Becoming a payment facilitator (PayFac) is quite lucrative for many brands. According to industry analysts, by 2021, Software as a Service (SaaS) providers and independent software vendors (ISVs) will generate $4.4 billion in revenue as payment facilitators.
Your brand is unlikely to become the next PayPal, but becoming a payment facilitator may be one of the smartest business decisions you make. Once you’re up and running, you’ll enjoy a mostly passive revenue stream while boosting your brand in numerous ways.
Payment Facilitation: A Quick Overview
Every platform or marketplace is different, but customers are increasingly turning to platforms that offer payment processing services. Working with a marketplace that can provide a one-stop-shop solution is attractive for many entities that need to process payments.
Payment facilitation is complex because it represents compliance with the requirements of three significant parties:
These three players share a responsibility to secure the payments ecosystem from various angles.
Most payment facilitators fall into one or more of three categories:
Commerce platform providers
Marketplaces or platforms
Commerce Platform Providers
These entities include companies like Stripe and Square, which facilitate digital transactions using modern payment software and hardware technology. These platforms own payment flows and are responsible for paying out money directly to the sub-merchants that use them for payment processing.
Independent Software Vendors
ISVs offer direct payment solutions. However, they do not control the required technological infrastructure.
Marketplaces or Platforms
These merchants aggregate a set of sub-merchants, controlling the flow of funds and payouts. SaaS platforms with a large number of clients who need to process payments are likely candidates for becoming payment facilitators.
Payment Facilitator Partners
If you decide to become a payment facilitator, you’ll work with several key players to get your payment ecosystem set up and flowing smoothly.
Acquiring or Sponsor Bank
These financial institutions supply merchant accounts with the ability to hold deposits. They also assume liability for the PayFac’s clients’ transactions. The payment facilitator will need to meet strict requirements to be approved by a sponsor.
Payment processors authorize transactions and send them through to card networks like Visa, Mastercard and Discover. They also work to settle bank funds from the banks that issue the cards used for transactions. Payment facilitators must become fully integrated with payment processors to route transactions correctly.
You’ll also work with your own clients or sub-merchants, industry regulators, software engineers, and many other parties along the way.
Becoming a Payment Facilitator: Benefits
There are three compelling benefits you may want to consider if you’re thinking of becoming a payment facilitator.
1. Acquiring a New Revenue Stream
Payment facilitators earn a per-transaction fee each time a customer or client purchases a product or pays for a service.
This per-transaction revenue accumulates quickly at scale. If your clients routinely process a high number of transactions, becoming a payment facilitator can lead to a measurable income boost.
Plus, each time a merchant is up and running, the per-transaction fee becomes more of a passive revenue stream. You can use automation tools to handle your transaction fee processing.
2. Cutting Out the Middleman
As a payment facilitator, you’ll be able to connect your clients to payment processing products directly. You won’t need to loop in a third party payment facilitator like PayPal or Stripe. Instead, you’ll control onboarding and underwriting from beginning to end.
Here’s an example. Imagine you have an SaaS platform for small retailers, and one of your clients decides to offer credit card payment options. If you aren’t a payment facilitator yourself, you’ll have to get them underwritten by a third party payment facilitator or payment processor.
As a payment facilitator, you can process your clients’ credit applications and underwrite them yourself. These clients become sub-merchants under your payment facilitator account.
3. Being Able to Offer Value-Added Client Services
Inevitably, your clients will encounter problems running payments. As a payment facilitator, you’ll be able to help these customers yourself. They won’t have to contact their third-party payment facilitator, and you won’t have to draw attention to what you’re able to do directly.
This increase in service quality is a value-added benefit for your customers that you can capitalize on through your marketing messages when generating leads. Offering payment
processing to your existing clients can enhance customer lifetime value (CLV), loyalty, and trust.
Becoming a Payment Facilitator: Challenges
To make thoughtful business decisions, it’s vital to weigh challenges against benefits. There are a few things you’ll want to carefully consider if you’re thinking of becoming a payment facilitator.
1. Upfront Investments
When you become a payment facilitator, you’ll need to make a significant investment into infrastructure and industry regulatory compliance.
Payment facilitators integrate into a payment processor’s network to access major credit card networks. This can take several weeks, if not months. All your systems and your clients’ systems need to work seamlessly with those of the payment processor. Getting to that point is a highly technical, complex, and costly undertaking.
2. Sponsorship and Compliance Concerns
Dealing with financial institutions and industry regulators can be challenging, time-consuming, and frustrating.
Financial Sponsorship Requirements
You will need to obtain financial institution sponsorship to become a payment facilitator. It would be difficult to overstate how important it will be to partner with a trustworthy, stable bank.
Your relationship with a sponsor bank will be critical. Ideally, the bank you select will operate smoothly and allow your clients’ transactions to flow freely, but bank disruptions are always a looming threat.
For example, if regulators step in because the bank fails to comply in some way, your relationship could suffer. Depending on what the regulators determine, you may lose your ability to perform as a payment facilitator with the bank entirely.
You’ll also want to consider the stability of potential financial sponsorship partners. You don’t want your relationship to be damaged or ended as collateral damage when the bank changes management or downsizes its operations. While you can’t predict every possible internal disruption that might impact your agreement with a bank, due diligence is a must.
Payment facilitators often work to achieve PCI DSS (Payment Card Industry Data Security Standard) Level 1 Compliance. These standards are developed and maintained by the PCI DSS council, which comprises five of the largest card brands: Visa, Mastercard, Discover, American Express and JCB International. These brands take a collaborative approach toward upholding cardholder security, which includes requiring payment facilitators to comply with specific requirements.
PCI compliance goes well beyond ticking off a few checkboxes and running audits. You’ll need to ensure that both you and your clients are using only PCI-compliant systems throughout your business. You’ll also be responsible for ensuring that each of your sub-merchants is using a compliant system under specific security protocols — for example, maintaining restricted access.
Keeping up with PCI compliance is a major undertaking. You will either need to dedicate staffing resources to this task or outsource some or all of the background work required. Compliance requires merchants and service providers to submit to a yearly onsite audit and file annual compliance reports to be approved by a Qualified Security Assessor (QSA) or Internal Security Assessor.
3. Staffing Issues
You’ll need to work with each individual client to handle onboarding, underwriting, and support issues. If you have many clients, you may find that you need to hire additional staff members to handle these new functions.
Many payment facilitators have several staff positions dedicated to payment technology and processing:
An underwriting specialist or team
A PayFac client support team
A merchant onboarding specialist or team
PayFac software engineers and specialists
From a corporate structure standpoint, you’ll need to decide how you’ll manage these new employees. Will they join your existing payments or FinTech team? Would it be better to create an entirely new department?
These are significant investment decisions that will take time and resources to develop.
4. Client Education Commitment
Becoming well-versed in payment facilitation takes time and commitment, and this education doesn’t end with you. You’ll need to invest time into getting your clients up to speed on relatively complicated new processes that will impact their businesses in a meaningful way.
As your clients become familiar with this new aspect of your relationship, they are likely to run into occasional hurdles. You may need to walk them through complex procedures, explain how payouts work, introduce new methods for reconciling payment data, and so on.
Client education is an ongoing resource investment. Any time new compliance regulations are enacted or a card network introduces new integration requirements, you’ll need to connect with your clients.
Becoming your clients’ payment facilitator will increase the level of attention you’ll need to provide each of them at scale. These new investments of time will be spread across multiple departments or staff members, but you’ll still need to account for the total time needed for client education as you look ahead.
5. Critical Mass Urgency
The key to becoming a successful payment facilitator is reaching the tipping point where you have enough clients to overcome your fixed costs. This point may require a considerable number of customers.
To lure enough clients into using your payment facilitation services, you’ll need to sway them away from other third-party payment platforms that they have become comfortable using. If you can’t bring on enough new clients to reach the tipping point, you’ll have wasted all your time and resource investments.
6. Client Service Issues
Your clients may not be receptive to the idea of switching the way they have already been accepting payments. You’ll need to spend time reassuring them that the switch will be worth the effort.
Bear in mind that you may need to gather new information to perform the underwriting process. For example, you may not have needed to collect Social Security or Employee Identification Numbers in the past, but you may need them now to meet the new underwriting requirements. This can feel like an imposition to some of your clients.
Should you become a Payment Facilitator?
Here are a few key takeaways to consider as you make this key business decision. Becoming a payment facilitator is expensive and time-consuming, but it can lead to a new lucrative revenue stream. It also:
Requires master-level coordination between numerous entities, institutions, and technical specialists
May require you to drastically change fundamental aspects of the way you run your company
Is likely to impact your client relationships but also strengthen client loyalty and increase customer lifetime value
Can help you build your client base
May require you to devote resources to shifting your approach to client service and education