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Payments were once considered a relatively easy environment with some basic choices that focused on the framework of a financial system tied to banks and other financial institutions.
The payments offered a platform with bank accounts as the source for payments made with cash or checks. Banks also offered some electronic transactions, including wire transfers. Then, along came credit card companies and added another payment platform. Seeking to compete and offer other payment options on its platform, banks added debit cards.
However, what has really changed the payments platform system has been the Internet -- transforming how consumers and businesses buy products and services as well as how they pay for them.
The new online platform further expanded when the majority of consumers decided they liked using mobile devices for shopping and making purchases, adding the need to develop mobile payment platforms or online payments platforms that could work in both channels.
New online companies have also formed to provide different types of services, including the types of services demanded in the shared economy companies like Uber, and for use in the marketplaces of the freelance world, such as work provided by companies like, UpWork.
Other models have emerged, including crowdfunding, which has also required a payments platform to fuel its strategic goals. Additionally, more merchants have migrated to the online environment, seeking solutions that will facilitate payments and enhance the online shopping experience for users.
This online environment has also enabled freelancers, startups, and small business owners to reach out to a wider audience and generate considerably more revenue for themselves.
These online environments are much smaller than the large financial institutions and they have been the ones who have also sought affordable, easy to implement, and secure payment platforms so they can receive payment from this expansive and growing customer base.
Along with these increasingly popular business opportunities and the development of payment platforms to assist in their growth, it has also become necessary to offer the payment methods across all platforms (including mobile) for all these businesses, merchants, and payment companies.
New challenges have emerged due to what has become a complex, risky, and highly regulated environment. Increased fraud and numerous data breaches have further complicated the online and mobile payments environment.
What this means is that having a payment platform that can facilitate payments while address the risk issues is not easy -- especially when the sheer numbers of users and their expectations continue to increase
This guide to payments platform: is intended to provide insights into how to facilitate payments while expanding your knowledge about the various types of logistical, regulatory, compliance competitive and fraud challenges that continue to complicate the payments industry.
The payments platform guide: is also intended to help you understand how your business, merchant service, or payments service can address the challenges you are presented with and how to make better decisions about how you will address the payments environment you are currently in and also the environment of your customers -- and where to get the help you need.
Payment facilitation (commonly referred to as payfac) involves two key areas:
The design of both determines just how easy or difficult payments will be for a business, merchant, or payment service provider.
This chapter explains: both of these areas and how the design influences payment facilitation.
There are two ways that funds can flow during the process of payment acceptance. Which one you use is based on what point in the payment process where you take ownership over the users’ funds and that determines what type of payment platform you will use.
The first option: for taking control over the users’ funds is aggregation. With this process, all funds are collected into a central account that is controlled by the platform. In this type of arrangement, the payments platform can also be referred to as a payment service provider, third-party payment aggregator, or payment facilitator. In this situation, the platform may be subject to other types of regulatory, operational, and compliance issues that are discussed later on in this guide.
The second option: does not have any of the funds going to an account that the payment platform manages. Instead, the funds that are processed go directly to the end user. Since this involves never controlling the users’ funds at any point, this arrangement most likely requires that the payment platform have a payment facilitator do the task for them.
To better understand how payments work and to help determine which of the aforementioned options to adopt, it’s important to understand the various components of the payments ecosystem.
Here are some important terms and components of the payments ecosystem:
With so many components involved in the payments ecosystem, it’s easy to see why payments become so complex. However, this is just the first layer of complexity because regulations, compliance, and other issues add to the difficulty of payment platforms.
Regulatory issues are really nothing new in the payments industry, but what has changed is the number of regulations surrounding transactions. Starting in 1976 with The Electronic Fund Transfer Act, the regulatory environment has only increased in an attempt to monitor electronic payments.
The amount of regulatory pressure varies by the type of transaction and the risk that is associated with it. For example, payment facilitators experience more regulations because they are in the middle of the transaction and have one set of regulations when charging customers while another regulation for disbursing those funds to merchants.
The regulatory requirements for payment facilitators become even larger when the transactions involve overseas merchants. Because of the complexity of the regulatory framework, many payment facilitators have to hire specialized talent that understands all the regulations and can assist with regulatory compliance.
This guide: in no way can cover every type of regulatory issue that now exists for payment platforms.
Here are some of the main types of regulations that a payment platform must comply with:
Since its initial entrance into the regulatory framework, the BSA has been amended several times, including being folded into the USA PATRIOT Act of 2001, which states that companies must provide information on any potential financial transactions that could involve terrorist financing.
This requires developing Customer Identification Programs (CIP) that can also help to identify and prevent other criminal activity, including financial fraud, identity theft, and money laundering.
Payment facilitators must issue a Form 1099-K to each merchant that processes more than $20,000 and 200 payments in a calendar year. The form must include the merchant’s legal name, address, tax identification number and total transactions for the year.
If the form is filed incorrectly, is incomplete, or is late, the result could be huge fines.
And, this is a list of just the major regulatory issues. There’s even more, depending on what aspects your payments platform is involved in within the financial transactions industry. Next up is compliance.
Almost larger than the regulatory environment is the compliance framework established by credit card associations, namely Visa, Mastercard, American Express and Discover. The list of compliance areas only continues to grow each year, leaving payment facilitators like payments platforms with significant challenges.
Here are some of the main issues faced by these payment facilitators:
The biggest concern that payment platforms and those they serve -- such as businesses, merchants, and other payments companies -- is the risk for fraud, as well as the numerous large-scale data breaches that have hit all types of companies.
Most of the existing fraud prevention measures are made for the card-present environment, while online card transactions have been tougher to stay on top of. The ever present criminal loves to dream up various types of fraud and data breaches.
Primarily related to fraud is the increase in chargebacks. This has become a real sticky issue for companies that sell products and services online and in physical locations.
Chargebacks can occur when a cardholder disputes a charge with the bank that issued their credit card and then that bank reverses the payment to the merchant and refunds the cardholder
While this is intended to protect the cardholder from any card theft and illegal charges by someone other than the authorized cardholder, many criminals and dishonest individuals use this caveat as a means of fraudulently getting their hands on goods and services without having to pay for them.
At first intended to help the average card holder avoid fraud on their care, this practice can become a costly proposition for a payments platform as well as the merchant involved with each chargeback -- especially if the payment facilitator -- like the payments platform has signed an agreement that makes them responsible for these chargebacks.
There are four categories of risk related to fraud that have been identified that are important for you to understand as a payments platform, business, or merchant:
This type of fraud and the rising costs of chargebacks have led to numerous strategies that are intent on minimizing chargeback risk. Detecting merchant identification fraud can be a very complex issue. That’s because there is such a large amount of data involved to collect and analyze in a rapid way in order to prevent the fraud before it goes too far and leads to those chargebacks.
Even if it is possible to give each identity a given probability of validity or fraud, there are issues that arise, like false positives in which a valid merchant has been identified as fraudulent, or a false negative where a legitimately fraudulent merchant has been allowed to process transactions.
Making mistakes here with identity can lead to writing off a tremendous number of transactions as losses. Criminals often work together to test a payment platform’s weaknesses in order to go after multiple accounts, get what they want, and leave the payment facilitator with huge losses.
The main problem here is that even if the safeguards against chargeback fraud work effectively to slow down the criminals, they also slow down the transaction and funding processes. This tends to put a damper on the user experience plus leads to much lower cash flow for everyone involved.
What becomes even more difficult is the ability to identify merchants, fradulent or otherwise. Without doing credit checks, verifying bank account balances, auditing financials, and reviewing processing history, it’s still very difficult to assess the credit risk of various merchants who want to work with your payments platform. Some of the ways to address this complexity have been setting a process and withdrawal limit until trust is established This process requires that merchants post some kind of collateral, or a holding of a percentage of the merchant’s payments.
It’s important to remember that it is simply impossible to get rid of all risk and fraud completely in an environment that involves money. However, a payments platform can establish specific policies and procedures on how they will recover funds from merchants or pursue legal action.
As part of the process, payment platforms must also implement processes that determine how they will manage and resolve any disputes that arise between buyers and sellers that, in effect, could preempt chargebacks.
There are additional complexities related to the technical aspects involved in processing payments. This is especially true if a payment facilitator wants to process payments directly to their end merchants and will not be able to get by solely on what a payment gateway offers them.
Payment gateways reduce: the number of technical aspects involved in the process, but there are still specific technical components to address to make sure that the merchant can be uniquely identified and onboarded into the payment process.
The technical aspects that handle how the payment platform sends their instructions to the bank -- in terms of where the merchant’s money is located and how this will be transferred -- also needs to be addressed.
Additionally, technical components must achieve specific accounting and reconciliation requirements, especially when money is coming into the payment platform from numerous financial institutions that involve various settlement processes.
Even with today’s technology, standardizing this process has become one of the biggest challenges for payment platforms, including when global payments and varied financial institutions get involved.
There are different fees and regulations: that must be tracked and recorded to ensure they are withdrawn correctly. Even simple credit card transactions involve three sets of API interactions, including authorization, capture and settlement.
All the other aforementioned requirements plus connectivity problems, data integrity, and the need to meet specific timing and compliance factors while also ensuring low risk and your payments platform has become highly complex.
This guide on payments platforms: includes how these platforms work and the challenges faced by performing in this complex environment. The guide explains about the involvement of a global audience along with high risks encountered dealing with fraud and data breaches. Further explanations are given about the complicated compliance and varied regulations that are involved with a payments platform. And last, but not least, are the very complex and urgent demands of the customers with increasingly high expectations.
However, having a payments platform that provides solutions for merchants and businesses doesn’t have to be an insurmountable or overwhelmingly challenging feat if you work with a partner that understands all the issues presented in this guide.
When working with someone possessing the expertise, technology, and experience to deliver a scalable, robust, secure and compliant payments framework, it will help you be able to expand your own ability to process payments of all types – from in-store and online payments to global and mobile payments.