Payment Models Overview (And Why it Matters)

There are several roles companies play in the payments ecosystem. Distinguishing between them is important and here we examine those differences in contrast to an Internet Retailer.

Since ClickBank is classified as an Internet Retailer, we must adhere to certain requirements to maintain this status.

The following subjects are covered in this article:

Business Models

Payment Processor

For routing transactions through to an end-customer’s bank, companies such as First Data and Chase Paymentech have a direct software connection to the VISA, MasterCard, and American Express networks. These companies offer real-time authorization for purchases and expect settlement batch files to be delivered at the close of each day.

To connect with a Payment Processor, a business will undergo a number of compliance and certification processes prior to their technology being allowed to interface with the processor’s platform. Typically, only large merchants will have a direct platform connection to a Payment Processor due to PCI compliance standards, volume and technical requirements.

When a business obtains a merchant account, their Acquirer (the bank that gave them the merchant account) will specify which Payment Processor will be responsible for managing their funds and settling them back to their bank account.

Payment Gateway

Companies such as Authorize.net or Braintree offer businesses a connection to one or more Payment Processors. The gateway providers make it possible for a merchant to transact with credit cards without many of the constraints required to integrate with a Payment Processor’s platform. 

These service providers may also resell merchant services for additional fees, though they do not touch the money or settle funds to the business. A business is still responsible for holding a merchant account with an acquiring bank who has a relationship with a Payment Processor. When connecting to a Payment Gateway, the business will be responsible for select levels of PCI compliance, order forms and other technical integrations.

With both Payment Processors and Payment Gateways, the funds from a consumer’s purchase are deposited directly into the bank account for the merchant.

Payment Facilitator

Companies can also aggregate transactions for entities known as Sub-Merchants.

For example, this is when PayPal or Stripe use their merchant account and connection to a Payment Processor or Payment Gateway to sell for vendors without a merchant account. Payment Facilitators are convenient for many small businesses that do not wish to obtain a merchant account due to costs, imposed processing limits, underwriting and other hurdles.

Due to the inherent risk in providing credit card processing to any entity that hasn’t received a merchant account, Payment Facilitators operate under strict requirements imposed by the major credit card brands. These include limitations on providing services only within territories where they have a local presence, limits on sales volumes for each sub-merchant before that sub-merchant has to enter a direct contract with their upstream providers, requirements on how the money flows to the sub-merchant and other screening for past merchant accounts, etc.

In essence, a Payment Facilitator is a great initial option for small volumes and limited territories, but their restrictions can limit a growing business who needs their own merchant account.

Merchant Account With Payment Processor or Payment Gateway

If a business decides they want their own merchant account and desires to use a Payment Gateway or Payment Processor directly, here’s what to expect:

  • The business must work with an Acquiring Bank willing to extend a processing limit for credit card purchases, in exchange for a funds reserve of some amount. For example, maximum processing limits of $25,000 a month are not uncommon for new merchant accounts.
  • The business must pass underwriting by the Acquirer’s risk and compliance team. Their perspective adjusts the transaction fee and reserves up or down, depending on volumes and products.
    • Even when a processing limit is approved, dramatic fluctuations in sales volumes (as is typical in a performance marketing campaign) can make the Acquirer very nervous. This can lead to freezing of processing, increasing reserves dramatically, even closing of the account. This can leave a campaign dead in its tracks with no funds to pay affiliates. The Acquiring bank has an expectation of consistent sales with consistent growth, not low volume sales with sudden large spikes due to product launches.
    • Information Products, Card-Not-Present transactions, subscriptions, and cross-border sales are considered high risk. Transaction fees and reserves are increased to compensate for that risk.
  • The business will be directly examined by the major card brands for compliance with their chargeback policies and risk programs. Fines for their risk programs (e.g., high chargeback rates or non-compliance with their brand identity requirements) can be substantial.
  • A fraud screening control must be in place to ensure buyers are using valid payment methods and are who they say they are (see Know Your Customer regulations for more details).
  • The business is responsible for knowing and complying with PCI DSS (payment card industry data security standard) requirements. This includes quarterly security screening and security assessments at a minimum. Costs increase as sales volumes increase.
  • The business is responsible for collecting and remitting sales tax for federal, state and local jurisdictions, as well as VAT tax for applicable jurisdictions.

Using a Payment Facilitator

For a business that seeks to skip these hurdles and go through a Payment Facilitator, there are still a number of obligations to be aware of:

  • The power to charge consumers through the facilitator’s merchant account is subject to their risk and compliance review. For example, this can lead to investigations triggered by spikes in sales or a batch of fraudulent transaction attempted from rogue affiliates. This can lead to frozen or closed accounts.
  • A facilitator’s product offering will vary by territory. Card brands require businesses to provide processing for sub-merchants present in their same territory.
  • International processing in different currencies may be limited depending on their Payment Processor.
  • The business remains fully responsible for collecting the right sales tax or VAT tax, registering to pay that tax in each appropriate jurisdiction and remitting those funds regularly.

Each of these models has different pros and cons.

ClickBank as an Internet Retailer

ClickBank does not fall under any of the categories listed above. We are an Internet Retailer and we specifically chose that path. It permits us to offer our clients the benefits processors, gateways and payment facilitators are unable. Specifically:

  • We handle all the tax collection and remittance. Currently, we calculate tax rates for nearly 10,000 United States jurisdictions and 30+ VAT countries. Any client who wants to use either a gateway, processor or payment facilitator is directly responsible for registering with each entity to pay sales and valued-added tax for products sold online.
  • As the retailer, we approve and agree to resell your products, not your business. If you wish to use a merchant account, you will be responsible for full underwriting.
  • With the power of the marketing largely in the hands of the vendor, we screen and raise objections for potential FTC compliance issues that we find. This service is not provided elsewhere.
  • We offer front-line customer support for all inbound calls related to purchases. A processor, gateway or facilitator does not typically offer this.
  • We take care of all the Payment Card Industry (PCI) requirements, certification, and annual recertification. ClickBank is a PCI level 1 company, the highest rating available.
  • We manage and deal with chargeback processing. This includes research and dispute processes that save sales, which neither vendors nor affiliates ever have to worry about.
  • Card brand and merchant policies apply to our business, not your business. This frees you of the administrative hassle.
  • We pay affiliates directly for commissions since we control the cash flow. Affiliates love the reliability of having ClickBank pay for commissions versus trusting unknown vendors to do so.
  • We handle all Office of Foreign Asset Control (United States Treasury Department) and Anti Money Laundering and Know Your Customer (AML/KYC) requirements.
  • Our screening and fraud controls protect everyone, including consumers, from “bad actors” in the industry.
  • Our business does not limit accounts or freeze processing during a sales launch, as we are accustomed to this type of dynamic sales spikes.

This business model allows our vendors to focus on identifying the next product, creating high-converting pitch pages and finding big partnerships. With ClickBank, there is no need to worry about fraud attacks, credit lines and whether there’s money to pay vendors and affiliates.

There are many benefits to how we have structured our business and we continue to expand our capabilities. Here are a few other benefits we provide to entrepreneurs:

  • We take care of all the affiliate management challenges such as fraud controls and IRS-required 1099’s.
  • We pay, on time, every time. Our clients know and can trust that ClickBank will pay for sales.
  • We have controls in place that other “instant commission” networks do not offer to vendors. You do not need to worry about a bad affiliate with a batch of stolen credit cards destroying your company overnight.
  • We have a massive, active affiliate network. Over 100,000 different individuals are generating a sale each month.
  • Our product vendors can offer the best commissions in the industry.
  • Our platform is rock-solid and stable. You do not need to deal with a platform that crumbles in the middle of a huge launch, ruining ad campaigns and the trust of the consumer.
  • No need to worry when you launch a six-figure campaign in a single day. We are designed for and often handle this type of surging cash avalanche.
  • Front line customer support provided by ClickBank takes care of the headaches of managing customer support or running a customer service call center.
  • Flexible partnerships through our Joint Venture (JV) system provide flexible tiered commission capability, while affiliate exclusive whitelists give you the power to reward your valuable partners.
  • We auto-match new vendors to affiliates that perform well in similar product spaces and niches.

And in recent years, here are just a few of the major features we’ve put into market:

  • Subscription Management: perform subscription upgrades, downgrades, or pause and reinstate via API: ClickBank APIs
  • Ability to skin the order form using CSS and images: Advanced Custom Order Forms
  • Automatic affiliate partnership recommendations with Affiliate Finder: Affiliate Finder
  • Free trials for recurring products and support for $0 + Shipping & Handling physical products
  • Real-time client analytics; review traffic and sales data as orders flow in as they occur
  • New integrated sales reporting hooks to Facebook tracking and generic tracking/retargeting pixels: Integrated Sales Reporting
  • Expanded commission structures ranging from 0% to 100%, with flexibility for different rates on front and back end products
  • Support for multi-line item shopping transactions (e.g., shopping cart baskets): Cart: ClickBank's Multi-Line Transaction Platform
  • Support for selling more than one quantity per item on the order form: Editable Quantities on the Order Form
  • Ability to sell a wide range of physical products on the ClickBank platform, such as monthly subscription products
  • Flexible refund support with product-level configurations for 0 to 365 day refund periods
  • Lifetime commissions for all future purchases by a customer

We are able offer all of these business building and revenue generating features to our affiliates and vendors due, in part, to our Internet Retailer status. This is why it is so important that we remain in compliance to maintain our classification now, and for years to come.

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