There is considerable confusion regarding the term "third party payment processors" and what they do.
TPPPs are a critical part of the growing electronic payments processing world. Technological innovators, TPPPs are software companies run by payments experts that enable electronic transactions to occur safely and accurately. They allow consumers to make payments, merchants to accept payments, and banks to fund the transactions. They fill a special role in the electronic processing world, serving countless small businesses that, individually, are too small for banks, and large businesses that require technical expertise banks simply cannot provide.
Processing is industry-agnostic. Processors do not make value judgments as to the morality of the business in which the merchant is engaged. They perform due diligence up front to ensure that they know the merchant, understand its business and attempt to prevent known fraudulent merchants from having access to the system, and conduct ongoing monitoring to identify and eliminate fraudulent transactions.
Recent actions against TPPPs, banks and online lenders suggest that the unique role played by TPPPs is not well understood by regulators or federal law enforcement. TPPPs reduce risk. They use industry knowledge and experience (both in the payments industry and the merchants industry), cutting edge technology, and tenacity to process tens of millions of transactions a month, with minimal issues and almost no fraud. In addition, they spend countless hours educating merchants in the proper way to process payments.
A few months ago, ten leading processors around the nation formed the Third Party Payment Processors Association. Our goal is to provide advocacy and serve as a voice for the industry (along with the financial institutions and other parties that benefit from the services of TPPPs) and to set standards for appropriate compliance management systems for processors and the depositories that sponsor them.
For most, processing is not a dramatically lucrative business. It requires an enormous investment in software and hardware times at least two, given the redundancy requirements along with operations, compliance, development, IT, accounting, and sales staff. With high fixed costs and limited scalability, it is common for a new processor to wait six or seven years before seeing a profit. But that investment is precisely why small and midsized banks value the opportunity to outsource processing: it keeps their costs low and their flexibility high. Absent an ability to educate law enforcement and regulators while maintaining reasonable operating and compliance costs, however, processors like community banks face a severe threat to their survival.
The ten founding TPPPA members process about 93 million transactions a year, worth more than $111 billion, for an estimated 90,000 merchants. They process payroll, gym memberships, charitable contributions, mortgage and car loan payments, and phone and utility bills, among other types.
The TPPPA aims to raise the bar for the entire payment processing industry. Members must apply, be accepted into the TPPPA, and agree to abide by a strict Code of Conduct. Not all TPPPs who apply will be accepted.
By setting a high bar for our members, we are demonstrating to regulators and law enforcement that we are their partners not their adversaries in their quest to eliminate fraudulent merchants from the payment system. The payment system already has stringent rules and regulations that prevent fraudulent merchants from processing payments. TPPPs perform due diligence to determine if the business is legal and if the processor can properly mitigate any risk to banks and consumers that the merchant might pose. The work of processors in performing thorough, up-front due diligence and detailed transactional anomaly detection helps decrease risk and identify and eliminate fraud before it enters the system.
The system has worked well to date. Processors identify fraudulent merchants and transactions and remove them from the system. Because TPPPs have historically shared in the financial responsibility when a payment they originate for a merchant is deemed to be unauthorized, they have as much interest in eliminating bad actors as anyone. Every member of the TPPPA has collaborated with law enforcement at one time or another to eliminate a fraudulent merchant. It is a role we hope to continue to play.
There is no question that unscrupulous merchants exist. The overwhelming majority of TPPPs are legitimate and responsible companies that strive to operate with integrity and share the desire to eliminate fraud from the payments system. Part of the purpose of TPPPs is to quickly and effectively identify and react to fraud, removing bad players from the payments system.
Application of clear standards will benefit the entire payments industry. Governmental "gotcha" interferes with the legitimate expectations of financial institutions, TPPPs, merchants and consumers. None of us deserves that.
Marsha Jones is the director of the Third Party Payment Processors Association in Washington. She is certified as an Accredited ACH Professional and a National Check Professional.