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Education

Bank sponsorship Membership privileges

to be members for many reasons.
By Ken Musante The card networks allow only banks
Napa Payments and Consulting Banks are highly regulated. They
must be sufficiently capitalized and
very transaction has an associated bank sponsor. Within the United produce publicly available financial
States, Visa and Mastercard allow only financial institutions mem- reports in an audited and defined
bership as sponsors. Financial institutions, in turn, delegate author- format. Further, banks are governed
E ity to non-bank entities that enables them to access the card network by directors who have personal
rails. Ultimately, the sponsoring institution holds liability for all transactions, liability at stake.
which is why—regardless of the payment processor’s (ISO, ISV, payfac) size—a
bank is involved in every transaction. By allowing membership only to
banks, Visa and Mastercard lessened
A bank by any other name the risk and due diligence to vet
and approve new customers while
For clarity, financial institutions include banks, credit unions and thrifts, simultaneously providing value to
which I will refer to as "banks" for brevity. Although all networks require the bank charter.
sponsorship, I will discuss Visa and Mastercard. Debit networks, however,
also require sponsorship. Visa issues a Bank Identification Number (BIN) and Visa and Mastercard require the
Mastercard issues an Interbank Card Association Number (ICA) to delineate sponsor bank to be listed on the
the bank. merchant agreement. Should there
be a complaint, the merchant should
BIN portability refers to the ability to move all merchants associated with know which sponsor bank was
a specific BIN from one bank to another. This is done when the payment involved. For its part, the bank may
processor changes sponsorship, for example. It may be helpful to have your earn non-interest income through its
merchants within a unique BIN if you ever wish to migrate them, en masse, to sponsorship activities.
another processor.
Sponsorship fees range wildly from
a fraction of a basis point to nearly
0.50 percent. The fee is dependent
upon the risk as well as the labor
undertaken by the bank. A smaller
ISO with limited assets will pay more
than an established platform.

An ISO seeking higher risk merchants
can expect to pay a larger sponsorship
fee. Should the ISO need the bank to
perform reconciliation services or be
actively involved in underwriting,
the sponsorship fees will reflect this.

Banks will also earn income from the
float on funds. With shorter payout
time frames, the float decreases, but
with a one-day hold, a bank could
earn float on 5 percent of the monthly
volume plus an additional 5 to 10
percent float from merchant reserves.
Vertically integrated
Recently, some non-bank payment
processors have sought to acquire
or become banks to eliminate the
sponsor fee and provide embedded
banking. Square is seeking to
disintermediate its sponsor bank and
obtain its own bank charter. Column
is taking a different approach: it

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