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Payment processor

lastmod 2025-08-19created 2025-08-193 edits

A payment processor is a system that enables financial transactions, commonly used by merchants, to handle transactions with customers through various channels such as credit cards, debit cards, or bank accounts. Payment processors are generally divided into two types: front-end and back-end.

Building your own payment processor

Claims about building your own Payment Processor are common, but in reality it is a hard task tangled in technical, financial, and regulatory barriers

  • Building an independent payment network without the MSP/PayFac structure and bank sponsorship is practically impossible
  • KYC/KYCC, security/certification, and risk management obligations are enormous, and small services struggle to handle them
  • The alternative through high-risk processors comes with practically unsustainable terms such as 15% fees and reserve requirements
  • Ultimately points out that no fundamental solution exists because of the influence of card networks themselves, such as Visa and Mastercard

Payment processor structure

  • The term "payment processor" actually covers a multi-tier structure of several institutions
  • Payment Card Networks (PCN): card networks such as Visa and Mastercard
  • Acquirer: bank affiliates directly handle issuance and settlement
  • Merchant Service Providers (MSP): relay payment information and provide POS terminals
  • Payment Facilitators (PayFacs): like Stripe and PayPal, collect payments on the merchant's behalf and distribute them to stores
  • Merchant / Sub-merchant: Itch is the Merchant, and creators are Sub-merchants

The reality of setting up your own PayFac

  • Becoming a PayFac always requires sponsorship from a bank (Acquirer)
  • Banks strictly assess risk, assets, and the ability to handle chargebacks
  • The operator must pass strict audits and certifications for security, reliability, and accuracy, and needs a large engineering team
  • Under KYC/KYCC regulations, the operator is responsible for verifying every user's identity and storing and verifying it securely
  • Handling adult content adds age verification and even stricter regulation

Itch's practical limits

  • Itch effectively depends on a one-person operation with a small support staff
  • It already partly acts like a PayFac, but actual settlement goes through external PayFacs such as PayPal
  • In this situation, running an independent PayFac is impossible; it is a scale at which even Valve would need a separate organization
  • Even if built, it cannot ultimately avoid the risk management and censorship of banks and PCNs

High-risk processors (High Risk MSPs)

  • Adult content is classified as a high-risk industry by default
  • CCBill, Epoch, and others are typical, offering extreme terms such as 15%+ fees and 25% reserve requirements
  • Not comparable to the usual 3% fee and settlement within 24 hours
  • On the bank side, transactions linked to CCBill are often blocked by fraud alerts
  • In the end, too much cost and risk for small creators or Itch to bear

Direct intervention by Visa/Mastercard

  • As in the 2017 Fetlife case, a PCN itself can demand that an MSP stop transactions because of specific content
  • This can happen at any time, regardless of whether a high-risk MSP is used
  • That is, whichever part of the payment system you go through, the same problem repeats when a PCN intervenes

Attempts at alternative payment methods

  • ACH/eCheck: weak security, lack of user trust
  • Wire transfer: high per-transaction fees, processing delays
  • Paper check: practically impossible
  • Crypto: controversial and impractical
  • Prepaid cards (top-up at convenience stores): exist in some regions such as Japan, but cannot spread globally

Regulatory risk

  • Top-up/withdrawal systems above a certain scale may be classified under banking regulation
  • Financial regulations such as US 12 CFR 1005E are likely to apply
  • In that case, the burden of AML (anti-money laundering) compliance is added

Itch's revenue structure problem

  • Itch itself has a weak revenue structure and pays out creator earnings manually one by one
  • It is criticized for slow responses due to a lack of operational resources, but realistically there is no alternative
  • Using a high-risk MSP or raising fees is also difficult because of the large PR risk

Conclusion

  • Building an independent payment network is hard even for Valve, and impossible for Itch
  • High-risk MSPs are unaffordable in terms of fees, reserves, and risk management
  • Fundamentally, the decision-making power of PCNs such as Visa/Mastercard is absolute, so alternatives are limited
  • This incident shows that it is a problem of the payment network's power structure rather than "Itch's responsibility"

See also

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