Third-party settlement organizations (TPSOs) explained: How they work and how to choose one 📚💪

What exactly is a TPSO?

A third-party settlement organization is the “central switchboard” of a third-party payment network. In simple terms, TPSOs are businesses that:

1. Facilitate transactions between payers (e.g. guests or donors) and payees (e.g. service professionals or nonprofits)
2. Handle the payment process, acting as intermediaries to settle funds
3. Have a contractual obligation to make payments to the payees
   
   

Unlike a merchant-acquiring entity (the bank behind card rails) or a payment facilitator (PayFac), a TPSO usually touches many payment methods—cards, ACH, wallets—and does not need to underwrite each sub-merchant the way a PayFac does.

Fintech is evolving at a rapid pace, and it is Requite’s opinion that specialized TPSOs will play a significantly expanded role in solving specific business challenges as the trend of interoperability accelerates. Read more here.

The fund-flow in three steps

1. Payer pays using card, digital wallet (e.g. Apple Pay or Venmo), or bank transfer (ACH).
2. TPSO settles funds to the payees (workers or nonprofits) through an FBO account or similar financial tool.
3. TPSO reports annual gross proceeds on Form 1099-K once the payee crosses the threshold ( see table below 👇).

The compliance backdrop

‍

Falling thresholds mean more data, TIN-matching, and potential backup withholding. A TPSO worth their salt must be prepared to adapt to this landscape.

Many states exempt platforms from money-transmitter licensing if funds flow via an agent-of-the-payee structure—money is deemed received by the seller the moment the platform gets it. In tandem with FBO tooling, many TPSOs can outsource MTL requirements to trusted partners such as Stripe.

To learn about President Trump’s No Tax On Tips act and how businesses should prepare, review our update on S. 129.

TPSO vs. PayFac vs. PSP

‍

Why TPSOs Power the Future of Cashless Tipping

TPSOs are uniquely positioned to offer targeted fintech solutions for businesses along every stage of the growth curve. Smart partnerships and integrations with the larger payment ecosystem greatly reduce costs to businesses for resolving specific pain points such as wage shortfalls or inconsistent/nonexistent tipping that lacks transparency.

• Consumer shift: 67 % of Americans rarely carry cash.*
• Worker expectation: 85 % of service pros prefer same‑day payouts.*
• Guest friction: Apps and QR codes alone drop conversion by 20‑30 % compared with pairing with NFC 1‑tap tips.

A tip‑focused like SimplyTip TPSO eliminates those friction points while automating tax ops for finance teams.

‍

Why TPSOs Power the Future of In‑Person Fundraising

In-person fundraising events, from museum galas to charity 5ks, are quickly moving the same direction as consumer payments: cash-optional, contactless-preferred. A TPSO purpose-built to maximize in-person spontaneity like Requite’s SimplyGive unlocks:

• Immediate tax receipts: no manual bookkeeping or follow-up emails
• Friction-free giving: NFC or QR lets donors tap in <2 seconds without downloading an app or fishing for bills. Early pilots show a 37% lift in completed donations when a 1-tap reader is placed at registration tables or exhibits.
• No cash-handling risk: Funds land in an FBO account, so volunteers never juggle lockboxes and nonprofits avoid the security and audit hassles of cash
• Rich analytics - help orgs iterate on-the-fly and boost total gifts

‍

Common compliance pitfalls (and how to dodge them)

• TIN mismatch chaos – Assure collection of SSNs during onboarding or trigger the request to proceed with payouts beyond the annual threshold and run real-time IRS validation to avoid 24% backup withholdings.
  
  
• Data silos – Insist on event-driven webhooks so tipping transactions, reversals, and tax docs stay in sync.
  
  
• Agent-of-payee wording gaps – States can differ; mirror CSBS template language in your merchant agreement.
  
  
• “Set-and-forget” tax thresholds – Ensure the TPSOs 1099 logic is set to update with the changing regulations ($2500 for 2025, $600 for 2026).
  
  

How to choose the right TPSO: a nine-point checklist

‍

So you’ve realized that your business has a unique problem relating to payments. Now you need

1. Regulatory-fit – Does the provider file federal and state 1099-K? Support TIN-matching and backup withholding? Will its flow (FBO or agent-of-payee) keep you outside money-transmitter rules in key states?
2. Understanding of your unique needs - Is the solution one-size-fits-all or tailored to your needs?

Requite: Tip/Donation focus. NFC & QR options. Vertical specific design

3. Pricing transparency & SLAs – Flat vs. tiered fees, indemnity caps for tax mis-reporting, 24/7 support. Look out for monthly fees, termination fees, and other hidden fees and understand how these costs will impact your bottom line.
4. Settlement speed – Same-day ACH, RTP, or push-to-card? Hidden payout fees?
5. Payment/Settlement options – Can the provider offer choice to your team/business? Payouts through payroll OR direct-to-wallet? What payment methods are supported.
   
   
6. ROI – Can the provider produce meaningful outcomes for your team/business? How quickly can you recoup any initial investment? 

Requite: 1-2 weeks ; 6-8 with integrations ; +30% tip/donation totals +2x reviews +invaluable data insights

7. Deployment Speed – Time is money. How fast can your business start reaping the benefits of the solution?

Requite: Turnkey!...24-hours to start earning; 24-hours + ship speed for optional NFC touchpoints

8. Data exports & dashboards – Bulk CSV, webhook events, and worker-level tax dashboards for the $600 era.
   
   
9. Security & Risk tooling – Built-in KYC/KYB, OFAC checks, fraud monitoring. Is payment information protected?

Requite: checks these boxes…visit our site to learn more

Score each vendor 1-5 on these points; if they clear 44/50, you’ve found a contender!

TL;DR

• A TPSO moves money between guests and service pros or orgs, files Form 1099‑K, and can spare platforms from 50‑state money‑transmitter licensing.
• Form 1099‑K thresholds are dropping from $20 000 to $5 000 (2024) and $600 (2026+), multiplying compliance risk.
• Requite is a purpose‑built TPSO for hospitality, parking, transportation, and nonprofit donations—delivering instant payouts, giving‑centric UX, and a one‑to-two week payback period.
• Compare Requite using the scorecard above, then book a 15‑minute ROI call!

If you have any questions or would like to review your specific business needs with Requite, just get in touch—we’d be happy to help. You can also reach us on LinkedIn.

‍

If you’re ready to boost tips, cut churn, and glide through tax season then:

👉 Schedule a 15-minute strategy call: requite.tech/schedule-demo
📧 Prefer email? info@requite.tech

Turn every guest interaction into a win-win—for businesses, customers, and the service pros who simply deserve it.

‍

[Disclaimer: The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Requite does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.]