Understanding Express Payment Solutions: PayFac Solution Options

Businesses that operate as Software as a Service providers (SaaS) can benefit greatly from becoming Payment Facilitators (PayFacs). PayFacs, or “Master Merchants,” control the credit and debit card payments for their sub-merchants. In recent years mainstream PayFac Solutions have emerged as extremely successful businesses such as Square, PayPal, and Stripe.

In order to understand what being a PayFac means, let’s use a home service provider (HSP) as an example. Traditionally, an HSP’s payment collection would go as follows:

  • Gathering a customers business info
  • Gather bank account information
  • Complete an arduous merchant account application
  • Wait for approval

If the HSP becomes a PayFac, or Payment Service Provider (PSP),  the home service provider only needs to provide enough info to satisfy “know your customer” guidelines and provide bank account information. The platform receives payment credentials from the PayFac partner through API, and the provider is able to accept payments.

PayPal broke into the payments realm by providing payment acceptance tools for marketplace sellers. These sellers would have otherwise struggled to apply and obtain their own merchant account. This “master merchant” model initially was initially prohibited credit card associations, but as PayPal’s business model proved to be working well the attitude towards this payment facilitation model changed.

Similarly, Square changed the payments ecosystem by changing the client onboarding game, allowing a business to purchase a reader, fill out forms online and accept payments that same day.

So, what differentiates PayFac Solutions from having Traditional Merchant Accounts?:

It must be noted that PayPal, Stripe and Square assume the risks involved in payment processing, which include chargebacks, fraud loss, and non payment. Hence, becoming a true PayFac requires a lot of money, customer vetting, compliance and effort.

Pros of the Payment Facilitator model:

  • More Merchant Control
  • Speed of Onboarding
  • Flat fee Structure
  • Ease of Onboarding
  • Ability to Earn More Money from Network and Transactional Fees

Cons of the Payment Facilitator model.

  • Customer Support Burdens
  • Rigorous Approval Process
  • Compliance with “Know Your Customer” Guidelines
  • Potential Tax Reporting
  • Higher Risk of Financial Loss
  • Integration Demands

The high earnings potential of becoming a true PayFac is very attractive, but the assumed risk that comes along must be understood. Fraud and non-fee payment are just some of the challenges that a business that chooses the PayFac model will likely endure. An end user could potentially sign up for your SaaS service with the intention of committing payment fraud. Imagine that you process $10,000 using stolen credit card info. What happens next? You and your application are responsible for such a loss.

Risk can be reduced by using technology to identify potential fraud. Your facilitation partner should provide automated risk assessment tools. Said tools will minimize your exposure, and should do most of the user vetting. You are still responsible for knowing your customer and being aware of potential fraud,  especially when initially onboarding. Most payfac platforms offer controls to measure velocity, funding, reserves etc.

Consider your customer before attempting to become a PayFac. You need to know if you have enough users to generate ROI through payments volume.

As the Payment Service Provider you should aim to provide customers with as much self-service support as possible. Customers will demand service immediately, and understanding your client base and their potential for dollar loss is pivotal to your success.  With risk mitigation measures being taken, the PSP model is great if fast and easy client onboarding is a priority for your business.

One has to ask themselves: Will payments revenue be a primary profit driver for our business? If the answer is yes then becoming a PSP or facilitator is worth investigating. For many businesses, Hybrid Facilitation is a better fit. In Hybrid Facilitation your costs and ongoing obligations are MUCH reduced. Of course the cost of this is less revenue from payments. Costs should be rigorously explored, including Integration, compliance, support, admin costs.

Once you have an idea about costs it’s now about:

  • Understanding What Your Costs Will Be
  • # of Clients
  • Appropriate Sell Rate
  • Payment Frequency
  • Whether Facilitation will Help Acquire Customers More Quickly
  • $ Amounts

Decide how many clients it will take to break even, and know both your client acquisition costs and lifetime value. This will provide insight as to whether the Payment Facilitation route is optimal.

Becoming a True Payment Facilitator:

  • Register with Sponsor Bank: The Sponsor bank/processor underwrites your business for their potential risk [fraud, negligence, reputational].  Your business is vetted to ensure all seems on the up and up.
  • Approval by Sponsor: You are officially approved and move on to integration/testing.  You will want to be thinking about compliance [PCI/KYC] options as well as ongoing risk mitigation.
  • Technology Platform Integration: Data flow, onboarding, funding risk controls are all in place and operating
  • Sponsor bank issues credentials to make systems live.
  • Go to market: Either batch onboard current clients or turn on customer acquisition tap.
  • Refine:  Understand what is working and what needs changing.

From start to finish this process can take over 6 months and an investment easily over $100k.

If this model looks like too much time, effort and money then you consider Hybrid Payment Facilitation. However, profit margins are typically reduced as a Hybrid PayFac. Take time to weigh your options and decide if becoming a PayFac is right for your business.