When setting up your platform, choosing the right solution for your transaction facilitation is probably the most important setup decision. Clients ask, what is the best way to facilitate transactions between the parties? This simple question is not straightforward to answer.
This article is driven from 10 years’ experience in fintech. The WLCF team have undertaken API integrations with eMoney providers (MangoPay, LemonWay) and have implemented CASS-compliant client money solutions for platforms with the regulatory permission of handling client money.
There are essentially five types of solution, each with pros and cons; what’s right for your business depends on your specific circumstances, needs and vision.
Remember, if you are regulated, a 3rd party transaction facilitation provider is a ‘material outsourcing provider’ meaning that the firm should demonstrate they have been through a procurement process, using a decision matrix to ascertain what is right for the business. The provider then also needs a review once per year. Alternatively, if you select to manage client money (by using a segregated bank account), this is a separate regulatory permission that requires annual audit from an independent 3rd party auditor, like Sagars. So, the regulatory considerations vary widely.
If you intend to use the Innovative Finance ISA, please be aware that HMRC will only work with regulated firms that directly manage client money, i.e. using an eMoney provider is not an option.
The commercial considerations also vary widely; with eMoney providers offering tiered pricing by volume it can feel expensive to get started. People are unaware of the actual cost of transaction facilitation because banks ‘absorb’ this cost, hiding it from the consumer. There is also a setup cost to consider.
Technical leadership / competitive advantage. Is your platform predicated on being an industry leader? Will you use technical innovation to create a competitive advantage? This position can give you first-mover advantages and a unique selling point but comes with unique risks and costs. Sometimes simple and cheap is the right option; it’s best not to over-engineer a solution, unless there is a good reason for it.
|Simple, cheap||Not an eWallet so credited funds cannot be used for anything other than the intended transaction||Equity||Disputes,|
limited options with exception handling, inexperience of providers
|MOP, AML||Low / Low||Not Eligible||Low|
eMoney providers / banks with good APIs like lhv.co.uk
|Can hold and manage a balance on behalf of customers||Transaction costs||All||3rd party provider||MOP, AML||Avg / High||Not Eligible||Medium|
|CASS-compliant Client Money||Can hold and manage a balance on behalf of customers||Compliance team need to understand CASS, external audit needed||All||Internal fraud||CASS, AML||Avg / Avg||Eligible||Medium|
|Open Banking||Invoke direct transactions between parties||Execution only, so not easy to ‘hold or control’ a balance meaning that all transactions need to be ‘real time’||All||Inability to create conditional transactions means transactions are the last part of the process||OB, AML||Avg / Low||Eligible||Medium|
|Cryptocurrency||Control over the currency economy is tantamount to deposit taking||Run on bank problem,|
distrusted by many, unregulated
|P2P & Equity||Customers who lose their private key also lose their money||AML||High / Low||Not eligible||High|
Want to know what’s right for your business? Book a half day consultation with one of our experts to get an independent assessment or support with a procurement decision.