Payment facilitators have become increasingly mainstream across the country and the globe. By offering businesses a payments ecosystem alongside their other services, all on the same platform, many SaaS companies have exploded in popularity. In fact, it’s projected that the number of payment facilitators will nearly double from 2020 to 2025 (from 1,244 to 2,381), totaling $4 trillion in annual payment volume.
However, despite these FinTech companies facilitating payments and what seems like banking services, they’re not actually accredited banking entities, which is why all PayFacs have partnerships with sponsor banks to ensure regulatory compliance in order to offer their financial services. But what exactly is a sponsor bank? Why is sponsorship so important?
In this article, we’ll explain everything you need to know about the sponsor bank business model, including finding the best sponsor bank provider for your organization.
TL;DR
- Becoming an official bank requires a lot of effort, time, and risk, which is why most PayFacs find a reliable bank partner to underwrite the risk for their customers and transactions.
- Sponsor banks provide many much-needed services, like ensuring anti-money laundering (AML) compliance through transaction monitoring or Know Your Customer.
- When looking for a sponsor bank, you should check the ratings, ask how many PayFacs they’ve worked with, and find out how long they’ve been a registered sponsor.
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What’s a Sponsor Bank?
As a quick recap: a PayFac lets software platforms or SaaS companies aggregate sub-merchants (their customers) under one merchant account and offer integrated payments alongside their other offerings.
This can lead to more competitive pricing, streamlined transaction processing, and easier onboarding for multiple clients, which can translate to increased profit margins for the SaaS company.
PayFacs offer various online banking services, like ACH transactions or credit card payments. However, that doesn’t mean they’re legally a bank!
Becoming an official bank requires a lot of effort, time, and risk; it also forces PayFacs to focus less on doing what they do best. That’s why most FinTech companies find a reliable bank partner that actually moves the money for them and takes on the risk for their customers and transactions. So what are the top benefits of partnering with a sponsor bank?
Anti-money laundering (AML) compliance
PayFacs move a lot of money around and often work with small businesses or startups. That’s why it’s critical to meet AML requirements as part of the company’s risk management.
What happens if you don’t do so, or you partner with a sponsor bank with weak AML regulations? Well, the Office of the Comptroller of the Currency, which is a U.S. Department of Treasury independent bureau, filed a consent order to cease and desist with a New York bank that didn’t “monitor or investigate suspicious transactions.”
That’s why it’s paramount that PayFacs work with a sponsor bank that has a strong compliance department. Additionally, it should be easy for FinTechs to take their own initiative and contact the bank should they want to report suspicious activity.
Transaction monitoring
While a secure sponsor bank should have strong risk management protocols in place to reduce the need for regular PCI compliance, it’s important that they provide (cloud-based) transaction monitoring services as part of their AML services. To prevent financial crimes, the sponsor bank should be able to spot suspicious transactions, assess customer risk, and meet regulatory requirements.
Customer due diligence (CDD)
An important part of ensuring compliance within the PayFac ecosystem includes verifying customers’ identities. It helps proactively reduce the risk of nefarious activities such as fraud, money laundering, or even terrorism. A sponsoring bank can lead the process of carefully assessing the (potential) risk of doing business with a customer, saving significant time, money, and reputational risk down the road.
Customer due diligence and KYC are often used interchangeably, and while KYC involves performing CDD on customers as part of AML regulations, there are some differences to be aware of. Essentially, KYC is part of the onboarding process, when FinTechs collect personal data on their customers. CDD is the process of actually verifying the information, and should be done regularly to ensure accuracy.
At the end of the day, a solid sponsor bank should provide PayFacs with all the tools necessary to comply with anti-money laundering regulations, so the payment facilitator can focus on running its business and ensuring the best customer experience possible.
What to Look For in a Sponsor Bank for Payment Facilitators
Check the ratings.
Don’t fall into the trap of just reading what the acquiring bank has to say for itself—look at real reviews from real people. Are their customers satisfied with their compliance? How is their customer support? Have they been recognized or awarded for their service?
Ask how many payment facilitators they’ve worked with.
While you’re unlikely to get a precise answer, this is a good way to gauge who your potential future sponsor bank works with and is underwriting for. Try asking for an aggregated figure, so you can get more info about the rough number of PayFacs or ISVs they work with.
Plus, consider asking what amount of the bank’s clients are high-risk or not classified. If they’re high on the former, they may not be selective enough and could wind up embroiled in legal difficulties. If they’re high on the latter, it could be a sign they don’t have enough insight into their portfolio companies.
Find out how long the bank has been a registered sponsor.
Ideally, you should go with a bank that has some experience under its belt, so you can rest easy knowing they’ve got your back and have a tried-and-true system in place. The longer they’ve been in the game, the more likely they are to have fine-tuned their approach.
Wrapping Up
If your company wants to provide your customers with payment processing options alongside other services on your app or website, then Stax Connect might be for you.
Our fully-managed payments facilitation ecosystem makes it as simple as 1-2-3 to start getting paid in as little as 30 days. And since we fully understand the integral importance of a bank sponsor partnership, Stax does the hard work for you.
From Visa to Mastercard, we already have relationships built with the world’s leading sponsor banks, which all have decades of experience. Take the burden off your shoulders so you can focus on providing your customers with an unforgettable user experience—all with transparent pricing. It’s that simple.
Contact us today to start monetizing your payments with Stax Connect.
Quick FAQs about Finding Sponsor Bank
Q: What is a sponsor bank and why is it important for payment facilitators?
A sponsor bank is a regulated financial institution that partners with payment facilitators (PayFacs) to provide necessary banking services. Sponsor banks are crucial because they ensure regulatory compliance, particularly in areas like anti-money laundering (AML) and transaction monitoring, enabling PayFacs to offer integrated payment solutions without being accredited banking entities themselves.
Q: How do sponsor banks help in maintaining AML compliance for PayFacs?
Sponsor banks assist PayFacs in maintaining AML compliance by providing robust transaction monitoring services. They help detect and investigate suspicious activities, assess customer risk, and ensure adherence to regulatory requirements, thereby protecting both the PayFac and its clients from potential financial crimes.
Q: What are the benefits of partnering with a sponsor bank for a payment facilitator?
Partnering with a sponsor bank offers several benefits, including streamlined transaction processing, enhanced compliance with financial regulations, reduced risk, and the ability to focus on core business activities. Sponsor banks bring expertise in risk management and customer due diligence, which is essential for preventing fraud and safeguarding the facilitator’s reputation.
Q: What factors should a payment facilitator consider when choosing a sponsor bank?
When selecting a sponsor bank, PayFacs should consider the bank’s experience, reputation, customer feedback, compliance track record, and the number of PayFacs they have successfully partnered with. It’s also important to assess the bank’s ability to handle high-risk clients and their overall customer support quality.
Q: Why do PayFacs need a sponsor bank instead of becoming a bank themselves?
Becoming an accredited bank involves significant effort, time, and risk, which can divert focus from PayFac’s core competencies. By partnering with a sponsor bank, PayFacs can leverage the bank’s infrastructure and regulatory expertise, allowing them to offer comprehensive payment solutions without the burden of banking regulatory requirements.
Q: How can a payment facilitator assess the reliability of a sponsor bank?
To assess a sponsor bank’s reliability, PayFacs should review the bank’s ratings, ask about their experience and track record with other PayFacs, and evaluate their compliance with AML and other regulatory standards. Understanding the bank’s client portfolio and its approach to risk management is also crucial.
Q: What role does customer due diligence (CDD) play in the relationship between a PayFac and a sponsor bank?
Customer due diligence is vital for verifying customer identities and assessing potential risks, which helps prevent fraud and other illicit activities. A sponsor bank facilitates CDD by providing expertise and tools needed to conduct thorough checks, ensuring that both the PayFac and its customers are protected.
Q: How does a sponsor bank contribute to the success of a payment facilitator’s business model?
A sponsor bank contributes to the success of a PayFac’s business model by offering necessary banking services that allow the PayFac to focus on its core business activities. This partnership enables competitive pricing, efficient onboarding, and compliance with financial regulations, all of which are critical for the facilitator’s growth and profitability.
