The buzz around Payment Facilitation (or PayFac) in the software industry seems to be getting louder these days. I talk with countless SaaS providers that are either considering a PayFac-as-a-Service company for their integrated payments or becoming a PayFac themselves. If you are a little unclear on what a PayFac actually is and whether you need one for your integrated payments program, you are not alone. Almost everyone I talk to has a different perception of what a PayFac is and why they need it. That comes as no surprise as there is a lot of overlap across PayFac, PayFac-as-a-Service, and other integrated payments programs. In this article, we will answer the question “what is a PayFac?” and describe the different program models SaaS providers can choose for their payment integration.
A PayFac is the official merchant of record with the major card brands such as Visa and Mastercard and holds the relationship with the acquiring bank. As the merchant of record, a PayFac can aggregate and process the card payments for as many “sub-merchants” as they would like underneath their umbrella. That said, the PayFac is responsible for underwriting and compliance with Federal regulations such as Know Your Customer (KYC) and Bank Secrecy Act /Anti-Money Laundering (BSA/AML) for those sub-merchants. In addition, the PayFac assumes the risk for the transactions processed under their merchant account. If the sub-merchant is fraudulent or fails to deliver goods or services purchased by their customers, the PayFac is on the hook for those funds.
The process of becoming a PayFac can cost as much as $500,000+ and take around six months or longer to complete. It also requires knowledge of the payments industry and a service infrastructure to manage customer support.
Some SaaS providers consider becoming a PayFac so they can earn a greater share of the payments revenue and board their customers more quickly. Companies that help SaaS providers become a PayFac tend to downplay the requirements and risk – choosing to focus on increased share of payment revenue and quick customer onboarding. But those requirements and risks are real, and only you can decide if you they are offset by added revenue and quick customer boarding. Chances are, unless you are a pretty large software company, progressing down the PayFac route may not be an optimal path to pursue as there are other options available to you.
PayFac-as-a-Service has emerged from payment companies and independent sales organizations (ISO) that have gone through the regulatory compliance of PayFac registration. These companies have proven to the acquiring bank they can satisfy those regulatory requirements and, as a result, may board as many of the SaaS’s merchant customers under that umbrella as they’d like. That said, in-house payment expertise may be needed as often the SaaS is responsible for the sales and service of its customers.
Under this model, the SaaS provider can monetize payments and offer its customers expedited boarding as sub-merchants. Because of the added risk associated with sub-merchant accounts, the sponsoring PayFac frequently charges the SaaS’s merchant customers a higher rate. In addition, the SaaS itself may be required to pay a monthly subscription to the PayFac-as-a-Service provider. Consequently, this approach also may not be optimal unless the SaaS is confident its customer base is large enough to generate enough payment revenue to offset the subscription fee.
Here are a couple of alternatives to PayFac that SaaS providers may want to consider.
In a white label payment environment, a SaaS provider partners with a third party gateway or payment technology company to deliver a fully branded integrated program its customers. The payments partner works behind-the-scenes to handle things like underwriting, risk assessment, SaaS-branded billing, chargebacks, etc. Often, the branded payments capability is bundled with the purchase or subscription of the software.
The SaaS provider sets the rate its customers pay for card processing based on the “buy-rate” it receives from its payment partner. This enables the SaaS to control how much its customers pay and how much payment-related revenue it earns from its program – a feature they find very appealing.
A white label payment program also allows the SaaS to control its customers’ payment experience. Sales and service are typically handled by the SaaS so having some payments experience and in-house expertise is helpful. Some white label programs, such as Signature Brand Payments by Wind River Financial, include a formalized training program for sales, service, and operations to help the SaaS ramp-up its support.
Unlike the PayFac model where SaaS’s customers are boarded as sub-merchants, white label payments customers go through the application and approval process. Carrying their own merchant ID (MID), reduces the risk level for the payment partner. As a result, customers’ card processing fees do not need to be inflated to offset the risk. The application and approval process tends to take 24-48 hours depending on your payment partner’s program.
Sometimes referred to as a Shared-Sales model in which the SaaS integrates with a specific gateway and payment partner. Once the integration is complete, the payment partner handles the heavy lifting as it relates to the payment program. This includes:
Two cautions: 1) Be careful who you choose for your payment partner as your customers’ experience and your reputation are on the line. You’ll want to make sure your partner has the same service commitment that you have. 2) Not all payment partners offer a share of the payment revenue. If payment monetization is important to you, make sure your partner offers a fair program.
Related Content: The Strategy Behind Choosing Your Payment Partner
When determining whether the PayFac model is right for your business, consider the following:
PayFac: Greatest revenue opportunity; highest start-up cost and risk for the SaaS. Strong payments acumen needed. Quick customer onboarding.
PayFac-as-a-Service: Strong revenue potential, no start-up cost or risk. Customers likely to be charged a higher fee to offset risk. Quick customer onboarding. Monthly subscription fee applies regardless of number of merchants you have boarded. SaaS may be required to provide sales and support.
White Label Payments: SaaS controls the margin it receives on payment processing. SaaS controls the customer experience. Some payments expertise needed as the SaaS will handle sales and service. Customer onboarding timeframe is typically 24-48 hours.
Traditional Payment Partner: Revenue earning opportunity depending on partner that is chosen. The partner handles all payment-related matters post-integration. Similar to White Label, customers are onboarded within 48 hours. Great option for SaaS companies with little or no payments experience.
Hopefully this clarifies what a PayFac is and whether or not SaaS providers need one. If you still are a little unclear, please feel free to reach out directly with any questions. There’s too much revenue, customer experience, and SaaS reputation at stake to go into a particular payment model with unanswered questions.