Benefits of Becoming a Payment Facilitator (PayFac)

A Payment Facilitator provides merchant accounts relatively quickly to businesses or individuals who want to process credit cards. For SaaS companies and other technology providers, there are many key benefits of becoming a Payment Facilitator.

Benefits

1. New Source of Revenue

As a Payment Facilitator, you can make revenue on each transaction one of your customers makes. As a Payment Facilitator, you underwrite your customers/sub-merchants and charge them for using your payment services.

From a cost perspective, payment facilitation may have a cost basis of 2.5% or more (Factoring in fixed costs, interchange, and more). You likely would need to charge 3% + a fixed fee to make money on each transaction.

Let’s take the example of two transactions, one for $100 and one for $200. In this example, the merchant pays your company 3% on each transaction while it costs you 2.5% of operating costs per transaction.

At scale, 0.5% or more of profit per transaction can provide a new source of revenue for your SaaS company. For example, $1 Billion Transactions per year  x 0.5% = $5 million profit per year.

2. Control of the Underwriting and Onboarding Process

If you aren’t a Payment Facilitator, you can’t process merchant payments for your customers without referring them to another Payment Facilitator or Payment Processor. For example, if you had a SaaS platform for Tutors and they wanted to process credit cards, you would have to get them underwritten with another payment facilitator (e.g., Stripe, Adyen, etc.) or a payment processor ( e.g., Vantiv Core, Vantive eComm, Chase Paymentech, First Data, etc.).

However, if you are a payment facilitator, you can process credit applications from them and quickly underwrite your customers. You wouldn’t need to use a third party for payment processing since they would be underwritten as sub-merchants underneath your Payment Facilitator organization.

The result is that you control the onboarding and underwriting process from start to finish.

3. Easier Support Process for Customers

If you aren’t the primary provider of payments, your customers need to go to a third party for troubleshooting. Instead of saying, “contact your payment processor”,  payment facilitators have the ability to actively help their customers onboard and ensure a customer’s payment environment is running smoothly.

Key Challenges

1. Upfront Costs

One of the most significant hurdles to becoming a payment facilitator is the large upfront costs from an infrastructure and compliance perspective.

From an infrastructure perspective, Payment Facilitators must be directly integrated into a Payment Processor.  Payment Processors are the only payment entities directly integrated into the Card Networks.

Connecting to Payment Processors isn’t the most straightforward process. The integration period can often take 18-24 months of development time with an experienced team.

From a compliance perspective, the biggest hurdle is achieving PCI Level 1 Compliance. This can take months of work, especially if you aren’t using a vaulting solution to store the PCI data.

2. Headcount

As a Payment Facilitator, you will be responsible for onboarding, underwriting, support, and, ultimately the risk of each merchant. To handle these new functions, your company’s headcount will need to increase to tackle each of these new responsibilities.

For example, you may need to create a:

1. Merchant Onboarding Team
2. Underwriting Team
3. Dedicate Payments Engineering Team
4. Payment Support Team to take customer calls and questions

3. Payments Knowledge

The history and existing infrastructure of payments can be fragmented and unintuitive at first.  To become a Payment Facilitator, a significant amount of knowledge must be spread at scale throughout an organization.

Examples:

1. You may need to explain to your customers why they have to wait 2 or more days before they can get paid out from today’s transactions.
2. Your operations and finance team may need to reconcile your data and your Payment Processor’s data to verify there isn’t a discrepancy
3. Your engineering team may need to learn about payments so they can successfully connect to the Payment Processors and handle the required flows (e.g. authorizations, ACH, refunds, chargebacks)
   

4. Critical Mass

To make the Payment Facilitation process profitable, there needs to be a critical mass of your customer base switched over. Fixed costs can only be overcome if there is a significant amount of payment volume.

The most considerable challenge existing companies face to Critical Mass is migrating existing customers from their previous third-party payment platform to your new processing platform. Credit Card Token migration often poses the most difficult challenge as you do not want your existing customers to be impacted.

Customer migration challenges can be compounded by underwriting information that you may not have available from existing customers. Previously, you may not have needed to collect Social Security Numbers (SSN) and additional business information. However, to successfully underwrite, you may need such information.