What is a Payment Facilitator? And How Can I Become One?
Many people who work in software are learning that the payments space is booming, with loads of opportunities, but the concepts involved in payment facilitation can be difficult to understand. So let us begin with the basics.
What is a Payment Facilitator or PayFac?
A payment facilitator (PayFac for short) is a service provider that is layered between the submerchants (the merchants a PayFac works with) and an acquiring body. The PayFac provides both integrated payment technology and acquirer services to submerchants with the goal of simplifying the payment experience. Most companies considering the PayFac model are current ISOs as they already interact with the submerchants for sales and support. There is also a growing interest from software companies (independent software companies / ISVs) who see the value in becoming an end-to-end service provider with their solution.
A successful payment facilitator is usually a hyper-focused servicer of a narrow vertical. What is a narrow vertical? It simply means a very specific industry. Compare the needs of a general contractor, for example, to a convenience store. Contractors may require large infrequent payments off-site, recurring payments, and the ability to issue invoices for payment online. While a convenience store may also need to generate or pay supplier invoices, they also need fast, frequent processing of small transactions at a fixed location. While both parties could be serviced by a generic service provider, there is a huge competitive advance if you can create a tailored user experience that speaks to their needs. The ultimate goal of a payment facilitator is to create an easy, intuitive, streamlined experience, with clean, secure technology.
What Will Change for Your Customers If You Become a Payment Facilitator?
Once you become a payment facilitator, your submerchants will experience more ease from the front to the back end of a sale. You, as their payment facilitator, will relieve them of several complexities, freeing them to put their time and energy towards their own businesses. You will become the single source of authority for your submerchants, meaning they will no longer have to consult multiple people to fix a problem. Guiding them through the data needed to open a merchant account? You will take care of that for them. Questions down the road? With the right partnerships and guidance, you will be able to provide an experience as smooth as your submerchants would get with a payment giant. You will provide a single-source solution to their software and payment needs, which is the gold standard for your customers.
How Will Becoming a Payment Facilitator Affect Your Business?
Once you become a payment facilitator, you will gain control over three key areas: underwriting and onboarding, settlement of funds, and customer experience.
If you are a Fintech firm or an ISO, control is extremely important to the success of your company. As a payment facilitator or PayFac, you will be able to control both the submerchant application and onboarding experience, getting your submerchants online faster and quickly fixing any issues with setup. You will not have to consult (or wait for) any outsiders who may slow processes down.
Control over when the settlement of funds takes place is important as well. If you are operating simply as an ISO or ISV, you must depend on the acquirer to manage the settlement of funds–on their timeline, not yours. If your submerchants have complex remittance requirements, you will want the solution you provide to meet them where they are. As a payment facilitator, you will be able to control two key factors: when and how the submerchant is paid.
Control over the submerchant experience continues, as you have access to the data needed to address all customer service issues yourself. When you do not have to outsource any parts of your business that are mission-critical, you can solve problems more quickly, keeping your submerchants happier. As a result, your relationships with your submerchants will be deeper and stickier, because your software will be that much more valuable to them. What all of this adds up to is a more robust, profitable business.
So, How Do I Become a Payment Facilitator?
Choose An Acquiring Partner
Every payment facilitator needs either an acquiring bank or other acquiring partner. They will help you get registered to officially become a PayFac and provide both processing and settlement functions through card networks. There is a lot to think through when making this heavy decision: what products the acquirer offers for settling funds, whether or not they require exclusivity, pricing, and available functionality. Additional considerations include whether you want them to handle other responsibilities, including tax filings and administrative tasks. An acquirer’s ability to offer these add-ons may very, and the acquirer will charge a fee to handle these extra responsibilities, of course. A good tip when choosing an acquiring bank is to note their familiarity with your business vertical. An acquirer that is well-versed in your industry will usually serve you better as a PayFac.
Some other questions to think through as you are choosing an acquiring partner: how will you be paid for the payments services you will provide? Some payment facilitators arrange things so that the acquiring bank withholds the fees from the submerchant settlement and then deposits the fees into the payment facilitator’s account. Other payment facilitators prefer to invoice submerchants for fees or obtain the fees through an ACH debit to the submerchant accounts. Different arrangements make sense for different verticals, and you will want to make sure these details are delineated clearly in your contracts with an acquiring bank. While this list of considerations may feel overwhelming, the right payment facilitation consulting services can clear the path and make the process of choosing an acquirer much simpler.
Make Thoughtful Agreements with Your Submerchants
Once you have decided on an acquiring partner and contracted with them, they will officially be the sponsor of your payment facilitator program. At that point, you will need to get specific about the terms and conditions for the payment services that you will provide to your submerchants. These new payment service terms may be added to services agreements that already exist or you may decide to start with a new, separate agreement.
These terms must be in alignment with the operating requirements of the card networks, but terms and conditions are never one-size-fits-all. Successful payment facilitators will need to add to whatever terms and conditions they get from the acquiring partner in order to protect themselves from a submerchant’s potential breach. If a submerchant fails to comply with relevant laws and regulatory requirements, or if you offer a bigger variety of services to your submerchants, you will need terms and conditions that are specialized to your submerchants and reflect all parties’ needs. For instance, if a submerchant processes more than $1 million per year in Visa or Mastercard transactions, they will need a direct agreement with the acquiring partner–on top of your terms and conditions. Smaller submerchants are subject to specific requirements as well. Some states have specific requirements for issues like termination rights and early termination fees. Submerchant agreements need serious, experienced attention in order to cover all parties effectively. This is one of the many areas where it pays to work with experienced consultants if you want to become a PayFac.
Pay Attention to Compliance
A compliance first mindset is a keystone of a successful payment facilitator. Software companies that decide to enter the payments business tend not to have compliance programs that would accommodate the challenges in payment facilitation already in place. Once you become a payment facilitator, you will need to assess, monitor and react to multiple risk factors: from initially assessing a submerchant through monitoring transactions and submerchant behaviour. This monitoring is required for good reason: not only will you protect the payments system from risk of financial loss, but you will also guard yourself against reputational or regulatory risk in the event that a submerchant’s marketing or business practices are problematic.
Your acquiring bank will likely have its own legal and regulatory requirements (such as anti-money laundering stipulations) and your following them will be included in your contracts. The operating rules of the card networks will also apply to you.
Implementing a strong, flexible compliance program will mitigate your financial and reputational risks and also help protect you legally, as federal and state regulators take compliance very seriously. PayFacs that neglect to underwrite and manage their merchant portfolios properly have faced quick, significant consequences.
Decide Whether You Will Engage in Money Transmission
Control over settlement of funds is a key aspect of being a payment facilitator and may require a money transmission license. The complexity of the fund movement itself does not determine the license requirements, but who enacts the movement. Simply put, partnering with an acquiring body allows you to send settlement requests to be processed by the acquirer, while a money transmission license allows you to process the instructions yourself. Becoming a registered money transmitter is an expensive and lengthy process – to remove this step, many acquirers offer complex funding on your behalf. This removes the responsibility of you having to get the license in the first place.
Keep Security in Mind
If you are already an ISO or an ISV and you decide to incorporate payments services into your existing software platform, you stand to gain a lot. Not only will you increase your profits by earning a markup on separate fees, but owning the submerchant experience end to end gives you access to invaluable data which can drive new products and services. As you collect more and more data, you will be subject to increasing regulatory requirements at the federal, state, and international levels, as well as network laws and requirements.
The process to become a payment facilitator can be lengthy and overwhelming, but if done properly, is a sound business move. The potential benefits to both you and your submerchants are immensely consequential. You can expect improved profits and control; as you grow so does your ability to serve your submerchants. RPY’s team of industry experts offer decisive, tested insights that get you to market on a shorter timeline and can guide you through any question throughout the process. Check out our insights for more guidance on the payments space.