By Brandon Banks
Registering as a payment facilitator (PayFac) is becoming an increasingly popular option among software vendors. However, the costs, complexities, and risks associated with becoming a PayFac can be daunting. Understanding the economics behind the process is key to evaluating whether it makes sense for your business model.
In this blog post, we’ll take a deep dive into the economic factors that must be considered when registering as a PayFac, including upfront investment costs and long-term financial implications. We’ll also discuss alternative strategies that can yield similar economic benefits.
Payment Volume Threshold for PayFac Registration
Before we dive into the details, we need to address one specific question: How much payment volume do you need to process to make becoming a PayFac economically viable?
Unfortunately there’s no definitive answer to this question, as it depends on your initial and ongoing operating costs. However, industry experts suggest that an annual payment volume between $10 million and $100 million is necessary to justify the costs of registering as a PayFac. Smaller volumes may not provide sufficient returns on investment, given the expenses involved in PayFac operations.
Costs of PayFac Registration
Becoming a PayFac requires significant upfront and ongoing costs, including the following:
- Application and Registration Fees — The initial application fee can range from $10,000 to $25,000, while the ongoing annual registration fees can be between $5,000 and $10,000.
- Underwriting and Compliance — PayFacs must perform extensive underwriting and adhere to strict compliance requirements. This involves investing in risk management systems, due diligence processes, and other compliance tools, which can cost tens of thousands of dollars.
- Integration and Development — PayFacs need to develop and maintain the technology infrastructure necessary to manage the entire payments process. This can be a substantial investment, depending on the complexity of the platform and required features. Development costs can range from $50,000 to $400,000, depending on the scope of the project.
- Legal Costs — Navigating the legal landscape of PayFac registration requires hiring experienced attorneys to draft contracts, review agreements, and ensure compliance with various regulations. Legal costs can range from $20,000 to $200,000 depending on the complexity of your business and the legal expertise required.
- PCI Compliance Audits and Costs — PayFacs must adhere to the Payment Card Industry Data Security Standard (PCI DSS), which includes regular audits to ensure compliance. PCI compliance audits can cost between $5,000 and $50,000 per year, depending on the size and complexity of your operations.
Aside from registration costs, PayFacs must also manage ongoing operational expenses, including the following:
- Employee Headcount — Building and maintaining a payments infrastructure requires specialized staff, including compliance experts, risk managers, developers, and customer support personnel. The costs of these roles can add up quickly, especially when considering salaries, benefits, and office space. Annual costs for a small to medium-sized team can range from $500,000 to $1 million.
- Technologies — PayFacs need to invest in advanced technologies for fraud prevention, data security, and transaction monitoring. These systems often have high licensing fees and ongoing maintenance costs. Annual technology costs can range from $25,000 to $100,000, depending on the solutions implemented.
- Services — To stay compliant with regulatory requirements, PayFacs must engage third-party services for audits, assessments, and reporting. These professional services can also be expensive, with costs ranging from $10,000 to $50,000 per year.
- Reserve Requirements — Payment processors and card networks may require PayFacs to maintain a reserve account to cover potential losses due to chargebacks or fraud. The reserve requirements can vary, but typically range from 5% to 10% of your monthly processing volume, which can represent a significant capital commitment. For example, if your monthly processing volume is $5 million, you may need to maintain a reserve of $250,000 to $500,000.
- Insurance — PayFacs must obtain various types of insurance to cover potential risks, such as errors and omissions, cyber liability, and crime coverage. Insurance costs can range from $10,000 to $30,000 per year, depending on the coverage levels and specific risks associated with your business.
Alternatives to PayFac Registration
Given the financial and operational challenges of becoming a PayFac, many software companies are exploring alternative ways to monetize their platforms and offer integrated payment services, including the following:
- Payment Partnerships — By partnering with an established payment processor, software companies can leverage their partner’s infrastructure and expertise while still offering seamless payment services to their customers. This approach allows companies to avoid the costs and complexities of PayFac registration while still enjoying a revenue share from the transactions processed on their platform.
- Payment Aggregators — Software companies can also work with payment aggregators, which are pre-registered PayFacs that enable businesses to accept payments without direct registration. This approach reduces the burden of compliance and underwriting, as the aggregator takes on those responsibilities. In exchange, software companies share a portion of their transaction fees with the aggregator.
- White-Label Payment Solutions — Another option is to utilize white-label payment solutions, which provide fully customizable payment processing platforms. These solutions enable software companies to offer branded payment services without the upfront and ongoing costs associated with becoming a PayFac.
After considering the costs, complexities and risks that are associated with becoming a payment facilitator, many software companies have found more suitable solutions in strategies such as payment partnerships, working with payment aggregators, or white-label payment solutions. With these options, businesses can experience swift and secure payments without the burdens of PayFac registration.
In order to make an informed decision that is best for your business goals and customers, start by carefully evaluating your company’s payment processing needs and potential return on investment. From there, you’ll be able to get a clearer picture of what option will best suit you.
Take the first step towards optimized payment processing solutions with Nexio. Our experienced team will handle the nitty-gritty aspects, allowing you to test the waters without incurring additional operational costs or risks. You can always bring payment operations in-house if/when it makes economic sense for your company. Contact us today to streamline your payment processing.