If you wish to facilitate the payment then you need to become an IPSP. The specific thing to look for is what it takes to become PCI certified. You will need to hook up with a gateway (such as FirstData or PaySquare) to get your charges processed.
Imho you are on the wrong path and would do better to simply apply to an existing IPSP as a customer and get a merchant account. That way you sidestep all the things that have to do with certification, you only need to pass the merchant accreditation, which is a whole lot easier and less costly.
Examples of IPSPs that you could apply to are epoch, ccbill and vxsbill.
Good Luck.
What you are about to do is to layer one IPSP on top of another so you control the stream of funds. Because you outsource the bulk of the problems to the IPSP below you you will have a relatively easy time of it.
If your merchants are going to use your platform (it is hard to say exactly what you will run in to without knowing a whole lot more about your project, but I understand you do not want to put all your cards on the table) then you will want to keep the balance you hold for them as low as possible to reduce the risk in case something goes wrong.
I'm actually working on a very long post (more like a small book) regarding the whole internet payment process, likely it will too much time for you to wait until it is done.
Ideally you would make a deal with an IPSP to see you as an affiliate, and get every merchant their own account with the IPSP. That way your exposure is limited and in case of conflict it will be between the merchants and the IPSP you pick.
Some, but not all IPSPs support this kind of functionality, the 'split' is usually either a fixed amount per transaction or a %age of the total sales volume.
You will have to figure in a two to six week 'holdback' period which is used to create a reserve in case of massive chargebacks due to fraud, it is also a major source of income for IPSPs and a major source of trouble in case one goes under.
1. I want to make sure the buyer is authentic and has the available funds
2. Once the merchant wins the auction, buyer cannot back out and the deposit authorized earlier goes to the merchant.
Now you are getting into 'escrow' territory, which is yet another level of difficulty.
> Once the merchant wins the auction, buyer cannot back out and the deposit authorized earlier goes to the merchant.
That sentence makes absolutely no sense!
I think you have 'merchant' and 'buyer' switched in the first part.
The normal way this is done is that the auction requires the buyers to put up a 'can execute' before the auction.
For online auctions this is rarely done, the more common method is that the #2 gets it if the #1 does not perform.
His/her bid then counts as retracted and they're banned from further bidding.
But I get what you're saying, you get buyers that want to buy stuff from merchants, they deposit some amount of money with you, then the merchants can go in to a 'reverse auction' (that's what this model is called), the winner is the one that puts in the lowest bid.
You really should make such stuff clear up front when you ask for advice.
This is yet another kettle of fish, with its own associated problems.
You really don't want to be in between here, after all the chances of rip-offs increase enormously, or you will have to go through a lengthy accreditation phase with each merchant where you verify that they can deliver the goods.
In a normal auction the bigger problem is the buyers not being able to pay up.
If there is a performance related issue (such as work for hire) then you have even more things to contend with, such as deadline management, fallbacks and so on.
For instance, if there are no 'takers' then you end up having to refund but the charges are gone.
A hard to catch fraud angle here is a person laundering money putting charges on cards for deposits, then having a 'white' merchant receive the deposits with ridiculously low bids.
We have sort of solved that issue. The only issue left to be solved is authorizing a deposit against the buyers account before the auction, and then transfering this amount to the merchant at the end of the auction. This deposit is not only going to be part of the price of the merchandise. Any idea on how this model could be improved?
Longer terms you will have to simply charge the account and then do a refund.
So this very much depends on the timing of your auctions.
Google Checkouts is also a possibility but lacks a strong api.
> I will facilitate payment between a buyer and a merchant and charge a fee to process the transaction.
So his customers could apply to FPS but he can not do that unless he is the merchant.
Amazon does not allow that because they want to sit in that chair and do not want the 'real' merchants to sit at arms length.
I believe that Paypal does allow you to do this, iirc that's the reason etsy chose them for their financial needs.
Paypal is very finicky to deal with though, especially if you hold money in your account that is intended for third parties.
And if your account would ever be blocked then you would be in serious trouble with your merchants.