Introduction to payment aggregators
1. What is a payment aggregator?
A payment aggregator acts as a third party responsible for managing and processing merchants' online transactions. A payment aggregator facilitates payments from consumers to merchants, be it by credit card, debit card, bank transfer, e-wallet, or stored value account, without requiring merchants to go to a bank.
Payment aggregators are arguably better suited for small businesses with low transaction volumes than other payment service providers because a payment aggregator, using a master merchant account, acts as an umbrella for sub-merchant accounts, unlike the traditional method under which each merchant has a separate merchant account. The latter will easily overwhelm a start-up company with higher fees, transaction volumes, and chargebacks.
2. How do payment aggregators work?
a. Payment aggregator process
As mentioned above, a payment aggregator uses a "master merchant" model which allows it to represent a large number of small sub-merchants and facilitate payments from users. Payment aggregators eliminate the need for merchants to open merchant accounts by taking care of the contracts with various payment method providers.
b. How does a payment platform work?
Payment platforms, also known as payment gateways, authorise payments for both online and offline businesses. It is a software service that facilitates e-commerce transactions through businesses' websites or apps. Payment gateways are the equivalent of a physical point-of-sale terminal in an offline store. Payment gateways take the money paid by a customer via credit card, debit card, online banking, e-wallet, or unified payment interface to the merchant by securely passing the customer's payment details to the merchant and then between the merchant and the bank. The payment gateway notifies the merchant whether the charge has been approved by the customer's bank.
Benefits of a payment aggregator
1. Advantages of a payment aggregator
A payment aggregator saves merchants time and money. First, setting up an account with a payment aggregator does not require much paperwork while setting up a merchant account is very time-consuming while also requiring various documents. In most cases, the use of a payment aggregator allows a merchant to start accepting payments sooner.
In addition, most payment aggregators offer their services at a flat rate, making it easier for merchants to manage their budgets while also saving them money. Moreover, most payment aggregators accept short-term contracts. This also makes it less expensive than using merchant accounts in the short term.
2. Disadvantages of a payment aggregator
Despite requiring less time to set up, the use of a payment aggregator also means payments must first be processed by service providers. This means there is a period when they have control of your money and can thus also determine how soon you will receive it. Most payment aggregators make the money available within 24 to 48 hours, but it can sometimes take longer.
Suspicion of fraud can prompt your payment aggregator to deactivate your account for some time, or worse, permanently delete it. Some payment aggregators also limit the number of transactions that may be processed per month, limiting your business from expanding. Lastly, the fees charged to you will usually increase as your business grows.
3. Payment aggregator business model
a. How payment aggregators make money
Payment aggregators benefit from (1) network participation fees, (2) data processing fees, (3) international transaction fees, and (4) revenue from rewards programmes banks offer to cardholders, concierge services, and marketing promotions for merchants, among others.
Payment aggregators vs alternative solutions
1. Payment aggregator vs merchant account
A true merchant account is a type of bank account that facilitates the receipt of credit and debit card payments. Meanwhile, a payment aggregator is a third party that helps merchants by taking care of the contracts with various payment method providers. Payment aggregators are mostly faster, easier, and cheaper for businesses with smaller transaction volumes in the short term.
2. Payment aggregator vs payment facilitator
A payment facilitator has a contract with the acquiring bank, which processes customers' credit card payments to merchants, and merchants on a sub-merchant platform. The key difference between a facilitator and an aggregator is that the first provides merchants with their own merchant identification (MID) under a master account, while the latter signs up merchants directly under its own MID.
3. Payment aggregator vs payment gateway
As mentioned above, a payment gateway is a software service that facilitates e-commerce businesses transactions on merchants' websites or apps. A payment gateway acts as a transaction intermediary between merchants and customers while a payment aggregator facilitates fund transfers between two parties and a bank.
4. Payment aggregator vs payment service provider
A payment service provider is any third party that facilitates the receipt of payments made by customers to merchants through online banking, credit card, debit card, e-wallet, and more. This includes payment aggregators.
Regulation of payment aggregators
1. Are payment gateways regulated?
Yes, all payment service providers are regulated. In the United Kingdom, they are regulated under the Financial Conduct Authority.
2. What is a payment gateway licence?
A payment gateway licence is a permit issued by the body responsible for regulating payment institutions in a country. In the UK, it is issued by the FCA.