- Rising Demand for Payment Facilitation Services: The last decade has seen a surge in demand for payment facilitation (PayFac) services, primarily due to companies like PayPal, Stripe, and Braintree demonstrating successful PayFac models. This growth is fueled by acquirers delegating merchant experience management and a market trend towards integrated payment solutions.
- Advantages for Certain Business Types: Businesses with existing customer background verification systems, such as ISOs, SaaS companies, and online marketplaces, find transitioning to a PayFac model more manageable. This shift is further supported by the availability of intermediary solutions like white label PayFac and PayFac in a box.
- Comprehensive Compliance and Upfront Costs: Transitioning to a PayFac involves significant upfront costs, adherence to strict regulatory standards (PCI DSS, AML, KYC), and the establishment of robust risk management and security protocols. Companies must be prepared for these challenges before embarking on this journey.
- Strategic Partnerships and Revenue Models: Becoming a PayFac requires strategic partnerships with acquirers and card associations, and a thorough understanding of the payment ecosystem. Revenue is typically generated through transaction fees, service packages, and partnership agreements, necessitating a tailored approach to different merchant needs and preferences.
The topic of becoming a payment facilitator is as fresh and relevant as ever for many companies. Indeed, during the last decade, we witnessed a real PayFac boom. We should admit, that, to a large extent, it resulted from demand for payment facilitation services and willingness of acquirers to delegate merchant experience to other entities. At the same time, success stories of PayPal, Stripe, Braintree, WePay, and others became model examples to follow.
For businesses that already have some customer background verification logic at hand, the task of becoming a PayFac is a bit easier to accomplish. For example, such businesses include ISO, SaaS companies, franchisors, ISV, online marketplace owners and, perhaps, venture capital firms. Moreover, the prospect of implementing a payment facilitator model became even more appealing with the emergence of intermediary solutions. For instance, these include white label PayFac, PayFac in a box, managed PayFac etc.
No matter how lucrative the prospect may seem, the process of becoming a PayFac means considerable upfront costs, new requirements, and responsibilities. So, if you are serious about becoming a payment facilitator, you should know what to expect as you go through the process.
We will start by explaining the payment facilitator concept to those, who are still unfamilliar with it. If you are, you can skip the respeective section. Then, we will move on to the most important aspects a company should address along the way to becoming a PayFac.
Who is a payment facilitator?
A payment facilitator is a business that provides a simplified payment processing experience to other businesses. It allows a portfolio of sub-merchants to accept payments from their customers without the need to obtain their own merchant accounts. Payment Facilitators manage their own merchant accounts and provide a range of services to sub-merchants. These services include merchant onboarding, funding, payment processing, reporting, risk management, chargeback disputing, and customer support. The PayFac model has gained popularity in recent years, as it allows businesses to simplify their payment processing and reduce costs, while also providing a better customer experience.
PayFac vs ISO
Moreover, in a sense, PayFac model relieved acquirers from merchant management functions, which they delegated to PayFacs. Initially, acquirers delegated merchant account setting to resellers called independent sales organisations (ISOs). ISOs were once the go-to solution for businesses that needed help setting up merchant accounts and processing payments. However, ISOs were often seen as a costly and inefficient solution, with lengthy onboarding processes and high fees. Besides that, traditional ISOs do not take part in merchant onboarding and other functions, related to merchant lifecycle. So, in comparison with ISO model, PayFac is a more progressive and universal. In essence, the model is beneficial for all entities involved: acquirers, sub-merchants, and PayFacs themselves.
PayFac model: history and benefits
The PayFac model emerged in the early 2000s, pioneered by payment facilitator US companies such as PayPal and Stripe, which offered a simple and streamlined payment processing experience. Over time, the PayFac model has gained popularity among businesses of all types and sizes, as it offered a range of benefits beyond just streamlined payment processing. As we have explained, it allows businesses to manage their own merchant accounts, simplifies the process of onboarding new merchants, and provides more control over the payment experience.
Today, the Payment Facilitator model is an established part of the payment industry landscape, with many leading payment gateway providers offering PayFac services to businesses around the world. As the payment industry continues to evolve, the PayFac model is likely to play an increasingly important role in helping businesses streamline their payment processing and improve their bottom line.
Major aspects of becoming a PayFac
So, what does it take to become a PayFac? In this section we will breiefly dwell on the most important aspects of the process. These aspects include:
- partnerships and regulatory compliance,
- implementation process,
- technology and infrastructure requirements,
- merchant onboarding,
- revenue and pricing models,
- risk management, and
- customer support.
As we can see, each of the aspects can be attributed to either business (regulatory) or technical side of the process.
Partnerships and application process
In order to start the process, a prospective PayFac needs to get registered by card associations and an authorized acquiring bank. It is on behalf of this acquirer that the PayFac will service its sub-merchants. The application process for becoming a Payment Facilitator can be complex and time-consuming. It typically involves an initial application, underwriting, and approval process. To simplify this process, some providers offer special payment facilitator programs that make it easier for businesses to get started with Payment Facilitation.
Regulatory compliance and risk management
Besides registration and certification, becoming a PayFac requires a business to comply with various regulatory standards. These include Payment Card Industry Data Security Standards (PCI, PCI DSS), Anti-Money Laundering (AML) laws, and Know Your Customer (KYC) regulations. Ensuring compliance with these requirements is crucial for the success of your Payment Facilitation business. It is important to partner with a trusted payment gateway provider, regularly review and update your compliance policies and procedures, and train your staff on compliance requirements.
Primary goal of security standards is to help the company ensure secure payment experience and mitigate various risks. These include cinsumer and fraud, as well as, again, compliance risks. The respective risk mitigation tools should include real-time fraud detection, customizable risk settings, as well as comprehensive reporting and analytics.
Technology and Infrastructure
Setting up a Payment Facilitation platform requires robust technology and infrastructure to ensure smooth, reliable, and secure payment processing experience. Some of the key features include advanced fraud detection and prevention tools, customizable risk settings, and a robust reporting, and analytics dashboard.
Onboarding merchants onto the PayFac platform is a critical aspect of the Payment Facilitation business. It is important to streamline the process of collecting and verifying merchant information, setting up merchant accounts, and managing payment processing. Key features include customizable onboarding workflows, automated underwriting processes, support for target payment methods and MCC codes.
Payment monetization and revenue sharing
Payment Facilitators generate revenue in a variety of ways, including per-transaction fees, monthly service fees, different pricing plans, service packages, and revenue sharing arrangements with partners. It is important to offer sub-marchants a solution that optimally suits their business needs and types, and supports their preferred payment methods. Such a solution allows a PayFac to diversify its revenue streams most thoroughly.
State-of-the-art customer support is essential for the success of any Payment Facilitation business. Ideal 24/7 customer support should incorporate all available channels, including phone, email, and chat. Their team of specialists should be available to help customers with any questions or issues that arise, including payment disputes, chargebacks, and other inquiries.
Now that we have outlined the most important aspects of the process, let us move on to the brief step-by-step insturction.
10 basic steps to becoming a payment facilitator a company should take
- Register your business with card associations (trough the respective acquirer) as a PayFac. Card networks, such as Visa and MC, charge around $5,000 a year for registration.
- Establish a processing partnership with an acquirer/processor. The crucial aspect of this partnership is your transaction processing terms and costs/fees.
- Go through underwriting process as a PayFac with the respective acquiring bank. Even if you are a certified merchant, long underwritten by some acquirer, becoming a payment facilitator requires you to get through a separate underwriting process as a new entity. And keep in mind: not all acquirers that issue merchant accounts are authorized to underwrite you as a PayFac. So, you will need to complete a review of your operations model, provide estimates of expected transaction processing volumes, financial credentials, and other data.
- Meet general liability insurance and cyber insurance requirements.
- Develop a mechanism for management of your sub-merchant portfolio. The merchant management system should allow you to perform ongoing monitoring and support of the whole merchant life-cycle.
- Develop a mechanism for initial merchant background verification and underwriting (KYC logic etc).
- Establish a payment gateway partnership. In this context you have several approaches to choose from. First, you can develop a gateway product from scratch. Second, you can license a readymade solution as an open-source-code product that you can customize in-house. Third, you can resort to some white label gateway option. And, lastly, you can partner with a third-party gateway provider, offering its solution under its own brand.
- Go through Level 1 PCI certification.
- Organize sub-merchant funding. This is one of the most important aspects, giving PayFacs an advantage over ISOs. Indeed, they take an active part in sub-merchant funding, even though they fund merchants on behalf of (and/or via) some acquirer/processor. In reward, they get their share of merchant servies fees.
- Implement mechanisms to protect you against the merchant and consumer fraud to ensure secure payment experience.
Becoming a Payment Facilitator can be a great way for businesses to simplify their payment processing and reduce costs. By following the steps outlined in this article and partnering with a trusted payment technology provider, businesses can navigate the complex process of becoming a Payment Facilitator and start reaping the benefits of the PayFac model.
We have just outlined the basic steps any prospective PayFac should follow. So, if you need more in-depth guidance and specific recommendations regarding your particular business case, you are welcome to consult payment experts and/or download a free white paper. They will be happy to help you, just like they helped other companies that are now successfully working as a white label or full-fledged payment facilitators. If you are looking to implement an PayFac gateway solution for your payment facilitator company, check out our short video guide.