Whether to become a Payment Aggregator or Payment Facilitator has far reaching implications for a SAAS application provider.
A Payment Facilitator [Payfac] is essentially a Master Merchant that processes credit and debit card transactions for sub-merchants within their payment application.
These clients or sub merchants don’t have to go through the traditional merchant account application process and can typically enroll and begin accepting customer payments in hours. This instant onboarding can be a powerful customer acquisition tool and is how Square has been able to grow so significantly.
Managed PayFac
Becoming a true PayFac or PSP [Payment Service Provider] can be a great fit for businesses that fall into the software provider classification and particularly SAAS business service providers.
While there are certainly many benefits of being a true PayFac there are also significant financial requirements, compliance obligations and ongoing operational demands. For a thorough overview of these risks/rewards read Payment Aggregation: Is It Right For Me?
These prerequisites to true aggregation often leave out the SAAS provider that does not have the financial or staffing wherewithal or does not want financial risk exposure.
Fortunately there are now Managed PayFac or Managed Payment Facilitation solutions that offer the many pros of true aggregation without the very significant investments of time and money.
Payment Facilitation offers the benefits of EZ client onboarding as well as more ownership of the payment process. It also offers a recurring revenue stream from payment fees charged to end users.
Recurring revenue is the holy grail and becoming a PayFac definitely offers your organization the opportunity to create a new revenue stream.
With the Managed PayFac model you might think your revenue share opportunities would be reduced-after all you have all the benefits of being an aggregator and few of the drawbacks.
This may be the case but many times may not. Seems too good to be true?
The reality is that many SaaS platforms have a desirable client base from payment processing standpoint. If for example your client base is all medical offices or restaurants that client base is very low risk, potential high volume business-VERY attractive as everyone involved in the payments process makes revenue from those payments.
Note: If speed to market and instant on-boarding is paramount a MarketPlace Payment Solution offers zero liability, instant on-boarding and the ability to be up and running in as little as a week.
So if the business opportunity is viewed as very desirable your cost basis may be equal to or better than a true PayFac.
Here is another reason: In the Managed PayFac model you are in essence a sub Payfac. There is a true PayFac that assumes all those compliance and regulatory and infrastructure costs. They create a platform for you to leverage these tools and act as a sub PayFac. They have a lot of insight into your clients and their processing. This level of insight mitigates much of the risk that Vantiv for example faces after approving a platform to act as a true PayFac.
The question then becomes: “Why go down the true PayFac pathway?”
The Managed PayFac model does have a downside. In the true PayFac model a client at that medical office sees “My Medical” on their credit card statement. In the hybrid model if your Master PayFac is YourPay for example you would see “YPY* My Medical” on their statement [descriptor] where YPY* indicates YourPay as master PayFac. This may not be an issue or it may depending on your business model.
Another reason to act as the true PayFac is you own the payment process and that customer. There is no one in between or involved. Certain business may value that.
Contact us to discuss Managed PayFac payment needs.
How is Payment Facilitation different from a traditional merchant account?
Paypal/ Stripe/Square underwrite and provision the merchant accounts themselves and 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.
Here are some pros and cons of Payment Facilitation:
The disadvantages to the Payment Facilitator model.
The advantages to the Payment Facilitator model
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.
From our experience the #1 question to ask is: Will payments revenue be a primary profit driver for our business? If yes then becoming a Managed PayFac or PSP is definitely worth looking at.
Our role is to listen to your goals, wants and vision. After discussing we give you our opinion on a best fit and why we think so.
Full-blown Payment Facilitation involves assuming all payment, fraud and compliance risk. Essentially you are pivoting to become a payment company. Managed Payment Facilitation enable a platform ton instantly onboard users and generate payments revenue without the expense and risk of traditional Payment Facilitation. The draw back is that margins are not as attractive
There is one BIG questions that decides if you should become a Managed PayFac: Do you HAVE to have instant onboarding to attract users?
This varies with volume but if you price at the 2.9% and 30 cent common in the market, you can generate .3->.5% per transaction