Payment Facilitators Acquiring Marketplace Businesses

In a surprising—if understated—announcement, Visa is now allowing Payment Facilitators to acquire Marketplaces. The Marketplace still has to be approved by Visa, of course. Let’s go deeper into some of the changes.

Marketplaces and Payment Facilitators: Understanding the Nuances

Visa’s Payment Facilitator and Risk Guide, published earlier this year, defines a Marketplace as “a third-party agent that brings together buyers and retailers via a single Marketplace-branded platform…”. Marketplaces exclusively process transactions in which the credit card is not present. In fact, they’re not permitted to operate in a card-present environment. In terms of how they differ from Payment Facilitators, the Marketplace has one merchant identification number (MID) while Sellers have their own terminal identification numbers. Payment facilitators have historically worked with merchants who have their own MIDs while Marketplaces have Sellers with their own TID under the Marketplace. In general, Payment Facilitators, before and now, will continue to acquire sub merchants and, for the most part, each merchant is established with its own MID.

Visa’s New Permissions

The big news is that Visa is now allowing Payment Facilitators to acquire Marketplaces directly. So, what do you need to know before exploring this option?

Requirements and Obligations Associated with Being a Marketplace

Any company that wants to register as a Marketplace needs to understand the operational risks involved, detailed below.

Regulatory Risks

Significant due diligence is still required on a company who wants to register as a Marketplace. They include OFAC, Politically Exposed Persons, Know Your Customer, and Transaction Laundering, to name a few. Let’s review those a bit below:

OFAC

OFAC, the Office of Foreign Assets Control of the US Department of Treasury, publishes economic and trade sanctions based on US foreign policy and national security goals. Essentially, any entity that the US government considers a threat to our national security, foreign policy, or economy is off-limits to work or trade with. You probably already know you can’t set up a Marketplace in Pyongyang or take on merchants in Havana. But OFAC also publishes lists of individuals and companies owned or controlled by targeted countries. And it’s not just sovereign nations you have to steer clear of. There’s also a list of counterterrorism and counter-narcotics traffickers you must avoid. These OFAC checks need to be verified at the time of onboarding, upon settlement of funds and “continuously” (as the lists are updated).

Politically Exposed Persons Check

A politically exposed person (PEP) is any individual with a high-profile political role. Typically, they present a higher risk for involvement in money laundering, terrorist financing, and other types of corruption and bribery because of the access they are granted and the prominence of their public function. PEPs may include domestic or foreign heads of state or otherwise senior government, military, or judicial officials, as well as senior executives of state-owned corporations. But you also need to consider family members and close associates of PEPs. While there are a few free directories online that list chiefs of state and other PEPs, for instance the CIA World Leaders List, which is updated weekly, most of the free lists don’t include local government officials, NGO PEPs, or family members and other vulnerable people. A solid and compliant Marketplace should be continuously aware of the PEP list so they can cross check it with their Sellers to avoid any conflicts of interest or risks.

Compliance Risks

Central banks and other related government agencies, such as banking regulators, are invested in the security of the entire banking system, which includes payments. Because the payments industry is relatively new and inherently sensitive to risk, there are a lot of laws that apply directly to our industry. Anti-Money Laundering (AML) and Know Your Customer (KYC) are two of the most important, detailed below.

Know Your Customer Check

The Know Your Customer check is a mandatory process of identifying and verifying your client’s identity when you begin to do business with them and again periodically over time. Marketplaces need to verify who their Sellers are, which can be time-consuming because often Sellers are individuals, not corporations. The Marketplace is then tasked with making sure they’re trustworthy from a financial standpoint. The Marketplace must have a policy specifically around risk, and this must be implemented continuously, not just at onboarding. Continuous implementation will help you remove questionable Sellers.

Transaction Laundering

Mastercard defines transaction laundering as “the action whereby a merchant processes payment card transactions on behalf of another merchant.” This is done to cover up or distract from suspicious transactions. When you take on the responsibilities of a Marketplace, you must watch out for this practice, also known as factoring. A Seller that might pass your KYC check may still be engaging in this form of money laundering, so detecting and preventing it is a significant part of protecting yourself as a Marketplace.

Operational Risks

There are several operational risks Payment Facilitators and Marketplaces have to think through: threats of financial loss, lawsuits, compliance and regulatory action, or even a blemished reputation can all occur if internal business processes, staff, or other systems in place are inadequate or fail for a reason that could have been foreseen. Every Payment Facilitator must ensure they have capable risk management personnel in place, as well as systems that actually work. If mistakes happen (which they inevitably do), a reporting system must be established. Having all three of these things in place before engaging in operations sets you up for protection and security. As the Payment Facilitator, you must monitor and review the Marketplace business on a regular schedule in order to detect operational risk exposure—Seller underwriting, and risk monitoring are two practices that are very important. You also must comply with the Visa Rules, the Visa Global Acquirer Risk Standards (GARS) and the Acquirer’s/ Sponsor Member own policies and Program Standards.

Third Party Agent Risks

Oversight of agents can help prevent financial loss, brand damage, regulatory intervention and even, in extreme situations, Visa revoking your license. Third party agents present a real risk, not only to Acquirers / Sponsoring Members, but to themselves and the payment system as a whole. If a third-party agent is not compliant with Visa Global Acquirer Risk Standards or they are engaged in questionable business, they can place an acquirer at risk.

Illegal Activity on the Seller’s Part

Of course, no one plans to partner with a Seller who is involved with illegal activity. Such individuals present a serious risk to acquirers, Payment Facilitators, the Marketplace, and the payment ecosystem. But often the risk can be difficult to detect, especially when dealing with experienced criminals, who can plan and execute schemes that cover up their corrupt ventures. Both Payment facilitators and Marketplaces have to take action when protecting the industry from the threats this illegal activity poses. Laws vary by jurisdiction, so certain goods and services—and the payment activity that goes along with them—may be legal in one place and illegal in another (for instance gambling and adult content). Payment Facilitators and Marketplaces cannot submit any payment into the Visa payment system that is illegal. While Visa uses the Global Brand Protection Program to detect illegal activity, it’s important for Payment Facilitators and Marketplaces to uphold the integrity of the payments industry through enforcing legal activity only on their Sellers’ parts. All transactions submitted to Visa must be legal in both the jurisdictions of the buyer (cardholder) and the Seller. Some illegal activity that happens commonly includes the unlawful sale of prescription drugs, online sale of tobacco products, and intellectual property violations.

In short, you will always be obligated to uphold the reputation of the Card Brands. One final comment before ending this review. Be sure and work with the compliance department of your Acquirer. They may have additional requirements for a Payment Facilitator acquiring a Marketplace business.

If you are looking to become a payment facilitator, talk to RPY Innovations.