Platform Payments 101

Your service connects buyers and sellers, and you want to learn more about payments. WePay's Platform Payments 101 is written to help you discover the realities of facilitating payments on your platform.

Chapter 1 Payment Facilitation

Our main character in the pages to follow is a platform with multiple users looking to let those users accept payments. This hypothetical platform may not have been active for a very long period of time – it may have fewer than a hundred users or so. Nevertheless, this platform has grand ambitions, and is exploring infrastructure options that would allow its users to individually process thousands of dollars, and collectively process tens of millions of dollars.

Flow of funds

When considering how to give its users the power to accept payments, the platform needs to start with one question: at any point should we take ownership of our users’ funds? The answer to this question is critical. It locks the platform into one of two potential options.

The first (choosing to take control of user funds) is called aggregation. All funds processed on behalf of the platform’s users are collected into one central account under the responsibility of the platform.

The second option involves processing funds directly to the end user. At no point are these funds in an account managed by the platform.

If a platform chooses to aggregate the funds of their customers, they may be defined alternately as a payment facilitator, a payment service provider, a master merchant, or a third party payment aggregator. These terms are pretty interchangeable.

Subsequently, a payment facilitator may be subject to the different regulatory, compliance, and operational challenges that are detailed in following chapters. If the platform decides not to take control of customer funds at any point, they will probably require a payment facilitator to perform this task for them.

The Payments Ecosystem

The online payments ecosystem is composed of the following actors. These terms aren't necessarily industry-standard - other services may describe things differently.

Buyer – The cardholder. This individual gives permission to their (issuing) bank to send money to the merchant/seller’s acquiring bank by purchasing a good or service with a credit card.

Merchant/Seller – The intended recipient of the cardholder’s money. In the following chapters, they are also an active user of a platform, and accept their payment from the cardholder through that platform.

Platform – A web business that connects customers (buyers) and users (sellers).

Payment Facilitator – An entity that takes legal responsibility for funds in the process of directing them from buyers to sellers.

Payment Gateway – A secure channel that moves data between payment facilitators and higher-level financial institutions like banks or card networks. They provide APIs for a payment facilitator to interact with.

Acquirer – A bank that underwrites the payment facilitator. The acquirer may store funds kept within that payment facilitator’s accounts. It also (similar to a payment gateway) connects the payment facilitator to higher-level financial institutions with APIs.

Card Association – A private network that facilitates transactions and settlement between issuing and acquiring banks of the parties involved in a transaction. There are four major card associations in the US: Visa, MasterCard, AmEx and Discover.

Platform Payments 101 is most concerned with the difference between an ordinary platform or marketplace and one which chooses to become a payment facilitator (chooses to take control of customer funds). Platforms should be armed with the information they need in order to treat this choice as an educated decision.

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