The Economics of Payment Facilitator RegistrationVertical SaaS

The Economics of Payment Facilitator Registration


Last Updated on May 1, 2024

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.

 

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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.

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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.

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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.

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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) RegistrationBecoming 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.

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Final Thoughts

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.

FAQs on the Economics of Payment Facilitator Registration

What Is a Payment Facilitator (Payfac)?

A Payment Facilitator, commonly referred to as a PayFac, is a specialized business model designed to streamline the payment process for software companies. This model is particularly beneficial for these companies as it enables them to process payments on behalf of their customers directly. A key advantage of adopting the PayFac model is the ability to oversee the entire transaction process, from the initial payment initiation to the final settlement.
The responsibilities of a PayFac extend beyond just processing payments. They play a crucial role in ensuring compliance with various financial regulations and standards, which can vary significantly from one region to another. This compliance aspect is critical, as it involves adhering to rules set by credit card companies, financial institutions, and government bodies, ensuring secure and lawful transactions.
Additionally, PayFacs are responsible for handling dispute resolution. This includes managing chargebacks, where a customer disputes a charge, and working to resolve these issues in a timely and efficient manner. The ability to handle such disputes internally allows software companies to provide better customer service and maintain good relationships with their user base.
The PayFac model also offers scalability advantages. As a software company grows and its transaction volume increases, the PayFac can easily accommodate this growth, handling an increasing number of transactions without the need for the company to invest in additional payment processing infrastructure.
In summary, a PayFac serves as an intermediary that not only processes payments but also manages the complexities associated with financial transactions, including compliance, security, and dispute resolution. This allows software companies to focus on their core products and services, leaving the intricacies of payment processing to specialized professionals.

What are the alternatives to PayFac registration?

When considering alternatives to Payment Facilitator (PayFac) registration, there are several viable options available for businesses looking to process payments. Each alternative offers unique features and benefits, catering to different business needs and operational models.
Partnering with Established Payment Processors: This approach involves collaborating with established payment processing companies. These companies are already equipped with the necessary infrastructure and compliance measures to handle transactions. By partnering with them, businesses can leverage their robust processing capabilities without the need for extensive setup or compliance burdens. This option is ideal for businesses seeking reliability and established systems.
Working with Payment Aggregators: Payment aggregators, like PayPal or Stripe, allow businesses to process transactions under the aggregator’s merchant account. This method simplifies the setup process as businesses do not need to set up their own merchant accounts. Aggregators handle most of the compliance and security aspects, making this a good choice for smaller businesses or those looking for quick and easy payment solutions.
Using White-Label Payment Solutions: White-label solutions offer businesses the opportunity to use pre-built payment processing software branded as their own. This means businesses can offer payment processing services to their customers under their brand name, while the backend processing is handled by the white-label service provider. This is an attractive option for businesses that want to maintain brand consistency and control over the customer experience without the complexities of building their own system.
Registering as an ISO (Independent Sales Organization): Becoming an ISO is a more involved process, where a business is registered with a card association (like Visa or Mastercard) to sell merchant services. This option gives businesses more control over their payment processing, including pricing and customer relationships. However, it also involves more responsibilities in terms of compliance, risk management, and sales. This choice is often suited for businesses that have the resources to manage these aspects and are looking to fully integrate payment processing into their service offerings.
Each of these alternatives to PayFac registration offers distinct advantages and considerations. The choice depends on the specific needs, resources, and goals of the business, whether it’s ease of use, brand control, or the desire to fully integrate payment processing into their operations.

How does a business become a PayFac?

Considerations include the annual payment volume, potential revenue from payment processing, resource allocation, and the ability to manage regulatory and financial responsibilities.

What factors should be considered when deciding to become a PayFac?

Becoming a Payment Facilitator (PayFac) involves a multifaceted process that encompasses several key steps and compliance with various requirements. Here’s a more detailed explanation:
Understanding the Requirements: Before embarking on the journey to become a PayFac, a business must understand the full scope of what is required. This includes legal, financial, and operational commitments.
Legal and Regulatory Compliance: The first step involves ensuring legal compliance. This means understanding and adhering to the regulations set by card networks (like Visa and Mastercard), as well as local and international financial laws. This often involves extensive paperwork and legal consultations.
Partnering with an Acquiring Bank: A PayFac must partner with an acquiring bank, which is a bank authorized to process credit card transactions. This partnership is crucial as it provides the necessary financial infrastructure to process payments.
Obtaining a Merchant ID (MID): As part of the process, the business will need to obtain a unique Merchant ID from each card network they plan to work with. This ID is essential for processing payments.
Implementing Technology Solutions: Setting up the technical infrastructure is a significant part of becoming a PayFac. This includes developing or integrating a payment gateway, ensuring secure transaction processing, and setting up systems for monitoring and reporting.
Ensuring Security Compliance: Compliance with security standards like PCI DSS (Payment Card Industry Data Security Standard) is non-negotiable. This involves setting up secure systems to protect customer data and prevent fraud.
Developing Risk Management Protocols: A PayFac must have protocols in place for managing risks, including fraud detection, chargeback management, and dispute resolution.
Ongoing Compliance and Monitoring: Becoming a PayFac is not a one-time event. Continuous monitoring of transactions and adherence to evolving regulatory and security standards is required.

What types of businesses benefit most from using a PayFac model?

The PayFac model is particularly advantageous for certain types of businesses and industries, depending on various factors:
High-Volume Transaction Businesses: Companies that process a large volume of transactions stand to benefit greatly from the PayFac model. This includes online marketplaces, e-commerce platforms, and subscription-based services.
Businesses Seeking Integrated Payment Solutions: Companies looking for seamless integration of payment processing within their service offerings, such as SaaS (Software as a Service) providers, benefit from the PayFac model. It allows for a more streamlined customer experience.
Businesses with Varied Transaction Sizes: Companies that deal with a wide range of transaction sizes can leverage the PayFac model’s flexibility and scalability.
Businesses in Need of Customized Payment Solutions: Industries requiring tailored payment solutions, like healthcare, education, and real estate, find the PayFac model advantageous as it allows for customization according to specific needs.
Startups and Growing Businesses: The PayFac model is also ideal for startups and growing businesses that anticipate a rapid increase in transaction volumes and require a scalable solution.
Businesses Looking for Faster Onboarding: Companies that want to quickly onboard customers for payment processing will find the PayFac model beneficial due to its efficient merchant onboarding process.
In conclusion, the PayFac model is most beneficial for businesses that require integrated, flexible, and scalable payment solutions, especially those with high transaction volumes and specific industry needs.

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