Payment Facilitators vs. Acquiring Banks

The advance of payment facilitation services during the last decade was tremendous. Card networks introduced the initial set of formal rules of the game for payment facilitators back in 2011. Since then, the PayFac concept has gone a long way. As of now, we are witnessing a situation when independent sales organizations (ISO) are vacating the stage for payment facilitators. At the same time, PayFacs themselves are rapidly increasing their market share.

So, what is the secret of payment facilitation model? Why is everyone so thrilled by success stories of PayPal, Stripe, Square, WePay, and other payment facilitation pioneers? Are PayFacs really some new highly intelligent predators “hunting for residual revenue and stealing it from acquiring banks”? Or is it just the survival of the fittest that we are witnessing?

The top-five candidates to become payment facilitators include:

1. ISVs;
2. SaaS platform owners;
3. Franchisors;
4. Investment and venture capital companies;
5. Online marketplace owners.

Besides them, becoming a PayFac is a way of survival for many traditional ISOs.

It may seem that newly emerging PayFacs (especially, software companies implementing PayFac models) are laying their hands upon revenues intended for acquirers and processors. In fact, they are not. The payment facilitator model is so popular with software companies not because they have more capital and developers at hand (or because they are somehow more aggressive). It just works best for all interested parties: merchants, acquirers, and PayFacs. Let us take a closer look at the situation:

• merchants get smooth underwriting experience and better service throughout their whole cycle of operation (onboarding, reporting, reconciliation, funding, processing, fraud protection, chargeback handing etc);
• acquirers happily delegate the listed functions (and much of the responsibilities) to PayFacs;
• and PayFacs themselves get their well-deserved residual revenue share.

The relationship between acquiring banks and PayFacs is symbiotic rather than competitive. An acquirer can be compared to a hippo, while PayFacs are those birds that clean its teeth and eat parasites hiding in the folds of its skin, and thus, relieve it from some of its troubles in exchange for protection. Similarly, payment facilitators make life easier for both an acquiring bank and the merchants.

If, as statistics shows, payment facilitator model is steadily conquering the market, it is a very peaceful conquest, or rather a gentle wave.

PayFacs and online marketplaces

Some might say that payment facilitators represent a threat for online marketplaces and other companies, providing services to merchants and not final consumers. PayFac and online marketplace models do not compete, they are just intended to serve slightly different purposes. Payment facilitator’s role is to handle merchant lifecycle-related functions (from underwriting and onboarding to funding and chargeback handling) instead of the acquirer.

A marketplace is a tool, allowing multiple vendors (retailers) and affiliates to sell their products and services through a unified platform. Besides that, a marketplace (especially, a reputable brand such as Uber or Amazon) is often a merchant of record for the respective retailers. If a marketplace or any other company (ISO, SaaS provider, ISV, franchisor, venture capital firm) decides that it is the right time for it to become a white-label or full-fledged PayFac, it can do so. Some stay where they are (like, again, Uber or Amazon), while others decide to implement the PayFac model. Whatever works best for them.

Concludeing remarks

As we can see, there is no rivalry between payment facilitators and any other entities. Their domination over ISOs is caused by inherent competitive advantage. Their relationship with acquiring banks and merchants is a mutually beneficial or symbiotic arrangement. And they do not compete with online marketplace or any other service provision models. These models just peacefully coexist, each serving its intended purposes.

Judging from the present situation (and according to many experts), in the near future we are going to see payment and merchant experience blended into business models and platforms of many companies. As a result, new and even more effective payment and merchant service provision mechanisms will, probably, emerge.