Across the Board

Blog on e-business and online payments.

Third Party Processing

Today we’ll have a look at a certain method of processing payments.

The one that got big rapidly in the last few years.

It may seem enigmatic to you at first, especially if you never worked with it and only heard about it somewhere. The process looks quite simple when you get a hang of it though, as you will see.

The method gains more and more attention, and rightly so, although there are a few traits that you need to be aware of before you decide whether or not to use this option.

Third Party Business – What Is It?

The question occurs very often.

Especially in situations where people who have never had much to do with online payments start to plan out a particular business model. The kind in which a platform is supposed to be an agent for sending money.

It can be, for instance, an application enabling finding jobs and getting paid. On the one hand, freelancers and other professionals may offer their services through it, and, on the other hand, it lets people and companies (in need of a specific service) find their business partners.

A good example to illustrate this would be a mobile application helping anyone in need to hire a tutor. A place like this makes it possible for tutors to find their customers. They just have to put their information in the database and set the alerts to get notified about new job offers from their field (that equals registration and, in some cases, getting verified before successfully taking on the first job.)

A prospect client, searching for help with learning English, physics, programming and so on – you name it, browses the contents of the site. The tutors tag their areas of expertise, as to make the searching process fast and easy for everyone.

Some platforms enable browsing their catalogues without registration, just to give the users a grasp of the possibilities and, what’s probably most important, the rates for the desired service. After finding a contractor, they’ll have to create an account either way, to be able to contact the person of their choice.

What it all comes down to in the end? The registered clients have to pay for the tutoring service. They send the payment through the application and, in exchange, they get their service.

The question that arises here is: how does the payment work? Does the customer have to pay the application owner, who then passes the money on to the contractor?

I won’t keep you in the dark about it: if the money was sent to a third party, it almost certainly would create some legal problems.

And so, the question that follows: how to process the customer’s money to be on the safe side?

Read on, we’re getting there!

All the Cool Kids Do It Nowadays

Some big names of today’s commerce world use this business model: that’s how Uber works, that’s how Airbnb operates, that’s the way in which many portals for freelancers choose to handle the transactions between clients and various specialists for hire.

If they all do it, it has to mean something, right? What it probably means is that this method is faster and easier to use, with less resources necessary.

“Too good to be true. What’s the catch in all this?” – you’ll probably wonder. And you’ll be right to do so, because there are parts of this bargain that need a dose of consideration.

Theoretically, there’s nothing wrong with this kind of business model. In practice – at first it may present itself as a challenge. To implement and sustain it successfully you need to know a few things.

There are three main causes of complications to pinpoint here:

  1. 3rd party processing is not authorized by Visa’s and MasterCard’s regulations. In light of their rules, the acquirer or PSP should have a direct connection with the party that’s processing money and the party that’s getting payment. In this case, if the money went through the middlemen (the platform), and only after that to the person offering the service, there would be no such relation present.
  2. In light of card institutions’ regulations – merchants should sell only things that are their property. In cases where merchants sell things that are not in their possession, or products/services they have no influence over (e.g. when there’s a service that’s being performed by a freelancer figuring in the platform’s database, and not by a platform ’s employee), there’s no way they could take any responsibility for the thing being sold, and, precisely because of that, their activity would be unauthorized by Visa, MC and so on.
  3. This method of processing money is very often against the law, unless the platform is being regulated nationally . And being regulated would, in fact, equal with having a payment institution status. In many countries third party payment processing (a situation in which we receive money on someone else’s behalf and then pass it on to that person or company) has to come in pair with having a payment institution license (requires being a regulated financial entity.)

Don’t Worry, We Got This!

Of course, the model itself is possible to operate perfectly well, but all of the three issues mentioned above have to be taken care of. There are situations in which a seemingly harmless process can open a possibility of illegal activities, and this is a breach that cannot be overlooked. You can say it truly works the way it should only when you are able to avoid money laundering and other financial crimes risks.

The best solution to put an end to those problems would be to make the payment go straight to the person getting paid for the service, and not to the platform itself. The same goes for all of the responsibility included along with the promise of providing a service to a customer.

Our company’s expertise and profile allows us to work in the model we have presented to you today. If you have any questions regarding the whole process – we are always at your disposal. Let’s talk.

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PayLane's CEO with all kind of skills - programming, marketing, team leading and more. A movie lover and snowboard fan. @KarolZielinski

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