Understanding Customer Payment Solutions: Examining Payment Facilitation

Software as a Service businesses often benefit from becoming Payment Facilitators (PayFacs). Payfacs, often referred to as “Master Merchants” are in control of the credit and debit card payments for their sub-merchants. Paypal, Stripe, and Square are all examples of PayFac Solutions, or payment service providers (PSP).

Let’s take a look a home service provider as an example. Traditionally, payment collection would entail gathering a customers business and bank account information, then complete an arduous merchant account application and wait for approval.

As a Payment Facilitator, the home service provider must only 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 can just accept payments.

Such a simple payment options is a HUGE client attraction tool.

PayPal changed the face of the payments realm by providing payment acceptance tools for marketplace sellers, who would have struggled to apply and obtain their own merchant account. This “master merchant” model initially was prohibited by credit card associations. As PayPal’s business model proved to be extremely lucrative, the attitude towards this payment facilitation model changed.

By the same token, Square took onboarding to new heights by allowing a business to purchase a reader, fill out forms online and accept payments that same day. Most notedly PayPal, Stripe and Square assume the risks involved in payment processing, include fraud loss, chargebacks and non payment. This means that becoming a true PayFac requires a lot of money, effort, customer vetting, and compliance.

Here are some pros and cons of PayFac Solutions:

Advantages to the Payment Facilitator model:

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

Disadvantages of the Payment Facilitator model.

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

While the earnings potential of becoming a true PayFac is attractive, the assumed risk must be understood. A business that chooses the PayFac model will likely face loss from fraud, non-fee payment, etc. An end user could sign up for your SaaS service intending the commit payment fraud. Imagine that you process $10,000 using stolen credit card info. What is the fallout?

YOU and your application are responsible for such a loss. However, risk can be reduced risk by using technology to identify potential fraud. Your facilitation partner should provide automated risk assessment tools that minimize your exposure, including tools that will do most of the user vetting. You are still responsible for knowing your customer and being aware especially when first onboarding of potential fraud. Most payfac platforms offer control to measure velocity, funding, reserves etc.

Before opting for PayFac Solutions, one must also consider their their customer base and themselves: Do we have enough users so that payments volume will generate ROI?

As the PSP you should be giving thought documentation and support systems that will allow for the maximum amount of self-service support. Customers will want service asap, and understanding your client base and their potential for dollar loss is pivotal to your success.

The PSP model is great if fast and easy client onboarding is a priority for your business, as long as risk mitigation measures are being taken.

The main question one has to ask is: 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 need to be rigorously explored, including Integration, compliance, support, admin costs.

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

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

You’ll need to 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:

1-Register w/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.

2-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.

3-Technology Platform Integration: Data flow, onboarding, funding risk controls are all in place and operating

4-Sponsor bank issues credentials to make systems live.

5-Go to market. The fun part-you either batch onboard current clients or turn on customer acquisition tap.

6-Refine. Understand what is working and what needs changing.

Start to finish this can take 6+ months and significant $ investment, easily $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.