By Brandon Banks
For software companies looking to take their payments infrastructure to the next level, becoming a payment facilitator (PayFac) is an attractive option. As a PayFac, your company will have access to faster transactions and improved customer experience — but it doesn’t come without its challenges. It’s important for SaaS executives to fully understand what they’re getting into before proceeding down this path. In this blog post, we’ll go over some of the key points in deciding whether or not your business should register as a payment facilitator and break down the pros and cons of doing so.
What is a Payment Facilitator?
A payment facilitator is a service provider that simplifies the merchant service process. Traditionally, businesses that wanted to accept credit card payments had to set up a merchant account — a type of bank account that allows businesses to accept payments in multiple ways, typically debit or credit cards. Setting up a merchant account usually involves a considerable amount of paperwork, time, and approval processes.
A PayFac, on the other hand, is a service provider that maintains a master merchant account. Under this master account, they can then set up sub-accounts for individual businesses (also known as sub-merchants). The PayFac handles the setup and approval process, making it easier and quicker for businesses to start accepting credit card payments.
The PayFac also manages the entire transaction process, including payment processing, transaction settlement, chargeback disputes, and compliance with industry data security standards. As a result, businesses don’t have to worry about these complexities and can focus on their core operations.
Responsibilities of PayFacs
PayFacs sign agreements with acquiring banks and card networks, which gives them the following responsibilities:
- Merchant underwriting and onboarding — PayFacs must establish processes for screening, onboarding, and underwriting new merchants.
- Risk management — PayFacs must monitor transactions, identify and mitigate fraud, and handle chargebacks.
- Customer support — PayFacs must provide support to merchants and end users, including troubleshooting and resolving payment-related issues.
Compliance and Legal Requirements for PayFacs
PayFacs are also responsible for maintaining compliance with applicable legal and regulatory requirements, including the following:
- Payment Card Industry Data Security Standard (PCI DSS) — PayFacs must maintain compliance with PCI DSS, which outlines security requirements for storing, processing, and transmitting cardholder data.
- Anti-money Laundering (AML) and Know Your Customer (KYC) — PayFacs must implement processes to comply with AML and KYC regulations, which include verifying the identity of merchants and monitoring transactions for suspicious activity.
- Card network rules — PayFacs must adhere to the rules established by card networks, such as Visa and Mastercard, which govern transaction processing, chargebacks, and other aspects of the payment process.
Costs of Becoming a PayFac
The costs of becoming a PayFac can vary but generally include the following:
- Registration fees — Acquiring banks may charge a one-time registration fee, which can range from a few thousand dollars to tens of thousands of dollars, depending on the bank and the company’s risk profile.
- Ongoing fees — PayFacs must pay ongoing fees to card networks and their acquiring bank. These fees can include transaction processing fees, interchange fees, and other related costs.
- Compliance costs — Maintaining compliance with regulatory requirements can be expensive, as it may involve hiring dedicated personnel, investing in technology, and conducting regular audits.
- Infrastructure investment — Establishing and maintaining the technology infrastructure required for payment processing, risk management, and customer support can be costly.
The Pros of Becoming a PayFac
There are many benefits of becoming a PayFac, including the following:
- Faster merchant onboarding — PayFacs can onboard merchants quickly (often within minutes) by leveraging their existing relationships with banks and card networks. This can be particularly attractive for software companies looking to offer a seamless user experience.
- Greater control over the payment process — Becoming a PayFac allows software companies to maintain control over the entire payment process, including transaction processing, settlement, and customer support. This can lead to better customer experiences and foster brand loyalty.
- New revenue streams — As a PayFac, software companies can generate new revenue streams by charging transaction fees, offering additional value-added services, or bundling payment processing with other software features.
- Competitive advantage — Offering integrated payment solutions as a PayFac can differentiate a software company from competitors, potentially leading to increased market share and customer retention.
The Cons of Becoming a PayFac
However, being a PayFac also carries certain risks and drawbacks, including the following:
- Increased responsibility — Becoming a PayFac requires software companies to assume more responsibility for managing risk, underwriting merchants, and handling chargebacks. This can require significant investment in personnel, infrastructure, and technology.
- Regulatory compliance — PayFacs must comply with a variety of regulatory requirements, including anti-money laundering (AML) and Know Your Customer (KYC) policies. This can be time-consuming and expensive.
- Financial investment — The costs associated with becoming a PayFac, including registration fees, ongoing compliance expenses, and maintaining the necessary technology infrastructure, can be significant.
When Does PayFace Registration Make Economic Sense?
For software companies, it makes economic sense to become a PayFac in one or more of the following situations:
- The potential revenue from payment processing and value-added services outweighs the costs associated with becoming a PayFac.
- Your company has the resources and expertise to manage the responsibilities and risks associated with being a PayFac.
- Your company’s target market demands a seamless, integrated payment solution and becoming a PayFac provides a competitive advantage.
The PayFac Registration Process
The process of becoming a PayFac typically involves the following phases:
- Assessing the feasibility — Software companies should first assess whether becoming a PayFac aligns with their business goals, resources, and risk tolerance.
- Selecting an acquiring bank — To become a PayFac, software companies need to partner with an acquiring bank to process payments. This relationship is crucial, so choosing the right bank is essential.
- Completing the application process — Software companies must submit an application to the acquiring bank, which includes information about the company’s financials, ownership, and business model.
- Implementing technology and infrastructure — Once approved, software companies need to establish the technology and infrastructure required to handle payment processing, risk management, and compliance.
Ultimately, the decision to become a PayFac or not should be based on your company’s business goals, resources, and target market. While there can be clear advantages to becoming a PayFac, these should be weighed against the potential costs and responsibilities that come with becoming one.
If you need help making a strategic decision about payment facilitator registration for your software company, Nexio can provide valuable insight. We have experienced professionals ready to answer any questions you may have. Contact us today to get started on planning for success!