In the payments market, distribution partnerships play a key role in driving transaction volumes and fostering innovation.  Making money from providing payment services is a numbers game.  The more transactions you process the better you do.  For PSPs finding more customers (transaction volume), and having more channels through which to do so, is almost always a good, even necessary, thing.  For non-PSPs, adding payment services to their customer journeys leads to increased customer loyalty and engagement and recurring revenue that can complement the firm's core business.  It can also enable a better and deeper relationship with customers. 

Why partner up?

• Expand Reach: teaming up with other companies can help PSPs reach untapped markets and customer segments they might not have been able using their own sales and distribution channels. 
• Boost Sales: partnerships can increase the number of sales channels, helping to achieve economies of scale and increase a PSP's customer base and/or conversion rates, even if the upsides of this then have to be shared.
• Innovate: with technology and e-commerce playing an ever bigger role for customers, partnerships can enable PSPs to keep on top of technological change and pair their services with those of cutting edge technology and web/cloud based customers.
• Revenue diversification and data insights: for non-PSPs, adding payment services generates a new revenue stream (for example, through revenue share), or can boost core businesses by making it easier, or more appealing, for customers to spend with the firm.  Payments can also provide valuable data insights on customer behaviour, spending habits, and preferences.
• Market differentiation: offering embedded payment solutions can also set a firm apart from competitors by delivering a superior or more integrated user experience i.e. centralised invoicing and better control of stock and supply.

Common partnership scenarios

• Co-branded Credit Cards: banks and non-banks have long partnered to offer financial services through co-branded credit cards – e.g. at department stores and airlines.  Usually associated with enhanced loyalty. 
• Buy Now, Pay Later:  point of sale finance ("buy now pay later"), for example on car/furniture purchases, has also been around for decades.  Modern fintechs have taken this to another level by partnering with retailers to offer cross-pollination of sales amongst their customer base.
• Merchant Services: in the merchant acquiring space, merchant referral and ISO (independent sales organisation) introducer/distribution relationships have been around for years as a way of enabling acquirers to partner with third parties.

The digital shift

The digital world we're living in, and in particular the rise of software APIs, has made partnering for distribution something that can now be done at scale, with much deeper embedding of a financial service.   Notwithstanding the fact that retailers and other partners are not authorised, they can, through partnerships with banks and authorised entities, offer sophisticated financial solutions from payments to banking to loyalty for their customers.  

Contracting for partnership

Creating a partnership can involve different kinds of agreements, from simple referrals, through to full white label (Banking / Payments-as-a-Service) arrangements, reseller and agency agreements, and beyond to full partnership, relationship or joint venture agreements.  From a card scheme perspective, models range from third party agents and network enablement partners, through to ISOs, payment facilitators and marketplaces or BIN sponsors and programme managers. 

While the details, and labels, can vary, there are common areas to think about:

• Structure and funds flows – given the range of possible approaches, what is the best way to implement the proposed tie-up and what is the flow of funds and transaction data?  To some extent, this may depend on the extent to which the non-PSP partner can carry out any regulated activities.
• Regulatory permissions – who is carrying out, and who is intermediating and providing, any regulated activity?  And are the right regulatory permissions (or agencies) in place?  What broader regulatory compliance requirements (e.g. Consumer Duty, or credit broking) apply?  Is the non-PSP partner operationally ready to meet all requirements?
• Scheme considerations – are there any card scheme registration requirements or other payment scheme rules to take into account? 
• Outsourcing – if the partnership involves a regulated entity, such as a bank or PSP, outsourcing any of its critical functions to a third party?   More broadly, what operational resilience requirements (if any) apply?
• Operational matters – what is the sales / onboarding process, and how is in life product management and customer servicing and support, and pricing and invoicing, to be handled?  AML and KYC screening and customer due diligence and credit and risk issues may also need to be dealt with.
• Branding and marketing – clearly a key topic and there may also be regulatory rules to take into account in this regard, such as financial promotion and credit broking rules.  Commercially, who drives marketing activity and who pays for it?  Is cross-selling (of other products/services) to the partnerships' customers allowed?
• Commercial terms – performance standards and SLAs, "ownership" of the customer relationship and revenue share (or commission) terms will typically need to be worked through.  Partners also need to be clear on the commercial scope of their relationship and whether it encompasses any exclusivity, non-solicit or non-compete commitments, and what performance and exit triggers will be included within the agreement.  Commission disclosure (and consent) requirements may also need to be reviewed in light of the recent court judgments on this topic [1].
• Liability and risk – are any indemnities between the partners appropriate and if so, for what?  What are the liability caps and related liability terms between the partners, and who takes on different areas of risk (such as compliance risk, credit/chargeback risk or settlement responsibilities).
• Technical integrations and developments – with the online context for many of these types of partnerships, the agreement will need to be clear about IP and the basis and terms for any integrations to be implemented and (if necessary) wound down.
• Other terms - as the partnership agreement is a commercial agreement, there are a number of other terms that it will inevitably need to contain – in particular, data, information security, employees, termination provisions, exit arrangements, governance, reporting and change management.

Specialist legal advice will be needed not just from commercial lawyers, but also to consider the arrangements from an antitrust, tax, regulatory, employment or data protection perspective.

Conclusion

Partnerships in the payments industry are complex, multi-faceted and dynamic.  But they can offer significant benefits in terms of growth, customer reach, and innovation. It's important to carefully consider all aspects of the partnership, from legal and regulatory to operational and technical.