At a high level, the sponsor bank is responsible for getting the funds that are paid by end consumers to the merchant and, elsewhere, for getting ACH payments to the processor.
They are also responsible for paying the card brands and the issuing bank their share of the interchange fees, noted O’Brien.
Amid the great digital shift, he said, sponsor banks — while seeking to broaden their merchant acquiring presence — are getting pushback from ISOs and ISVs to upgrade the front-end experience. It’s no longer enough to sponsor PSPs in order to give merchants payments functionality — banks also have to help them navigate merchant onboarding with speed and aplomb (while beefing up their own risk management activities).
As he noted, the banks’ PayFac clients are demanding the changes, in an industry where Square and Stripe are boosting payments acceptance across any number of verticals. Call it the Amazon effect, in a way, where a fluid interaction, from the very first step, takes the customer through his or her journey with nary a misstep (as O’Brien noted, a bit tongue in cheek, “Jeff Bezos has done all right for himself.”)
Taking A Cue From Square And Stripe
The merchants, he said, “expect the same kind of experience” from their PayFacs. “And so the pressure is now on the sponsor banks.”
But increasing merchant acquisition, of course, brings the question of risk into the equation.
It’s only human nature to look at speed as a danger, noted O’Brien. In other words, accelerating the onboarding process, with the goal of getting more payments options to more merchants, may miss some red flags in the underwriting process.
“But that’s the beauty when you start talking about the front end experience and automation — it can actually be done with less risk,” said O’Brien. “It actually means that you’re doing things far more efficiently.”
Using automation, he said — especially in underwriting, where the complex is ultimately rendered simple — can catch what eyeballs miss. Gone, then, is the “Carl effect” — where a hypothetical human underwriter (in this case, named Carl), with all the human failings that, well, make us human, might be a less-than-optimal judge of merchant risk. The right data must be fed into an intelligent data underwriting engine, with an eye on reviewing and solving bottlenecks.
With the right digital tools in hand, said O’Brien, sponsor banks can act a bit like a factory.
“They have a bunch of people out there that are sales organizations that are going out to merchants. And those are your salespeople that are bringing in the orders. The more orders, the more payments you’re processing, and ultimately, the better it is for the banks.”
Don’t Rely On Carl Too Much
That’s not to say that the underwriting process can, or even should be, entirely friction-free, said O’Brien (who said that the concept might make underwriters queasy).
“There needs to be some friction — you have to investigate whether a risk is a good risk or not.” Beyond the automation, there is room for Carl the underwriter, who can serve as yet another check and balance.
The urgency is there for the sponsor banks to fine-tool their front-end experiences — especially if they set the bar high enough, where, for example, a client may want 90 percent of what they are underwriting to be approved. First impressions matter, he cautioned, and the journey across underwriting to “turning on” payments for a merchant should be as easy and as intuitive as buying a shirt from Amazon.
Against that backdrop, he said, sponsor banks need to be maniacal in their pursuit of easier onboarding — and perhaps should review strategy on a quarterly basis in order to pick up as much share as possible.
“A lot of people will switch payments very quickly for a lot of these merchants,” he told PYMNTS. “If the merchants are dissatisfied, it’s very competitive industry. They’re going to jump ship — and there’s a huge cost if the sponsor banks aren’t really focused on that. “