Setting up a payment facilitator involves several key steps, and one crucial aspect is establishing a relationship with a sponsor bank. In this blog, we will explore the process of how a sponsor bank sets up a payment facilitator and the important considerations involved.

A payment facilitator, also known as a payment aggregator or payment service provider, is a company that enables merchants to accept electronic payments from their customers. The role of a sponsor bank in this process is vital, as it provides the necessary infrastructure and banking services that allow the payment facilitator to operate.

Here are the general steps involved in how a sponsor bank sets up a payment facilitator:

1. Identify the target market: The sponsor bank begins by identifying the target market for the payment facilitator. This includes understanding the industry sectors, geographic regions, and types of businesses the payment facilitator intends to serve. This step helps the sponsor bank assess the potential risks associated with the market and determine if it aligns with their risk appetite.
2. Due diligence and underwriting: Before establishing a relationship with a payment facilitator, the sponsor bank conducts thorough due diligence and underwriting processes. This involves assessing the payment facilitator’s business model, financial stability, compliance with regulatory requirements, and risk management procedures. The sponsor bank also evaluates the payment facilitator’s ability to comply with anti-money laundering (AML) and know-your-customer (KYC) regulations.
3. Agreement and contract negotiation: Once the due diligence process is complete and the sponsor bank is satisfied with the payment facilitator’s credentials, the two parties enter into an agreement. This agreement outlines the terms and conditions of the partnership, including responsibilities, liabilities, and fees. Contract negotiation ensures that both parties have a clear understanding of their roles and expectations.
4. Establishing the sponsor bank account: The sponsor bank sets up a dedicated account for the payment facilitator. This account will be used to process and settle transactions on behalf of the payment facilitator and its sub-merchants. The payment facilitator will typically hold the funds from the transactions in this account until they are settled and transferred to the sub-merchants’ accounts.
5. Integration and technical setup: The sponsor bank provides the necessary technical specifications and APIs to enable the payment facilitator’s integration with its banking infrastructure. This integration allows the payment facilitator to securely send and receive transaction data, perform authorizations, and settle funds. The sponsor bank may also provide the payment facilitator with reporting tools and access to transaction data for monitoring and analysis.
6. Compliance and ongoing monitoring: Compliance is a crucial aspect of the relationship between the sponsor bank and the payment facilitator. The sponsor bank ensures that the payment facilitator adheres to all regulatory requirements, including AML and KYC policies. Ongoing monitoring and periodic audits are conducted to assess the payment facilitator’s compliance and risk management practices.
7. Support and relationship management: The sponsor bank provides ongoing support to the payment facilitator, assisting with any issues or inquiries related to payment processing, compliance, or banking services. Relationship managers from the sponsor bank maintain regular communication with the payment facilitator to address any operational or strategic concerns.

It is important to note that the process of setting up a payment facilitator with a sponsor bank may vary depending on the specific requirements, regulations, and internal procedures of the sponsor bank. The payment facilitator must work closely with the sponsor bank throughout the setup process to ensure a smooth and compliant operation.

In conclusion, establishing a relationship with a sponsor bank is a critical step in setting up a payment facilitator. The sponsor bank conducts due diligence, sets up a dedicated account, enables technical integration, ensures compliance, and provides ongoing support. This partnership allows the payment facilitator to leverage the banking infrastructure and offer efficient and secure payment processing services to merchants.