Payment Facilitator: What is a Payment Facilitator and when does it make sense for a SaaS Platform to explore becoming one?
A Payment Facilitator or PayFac acts as a Master Merchant. The PayFac’s role is to quickly and easily onboard sub merchants to facilitate credit, debit card and in some case ACH transactions for participants in their payment ecosystem. The Payment Facilitator is responsible for regulatory compliance and bears financial risk of their sub-merchants.
In years past the only Payment Facilitator model option was the “True PayFac”. Becoming a true Payment Facilitator is expensive, time consuming and requires staffing to meet compliance and risk mitigation demands. In essence you become a payment business in addition to to your core SaaS offering.
Today technology and regulation changes enable a Hybrid or Managed Payment Facilitation model. In this scenario the SaaS platform looking to gain the benefits of being a Payment Facilitator [fast onboarding, revenue generation, more control of payments process] can take advantage of the PayFac benefits without incurring much of the costs or significant compliance challenges. We will use an example to illustrate what the Payment Facilitator role is and how the true versus managed roles would vary.
As an example a SaaS offers an invoicing solution eg CoolBooks. Businesses that want to leverage their invoicing solution complete a simple application and 15 minutes or so later they are approved and set up to accept customer payment. For our example let’s say the business name is “Best Landscapers”.
Note: In this application process we see one of the differences between True PayFac and Managed PayFac. Best Landscapers execute a contract that spells out responsibilities and fees. If CoolBooks went the True PayFac route the customer contracts with CoolBooks. If CoolBooks was a Managed PayFac they are a sub PayFac of another registered PayFac. In essence they are leveraging all the compliance and tech resources the Master Payment Facilitator already has in place. If CoolBooks elects the Managed Payment Facilitator route then the customer will see reference to the Master Payment Facilitator in the sign-up phase.
Let’s say they send an invoice to Suzy Jones for $100. She pays online via credit card [ACH is possible in some solutions].
- The business receives customer payment less the fees charge by the Payment Facilitator. Often this is in the 2.9% and 30 cent range so the deposit would be for $96.80
- On her credit card statement:
- If a True Payment Facilitator Suzy Jones sees CBS* Best Landscapers [CBS is abbreviation for CoolBooks]
- If CoolBooks acts as sub Payment Facilitator then Master PayFac abbreviation appears before Best landscapers.
In both True and Managed Payment Facilitator models there is a revenue stream generated for every payment transaction. Typically the True Payment Facilitator model offers greater revenue potential but is often not the case. Much depends on the SaaS offering and a-perceived risk b-overall payments volume.
If your app has a low risk high potential $ processing volume you tend to have negotiating power and the revenue generation potential tends to be about equal.
Becoming a Payment Facilitator or PSP [Payment Service Provider] is often a great fit for SaaS platforms that offer a payment processing solution.
With the significant rise of SaaS platforms offering embedded payments there has also been an increase in the number of acquirers offering a payment facilitation solution as well as technology plays to improve areas where traditionally the legacy acquirer platforms have weaknesses [eg chargeback management and funding].
This makes for a very attractive time for SaaS platforms looking to leverage Payment Facilitation to become a PayFac to both drive new revenue streams and create a better end user experience.
How is Payment Facilitation different from a traditional merchant account?
Paypal/ Stripe/Square are all true Payment Facilitators and underwrite and provision the merchant accounts themselves as well as fund their sub-merchant’s payments. MOST importantly, PP, Stripe and Square assume the risks involved in payment processing. These include fraud loss, chargebacks and non payment.
Because of these risks and more [eg money laundering] there is a tremendous amount of money, work, scrutiny and compliance to becoming a true Payment Facilitator.
A traditional merchant account provider will obtain information from the business owner that makes them comfortable enough to assume payment risks. This could include voided check, bank statements, copies of business license, personal license and more. As a Payfac these friction points are removed and much of the customer vetting process is automated via API calls.
The disadvantages to the Payment Facilitator model.
- Potential risk of financial loss
- Customer support burdens
- Integration demands
- Approval process to become a PSP can be somewhat burdensome
- Compliance with KYC/PCI and potential tax reporting
- See video: Becoming a PayFac – What can go Wrong?
The advantages to the Payment Facilitator model
- Speed of boarding process: Being a Payment Facilitator allows you the ability to setup sub-merchants very quickly, removing a choke point to new client acquisition.
- PayFac Model: Right for you?
- Customers love that it is so easy to get the account going with no paperwork or documentation burdens. This dramatically improves the client boarding process. Buy a Square reader at Walgreens, go online and create your account and within 30 minutes you can be swiping payments. That’s a very attractive acquisition tool.
- Merchant Control: Sub-merchants are under contract with you, the Master Merchant.
- Payment Facilitation – I Want be a PayFac!
- Flat fee structure: Easy to understand flat fees for your merchant customers. No needs to understand interchange tables.
- Earnings: Master merchants are able to earn money from network and transactional fees, and potentially float. This is the big one for most SaaS platforms contemplating going the facilitation route. FinTech has seen massive investment and the main attraction is recurring revenue. As long as people are taking payments, revenue + profit are being generated. Think about a regular business selling widgets. Unless those widgets are razor blades the purchase frequency can be months or years. Contrast that with a business taking payments. You can see the allure of the payments business and why SaaS platforms look at payment facilitation.
Revenue is derived simply from the difference in buy rate from the processing networks and the sell rate charged to the end customer. For illustration, if a Payment Facilitator knows their true overall cost amounts to 2.4% of processed volume and they sell at 2.9% their margin is .5% of dollars processed. If they process $10,000,000 per day that works out to $50,000 in revenue per day. Very attractive business model and you might say sign me up.
Not so fast.
There is still the risk exposure that must be examined. Any business that chooses the PSP model will likely face loss from fraud, going out of business, non-fee payment, etc. It is possible an end user signs up for your SaaS offering with the intention of committing payment fraud–it does happen. They are enrolled in your ecosystem and process $10k or even $100k using stolen card data. Who is on the hook for that loss?
If you suspect it’s you and your application you would be spot on. Going into payment facilitation without an understanding of your risk exposure is a fast way to lose your shirt. Mitigating risk and using technology to identify potential fraud is massively important. Your facilitation partner should provide automated risk assessment tools that minimize your exposure. These tools will do most but not all of the user vetting. You still need to know your customer and be aware especially when first onboarding of potential fraud. Most payment facilitation platforms offer controls to measure velocity, funding, reserves etc.
In addition, small dollar average ticket merchants that do very few transactions per month are typically not profitable. A merchant that does three $40 transactions per month might generate $4 in revenue. If acquisition, boarding and support cost an average of $40 per merchant, the ROI is almost a year to break even. So thought must be given to your target user base: Do we have enough users so that payments volume will generate ROI?
As the PSP you will also be front line for payment related support and when money is on the line you know people want service ASAP. There must be thought given to the support burden when pursuing the PSP model. The more you “know” your client base and the potential for dollar loss the more informed your decision will be. Thought should be given to documentation and support systems that allow for as much self service support as possible.
So it for you? Definitely a decision your business needs to give a lot of thought to. If fast/easy client boarding is a must the PSP model is very tough to beat. There is of course the risk mitigation that MUST be addressed. There are certainly cases where payment processors have gone down because they did not properly mitigate exposure. Customer service burdens are also a part of your decisioning. Typically you will also have an integration timetable to ensure the account provisioning, application process and KYC [know your customer] obligations are programmatically correct.
It is also very much a numbers game. Your hard costs should be explored up front. Integration, compliance, support, admin costs should all be looked at.
Once you have an idea about costs it’s now about:
- Number of clients
- Payment frequency and $ amounts
- Will facilitation allow you to acquire customers more quickly?
- Based on payments data from either your usage or similar businesses try and peg where your costs will be
- Appropriate sell rate
Run the numbers and decide how many clients it will take to break even. You should know both your client acquisition costs and lifetime value. This will provide insight as to whether going down the Payment Facilitation road makes sense.
How do you become a Payment Facilitator?
After you have decided what Facilitation solution is the best fit your next steps vary.
Full blown Payment Facilitator
1-Register w/Sponsor Bank. The Sponsor bank/processor [eg Vantiv] underwrites your business for their potential risk [fraud, negligence, reputational]. You and your business will be vetted to ensure all seems on the up and up. Think applying for a large mortgage.
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: You make sure data flow, onboarding, funding risk controls are all in place and operating
4-Sponsor bank issues credentials to make systems live. Testing moving real money around to monitor flow and system performance.
5-Go to market. The fun part-you either batch onboard current clients or turn on customer acquisition tap.
6-Refine. You will learn a LOT in first weeks/months. What is working and what needs changing.
Start to finish this can take 6+ months and significant $ investment – easily $100k+
If all of that seems too much time, effort and money then you consider Hybrid or Managed Payment Facilitation. In this model the path to facilitation is less onerous. You can sign contracts, integrate, test and go to market in as little as 3 weeks.
Typically there is a catch and that is you profit margins are reduced. This does not necessarily have to be the case. Much is dependent on the applications a-Potential volume b-perceived risk exposure and c-company’s financial strength.
So don’t discount this pathway-it can be a very attractive middle ground.
Check out Video: 5 Things You Must Have to become a Payment Facilitator
There is also a third alternative to becoming a Payment Facilitator while still being able to offer fast account set up. You may find a Third Party Processor with slick API’s for merchant account onboarding that offers a hybrid blend between traditional reselling merchant accounts for a TPP and acting as a Payment Facilitator. Advantages are no risk, no support and much lower implementation costs. You still gain revenue benefits without admin burdens. It is unlikely you would be able to provision accounts as quickly as if acting as the PSP, but this may be the best fit for you. Especially if you want to focus on your core product but realize payments can play an important role is business growth [and revenue generation]. Check out Saas Payment Partnerships for options
In summary Payment Facilitation isn’t for everyone but that’s not what is important. The question is “Is it right for you”?
That’s a question best answered by having a conversation with you guessed it: Agile Payments. Our strength is creating partnerships that help your business be more profitable.
Contact us today
You can get more detailed information from our Whitepaper: Payment Facilitation: Is it right for my business?