For banks, deciding to sponsor payment facilitators is a balance of risks and rewards. It allows them to target types of merchants—particularly smaller merchants—that they may not otherwise have supported, expanding and broadening their merchant base. It also provides additional revenue from their transaction fees.
But enabling access to the payments system is not a function to be taken lightly. Banks looking to get into merchant acquiring by sponsoring payment facilitators must make certain they are set up to manage the risks and responsibilities involved.
So, what should new sponsor banks consider? First, the bank must determine the type of payment facilitator business models it plans to support, says Dan Spalinger, senior consultant for Infinicept.
“At a management or board level, the sponsor bank needs to make the decision about its risk / reward appetite,” Spalinger said.
While some banks will choose to sponsor payment facilitators in high-risk industries, such as CBD products, most will stick to lower-risk verticals – those that involve the instant delivery of goods and services and little to no reputational concerns.
“It comes down to a business decision within the bank as to how much risk they want to take on,” he said. For many, the level of merchant acquiring experience the bank already has with direct merchants or other models will influence that decision.
“If they have robust systems and deeply experienced underwriting and credit and risk teams, then maybe they can afford to play in higher risk areas if they choose to,” Spalinger said.
“But certainly, if they are just entering the space, and they don’t have a lengthy history in merchant acquiring, we would recommend gaining experience and slowly growing their portfolio. I wouldn’t ever recommend that a sponsoring bank get into acquiring for the explicit purpose of supporting high-risk payment facilitators or high-risk merchants.”
Regardless of the type of payment facilitator a bank chooses to sponsor, appropriately managing the risk requires in-house expertise.
An acquiring bank needs staff to serve in compliance, legal and customer management roles, all servicing their payment facilitators, while these functions can be shared with other areas of the bank, Spalinger said.
Staff in the underwriting and risk management roles, however, are key areas to have experience and expertise within the acquiring space. Banks that have previously operated as issuers and are just getting into merchant acquiring must be aware that the risk calculus in acquiring is substantially different.
“You don’t want to drop a commercial loan analyst into overseeing a payment facilitator portfolio,” Spalinger said. “The analysis is quite different.”
In addition to the right staff, a sponsor bank must also have a robust set of policies and procedures in place. These will provide structure for the limitations and controls it plans to place on the PFs it sponsors and what it will require from the PF in order to oversee it. For example, the bank will need to determine whether it will require daily reports or access to the PF’s systems.
“You’re giving the payment facilitator the rights to generate liability that you as the bank are going to be responsible for,” Spalinger said. “So, your policies and procedures have to guide how you are going to control that payment facilitator in its generation of risk.”
And while sponsoring PFs means turning many acquiring functions over to them, there are some roles that many acquiring banks choose to continue to provide themselves as well, such as screening merchants against government databases or providing merchant monitoring services.
Making appropriate business decisions and setting up the necessary risk management infrastructure ahead of time are crucial to effective payment facilitator sponsorship.
“Sponsoring PFs is a relationship between the bank the PF and the hundreds or thousands of downstream merchants underneath the PF,” Spalinger said.
“So if you don’t set that up correctly on day one, you are putting yourself at risk, whether it’s something as simple as elevated chargebacks and consumer dissatisfaction all the way up to transaction laundering and large fines from the card brands, which can be material even to a well-capitalized bank.”
Companies such as Infinicept can help potential sponsor banks set up the capabilities they need to mitigate risk and manage a payment facilitator portfolio successfully.