What Is a Payment Facilitator?
The payment processing landscape is constantly changing, and to stay competitive, Software as a Service (SaaS) professionals—such as independent software vendors (ISVs), value added resellers (VARs), and developers— must harness the latest payment technology to ensure top-level merchant satisfaction.
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For the vast majority of merchants, a satisfactory payment processing account entails, among other things, a rapid account onboarding process and a simple
rate structure. Merchants don’t want to deal with the time and hassle of filling
out paperwork, getting their new account underwritten, waiting for equipment setups, and analyzing confusing rate structures. Instead, merchants are seeking a processing account option that enables them to bypass the traditionally lengthy application process and complicated rate structures. With this in mind, it’s no wonder that the payment facilitator, or PayFac, model is skyrocketing in popularity.
A payment facilitator is a master merchant processing account that services a myriad of smaller sub-merchants under its umbrella. This business model enables payment facilitators to bring their merchants a seamless and instantaneous onboarding process, as well as transparent pricing structures—all while the payment facilitator itself enjoys full control over their clients end-to-end processing experience and fund/settlement disbursements.
How Do PayFacs Work?
The Traditional Merchant Onboarding Process Versus the PayFac Model
To fully understand the benefits of the payment facilitator model, it’s important to first take a look at what goes into creating a standard merchant processing account. In a traditional onboarding model, a merchant must first apply for a merchant ID and sign a direct agreement with a sponsoring bank. This enrollment and onboarding process often entails a great deal of paperwork, and can take days or even weeks to complete. In the meantime, the merchant’s ISV or VAR is hoping that the merchant has a positive experience and does not experience any frustrations that could send them in the opposite direction.
The PayFac Advantage
By contrast, the payment facilitator model eliminates the lengthy underwriting process and brings developers even more control over their merchant’s processing experience. To become a PayFac, the ISV or VAR signs a direct agreement with a processing bank (e.g., Elavon or Fiserv) which enables them to operate as a master merchant account. By operating as a master merchant account, the payment facilitator has the ability to onboard sub-merchants. The sub-merchants can then tap into the payment facilitator’s existing relationships with acquiring banks, as well as the PayFac’s processing technology, in order to get up and running fast with their own processing account.
In sum, here are the main differences between a traditional processing model and a payment facilitator model:
PayFacs By The Numbers
The payment facilitator model is experiencing rapid growth. Here’s what the research reveals about the growing popularity of the PayFac business model.
Popular PayFacs
Here’s an overview of some of the most well-known players in the industry.
Stripe was designed with online developers in mind, making it easy to integrate a variety of online payment processing tools and plugins through its application programming interface (API). Stripe charges a flat-rate fee per transaction with no monthly service charges. Rather than in-person payments, Stripe is primarily used for online transactions. Because these types of card-not-present payments typically have a higher probability of fraud than in-person payment methods, Stripe has a higher cost per transaction than other providers.
Adyen is a Netherlands-based company that provides businesses with a single platform to accept payments through any sales channel anywhere in the world. Adyen serves over 4,500 businesses and supports online, in-store, and mobile payment processing. Their technology platform acts as a payment gateway and a payment service provider (PSP), and offers risk management services in addition to payment processing. In 2017, the company was granted a European banking license, which gives it the status of an acquiring bank. Although they primarily operate in Europe, they have expanded their payment processing services to Singapore through a direct credit card acquiring license for Visa and Mastercard.
Square began as a mobile payment processor for small service-based businesses that operate on the go, such as service technicians, by providing a way to accept credit and debit cards safely and inexpensively. It’s typically used for in-person payments where the card is present and can be physically swiped through a point-of-sale (POS) device. Square became popular due to its free adapters that operate through a phone’s headphone jack, plus charging a flat-rate processing fee and no monthly service charges. The service is widely used by both mobile and brick-and-mortar businesses alike, and has added products for inventory management, appointment management, analytics, invoicing, online ordering, gift cards, and money management tools.
PayPal is an online e-commerce platform that facilitates payments between parties through online funds transfers. PayPal allows customers to establish an account onits platform, which is connected to a user’s credit card or checking account. After identification and proof of funds have been verified, a customer can send or receive payments to and from other PayPal accounts. Although PayPal is not a bank, they put security controls in place to ensure online purchases are safe by providing a form of payment that does not require disclosing credit card or bank account numbers. In addition to online payments, PayPal also offers a variety of related services, including credit card readers for small merchants and lines of credit.
PayFac Benefits For Merchants
In addition to streamlining the enrollment and onboarding process, payment facilitator typically offer a number of additional payment processing benefits to sub-merchants, such as the following.
Seamless Payment Integration Solutions
Merchants can easily integrate with payment facilitator ’s technology.
Less Expensive Than Buying a Technology System
A payment facilitator provides an all-in-one solution that eliminates the need to purchase.
Support for Back-Office Operations Reduces Overhead
Most payment facilitators come equipped with products to support various back-office activities such as invoicing and billing, inventory management, and purchasing software.
The Merchant Remains Out of PCI Scope
Signing up with a payment facilitator gives a business instant PCI Level 1 Compliance.
PayFac Benefits for ISVs, VARs, and Developers
The types of businesses best-suited for a payment facilitator model are Software as a Service (SaaS) companies or independent software vendors (ISVs) who 1) sell to small businesses, 2) are experts in a particular industry vertical, and 3) have payment functionality integrated into their software. The benefits of becoming a payment facilitator PayFac for such businesses are:
Earnings
The main benefit of becoming a payment facilitator is recurring revenue. As a master merchant with multiple sub-merchants, you earn a percentage of merchants’ transactions through processing fees. It doesn’t matter what lines of business or industries your merchants are in: your business is taking payments.
Speedy Onboarding
Payment facilitator have the ability to set up sub- merchants very quickly, which allows merchants to skip the lengthy merchant account application process and start taking payments almost immediately
Merchant Control
A payment facilitator has considerable control
over their sub-merchants’ customer experience, including transaction processing, streamlined billing processes, and chargeback management. Since PayFacs are typically experts in certain industry verticals, they possess a superior understanding of the unique processing needs of those industries. By making it easier for their merchants to do business, payment facilitator can strengthen their client relationships and improve retention.
Flat-Rate Fee Structure
Having a transparent, easy to understand, flat-rate fee structure encourages businesses to sign up with a payment facilitator because it eliminates surprise charges and gives merchants the ability to manage their budgets more easily.
The Challenges of the PayFac Model
The PayFac model can be incredibly rewarding for ISVs and VARs, but it does have its drawbacks—particularly if you choose to build your payment facilitator system from the ground up. Here are some potential pitfalls:
Underwriting and Risk Management
The biggest disadvantage of the payment facilitator model is the financial risk. As a Master Merchant, a PayFac is 100% liable for all financial risk associated with their merchant portfolio, including loss from fraud, failed payments, and even merchants going out of business. Another factor to consider is merchant profitability. Very small businesses that process only a few transactions per month are typically not profitable: The cost for acquiring, onboarding, and supporting low-volume businesses can be more than the money earned from processing and transaction fees.
Capitalization
Along with financial risk, the costs associated with becoming a payment facilitator can be considerable. The business must be able to pay for back-office support services, meet Payment Card Industry Data Security Standard (PCI DSS) compliance audit criteria, and pay any required licenses, certifications, business taxes, and registration and annual renewal fees to Visa and Mastercard, all of which can add up quickly. The entire startup process can take as long as six months and cost up to $100,000 or more.
Fortunately, there is a quicker and less complicated path to becoming a payment facilitator which also mitigates some of the above-mentioned risks. With the growth of off-the-shelf PayFac solutions, which are ready-to-deploy payment facilitator solutions offered by payment technology companies, ISVs or VARs can get up-and-running fast with a fully developed payment facilitator platform so that they can board sub-merchants without the hassle. These off-the-shelf PayFac solutions handle many aspects of industry compliance and certifications, which greatly reduces risk.
Taking the PayFac Plunge
You’ve researched your industry verticals, analyzed costs and profit potential, and understand the financial risks and responsibilities you will be taking on. If you decide that becoming a payment facilitator is right for your business, here’s an overview of how the process works and what you should be prepared to do.
As you continue to onboard merchants and process payments, it’s important to proactively monitor your merchant accounts as well as your processing system. You will need to maintain ongoing PCI compliance, keep appropriate tax records and reports, and ensure all licenses, certifications, and registrations are up to date and paid.
Takeaways
Becoming a payment facilitator takes time and effort, but integrating with the right payment technology makes it easy to grow your business and watch your profits soar. Are you ready to enjoy the benefits of the payment facilitator model?
- Greater control over your clients’ end-to-end user experience
- Rapid and hassle-free account onboarding
- Simple and transparent flat-rate fee structures
- Reliable and lucrative revenue stream
- Access to seamless integrations and cutting-edge technology
Whether you decide to integrate with a developer-friendly payment gateway as part of your payment facilitator infrastructure, or utilize an off-the-shelf PayFac solution, the latest technologies simplify the payment facilitator development process while ensuring utmost customer satisfaction. That’s why so many developers choose to integrate with Cardknox— click here to learn more.
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