Being one who has built several Payment and Billing Platforms, I always wanted to share with the world and specifically with the people that are curious and want to build their own business for payments processing, and to make a business out of that, what are some of the ways or billing models to do and the right way to do it from the beginning?
So, today there are three main billing models of how to make a business from processing payments using credit cards, bank accounts, cheques, and you will be surprised even out of accepting cash. The three billing models I want to talk about today are – Revenue, Share, ISO, and MSB
Historically, the most common Billing model is Revenue Share.
So, want to begin with an example:
Let's say, you have a B2B2C Platform that provides services to apartment complexes or vacation housing. Your platform provides property management, floor plans, ledger management, accounting, billing, payments processing, and other services.
In order to process payments, your company needs to team up with a payment services provider, or PSP that facilitates digital or electronic payments processing. Your company reaches a revenue share agreement with the PSP on a volume in traffic of funds. The idea is to bring customers that are on your platform already, to work with your PSP. Usually, the PSP is a bank, or non-bank financial institution like Chase Paymentech, FirstData, Bank of America Merchant Services, and a lot more.
The main difference between your company and PSP is that the PSP has relevant licenses and rights to move funds for merchants and to charge for that a fee. This fee is usually called a Merchant Fee.
Now, we are going to talk about licenses and rights, and this is the time when I am going to talk about the second model, which is called ISO.
Before I am going to move to the next topic, I want to explain in a few words what merchant fees are.
So, every transaction that's processed via a PSP contains the total amount = merchant fees 3% usually + amount is going to be settled on the merchant's bank account. So, out of 3%, something is going to the card network and all the rest stays with the PSP. So, the revenue share is coming out of the leftover with PSP.
Practically what happens with companies that are in B2B2C business, these are illustrating ways to make more out of every transaction or in another way to call it RPU, which is revenue per user or RPC, which revenue per customer or RPT, which is revenue per transaction.
So, one of the ways, or models to become a sort of PSP is to apply for a relevant license and one of these licenses is called ISO. This kind of licence basically gives the honor to the company to resell Merchant Services and to nominate the merchant fee by themselves.
So, what ISO billing model?
First of all, ISO is an Independent Sales Organization. In the street language, it’s called a non-bank financial institution. ISO Company is a company that can and is able to resell Merchant Services for businesses. ISO is a licence that a company receives from a sponsor bank in other words, an ISO company that is hired by a business or a merchant to process its payments. And not less important than other benefits of being an ISO company is that an ISO company can nominate the merchant fees and as I mentioned before that it can be 3%, and sometimes more. Here are some of the known ISO companies: Braintree, Stripe, and Square. Basically, ISO is an organization that is a go-to “Partner,” for merchants to deal with anything that is related to payments processing and other related topics.
And it’s about time to discuss the most interesting billing model in my mind. I want to call this model even a business model. Yes, I am going to discuss MSB.
So, what is MSB billing or business model?
MSB -Money Service Business. Several companies that I am sure you’ve heard of before are Western Union, MoneyGram, PayPal, Check Free, GoFundMe, Airbnb, ACE Cash, and lots more.
Basically, and in other words, an organization that has the MSB license has the right to charge end users a Service Fee for moving their fund from one location to another. Money charges services fee people for using their technology or channel to move money from one location to another. If you want to send money from America to Russian using MoneyGram, you need to pay MoneyGram a service fee that is most of the time even percentage of the sent or transferred amount. There is more usages of this model like cash checks, foreign currency exchange service , transferring stored value card in cash and all of these are services obligated.
Merchant fees - amounts charged by a PSP per transaction
ISO - Independent Sales Organization
MSB - Money Service Business