction about how a bank handles its payment facilitator business – or whether it stays in the payment facilitator business at all. A bank could also decide to change its policies based on activity it is seeing within its broader portfolio, limiting activity within certain geographies or certain verticals, for example.
The most important thing a payment facilitator can do to choose a sponsor bank and to navigate the relationship with confidence is to develop as complete a picture as it can of the bank’s operations and any changes the bank might be undergoing.
What can PFs do?
Before entering a relationship with a sponsor bank, the PF should understand that bank’s appetite for risk, according to Deana Rich, co-CEO and co-founder of Infinicept.
“If the bank is willing to take on higher-risk accounts, there is more likelihood that it could face regulatory scrutiny or changes in policy resulting from a changing of the guard within the bank’s management,” she said.
When a prospective payment facilitator applies to a sponsor bank, that bank will perform due diligence to understand the soundness of the PF’s business and what sort of risk it is taking on. According to Rich, the same is true in reverse.
“When choosing a sponsor bank, a payment facilitator should do its own analysis to be sure it understands how the bank partner’s business and risk appetite align with its own,” she said.
When talking with a potential bank sponsor, Rich advises that PFs be prepared to gather information they can use in their own decision-making process:
- Check its rating. Ratings of an individual bank’s safety and soundness can easily be found online. Banks with low ratings that indicate performance issues are more likely to invite regulatory scrutiny and possible disruption down the road.
- Find out how long the bank has been registered with the card networks as a sponsor. According to Rich, newer acquiring banks could be less likely to have their processes and procedures fully fleshed out. This could lead to issues with other companies within their acquiring portfolio. Newer acquirers may also be getting into the acquiring business because they’re willing to take risks that current acquirers have chosen not to take.
- Ask about the other businesses in the bank’s acquiring portfolio. While a bank may not tell you actual names of the companies it partners with, Rich said, it is appropriate for the bank to share information in aggregate, such as the number of payment facilitators, ISOs and direct merchants in its portfolio. Also, go beyond the types of arrangements to ask the bank for further details such as its chargeback and fraud loss ratios.
You can also ask for the merchant category code (MCC) concentration within the bank’s portfolio, she said. Look for the concentration of businesses that are within high-risk or ambiguous, “not elsewhere classified” categories. A high number of ambiguous categories in particular could indicate that bank either has little information about the companies in its portfolio or is purposely obfuscating the types of businesses it serves.
- Make sure the bank’s policies and procedures and depth of knowledge indicate values that align with yours. A bank’s high standards will apply not just to you, but to all the companies within its portfolio, meaning that you are less likely to be affected by inappropriate activities of other companies the bank works with.
Finally, Rich advises that payment facilitators maintain their due diligence beyond choosing a partner. Again, a bank sponsor will continue to keep tabs on the payment facilitators that are already within its portfolio, requesting annual financial data, conducting an annual site visit, and generally being aware of any news about their activities, she said.
Similarly, it is appropriate for a PF to ask its bank about any negative coverage it might see in the news, and to use the bank’s annual visit to talk about anything that might have changed within the bank’s management and its acquiring portfolio.
Payment facilitators can seek expertise from companies such as Infinicept to help them select and work with sponsor banks they can trust and that align with their business.