By Brandon Banks
Registering as a payment facilitator (or PayFac) is becoming an increasingly popular option to monetize payments 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 payment facilitator, 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 Payment Facilitator 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 payment facilitator 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 or transaction volume between $10 million and $100 million is necessary to justify the costs of the payment facilitator model. Smaller volumes may not provide sufficient returns on investment, given the expenses involved in payment facilitation operations.
To learn more about how payment facilitators work, check out our blog post The Pros and Cons of Registering as a Payment Facilitator for Software Companies.
Costs of Payment Facilitator Registration
The payment facilitator model requires significant upfront and ongoing costs, including the following:
- Application and Registration Fees — The initial payment facilitator application fee can range from $10,000 to $25,000, depending on the acquiring bank (or sponsoring bank). The ongoing annual registration fees can be between $5,000 and $10,000.
- Underwriting and Compliance — PayFacs must perform an extensive underwriting process 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 — Payment facilitators 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 model 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 — Payment facilitators 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.
Payment Facilitator Operational Expenses
Aside from registration costs, payment facilitators must also manage ongoing operational expenses, including the following:
- Employee Headcount — Building and maintaining an internal payments ecosystem 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 payments team can range from $500,000 to $1 million.
- Technologies — In order to accept electronic payments, payment facilitators 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 PCI DSS, anti-money laundering (AML), and Know Your Customer (KYC) 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 payment facilitators 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.
Does Becoming a Payment Facilitator Make Economic Sense?
The honest answer to this question is: maybe?
As mentioned above, your annual payment volume needs to be over $10 million dollars before you should even consider this option. If your company meets that threshold, you really just need to do the math. If the potential revenue — from payment processing and value-added services — outweighs the costs of registration and upkeep, then yes, registering as a payment facilitator makes sense.
To determine the revenue potential of payment facilitation, be sure to perform an in-depth analysis of your target market. Is a seamless integrated payment solution a necessity for them? Unless the ability to embed payments in your software platform provides a competitive advantage, registering as a PayFac is probably not worth the hassle.
You also need to confirm that your company will be able to acquire the necessary resources and expertise to manage responsibilities and risks associated with payment processing. As discussed in the previous section, your employee headcount will have to increase in order to handle the additional workload becoming a payment facilitator will cause.
As long as you’ve done the math and are confident about being able to handle all the regulatory, operational, and financial requirements involved, then registering as a payment facilitator could be a great opportunity for growth. If not, you’ll want to consider alternative options for payment processing.
Alternatives to Payment Facilitator Registration
Given the financial and operational challenges of the payment facilitator model, many software platforms are exploring alternative ways to generate revenue and offer integrated payment services, including the following:
- Payment Partnerships — By partnering with an established payment processor or merchant account provider, software companies can leverage their partner’s infrastructure and expertise while still offering seamless payment processing services to their customers. This approach allows companies to avoid the costs and complexities of payment facilitation while still enjoying a revenue share from the transactions processed on their platform.
- Payment Aggregators — Companies can also work with payment aggregators, which are pre-registered payment facilitators 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 payments solutions, which provide fully customizable payment processing platforms. These solutions enable software companies to offer branded payments services without the upfront and ongoing costs associated with the PayFac model.
- Independent Sales Organization (ISO) Registration — Becoming an ISO can offer benefits similar to registering as a payment facilitator, but with potentially less responsibility depending on the type of ISO. There are three types of independent sales organizations: Retail ISO, Wholesale ISO, and Full Service Providers, each with their own unique benefits, drawbacks, and revenue potential.
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, white-label payment solutions, or registering as an ISO. 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 if payment facilitator registration makes economic sense for you.
Take the first step towards monetizing payments with Nexio. Our experienced team will handle the nitty-gritty aspects of accepting payments. This allows you to test the waters of payment processing without incurring additional operational costs or risks. Unlike traditional payment companies, our contracts ensure you can always bring payment operations in-house if and/or when it makes economic sense for your company. Contact us today for an obligation-free consultation on adding payments to your software.