The Pros and Cons of Registering as a Payment Facilitator for Software CompaniesVertical SaaS

The Pros and Cons of Registering as a Payment Facilitator for Software Companies


Last Updated on April 17, 2024

As a software company, the thought of becoming a payment facilitator (or PayFac) may be an exciting prospect. Not only will your company be able to provide an improved customer experience, but also generate a new revenue stream through monetizing payments. But before jumping in headfirst, it is crucial for SaaS executives to understand what they’re getting into.

Becoming a PayFac is not without its challenges. Before you decide to proceed down this path, it’s crucial to have a full understanding of what you’re getting into. In this blog post, we’ll go over some of the key points in deciding whether or not your company 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. The PayFac maintains a master merchant account. Under this master account, they can then set up sub-accounts for individual clients (also known as sub-merchants). The PayFac handles the setup and underwriting process, making it easier and quicker for businesses to start accepting credit card payments.

Illustration of a futuristic-looking machine. The image is meant to represent a payment facilitator and how it enables payment processing. How do Payment Facilitators Work?

Traditional payment processing methods require businesses 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.

Under the PayFac model, software platforms become the master merchant account. Each client has a sub-merchant account under the umbrella of the payment facilitator’s master account. This eliminates the need for the client to go through the processes of obtaining their own unique merchant ID (or MID).

The PayFac is responsible for creating their own enrollment processes to determine which clients they want to include as sub-merchants under the master account (or master MID). Factors to consider include transaction volume and the risk profile of the client.

Note: Poorly managed high-risk merchants can bring financial ruin to any merchant services provider, including payment facilitators. Any company considering payment facilitation should carefully consider the risk profile of each client during the onboarding process.

Once a client is onboarded, the payment facilitator handles all the necessary financial transactions on behalf of the sub-merchants. This simplifies payment processing for businesses looking to accept electronic payments without having to acquire their own traditional merchant account.

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Responsibilities of Payment Facilitators

Payment facilitators 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 merchant accounts under their master merchant account.
  • Risk management — PayFacs must monitor suspicious transactions, identify and mitigate fraud, and handle chargebacks for their sub-merchants.
  • Payment services — PayFacs need to provide a reliable payment processing solution and ensure sub-merchants can accept payments in a variety of ways, including both card present transactions and online payments (e.g. Apple Pay, Google Pay, debit cards, etc.).
  • Customer support — PayFacs must provide support to sub-merchants and end users, including troubleshooting and resolving payment-related issues.

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Compliance and Legal Requirements for Payment Facilitators

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.Payment facilitators are also responsible for ensuring that each sub-merchant account also maintains compliance.
  • 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 (i.e. Visa, Mastercard, American Express, and Discovery) which govern transaction processing, chargebacks, and other aspects of payment processing services.

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Costs of Becoming a Payment Facilitators

The costs of becoming a payment facilitator 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 accepting payments, managing risk, and supporting customers can be costly.

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The Pros of Becoming a Payment Facilitator

There are many benefits of becoming a payment facilitator, including the following:

  • Faster merchant onboarding process — 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 platforms 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 — Becoming a PayFac enables software companies to embed payments in their platform. This can be a differentiator and potentially lead to increased market share and customer retention.

An astronaut lifting a heavy box over their head. The image is meant to represent to cons of registering as a payment facilitator.

The Cons of Becoming a Payment Facilitator

However, being a PayFac also carries certain risks and drawbacks, including the following:

  • Increased responsibility — Becoming a payment facilitator requires companies to assume more responsibility for managing risk, underwriting sub-merchant accounts, 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 PCI compliance standards, as well as 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.

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When Does Payment Facilitator 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 to generate 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.

Are there other options?

If the payment facilitator model doesn’t make economic sense for your company, there are other options you can consider to monetize payments. Becoming an independent sales organization (ISO) offers many of the same benefits as registering as a PayFac, but with less responsibility (in some cases).

There are three types of independent sales organizations:

  • Retail ISOs — This model requires limited payment expertise and helps maintain drive conversion through competitive pricing.
  • Wholesale ISOs — This model requires some expertise in payments and a diverse client base. It can help companies provide customized payment processing services that enhance the value, improve customer experience, and drive conversion.
  • Full Service Providers — This model enables you to create your own payments ecosystem with advanced technology and comprehensive solutions. It is ideal for companies that want to have full control over all aspects of their payment processing and are striving to grow.

You can also follow a more traditional model and become a referral partner for a payment processor. Referral partners do not process payments, but refer merchants to payment processors and receive commissions. This model requires minimal investment and may be a good fit for companies that are just starting out.

The Payment Facilitator Registration Process

The process of becoming a PayFac typically involves the following phases:

  1. Assessing the feasibility — Companies should first assess whether becoming a PayFac aligns with their business goals, resources, and risk tolerance.
  2. Selecting an acquiring bank — To become a PayFac, companies need to partner with an acquiring bank (or sponsoring bank) to process payments. This relationship is crucial, so choosing the right bank is essential.
  3. Completing the application process — Companies must submit an application to the acquiring bank, which includes information about the company’s financials, ownership, and business model.
  4. Implementing technology and infrastructure — Once approved, companies need to establish the technology and infrastructure required to handle payment processing, manage risk, and maintain compliance.

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Final Thoughts

Ultimately, the decision to become a payment facilitator or not should be based on your company’s business goals, resources, and target market. Payment facilitation may sound like an attractive opportunity for your company, but make sure you’ve done your research and weighed the pros and cons to make sure this is the right move.

Being a payment facilitator carries its own due diligence with regards to performing merchant onboarding, managing risk, and providing customer service and support. Additionally, you have to ensure you’re in line with applicable laws and regulations.

Reaping the financial benefits of payment facilitation requires proper planning and preparation that can sometimes be time and money consuming. As a result, you need to make sure becoming a PayFac makes economic sense for your organization.

Whether or not your company is ready to take on this potential growth opportunity, Nexio can help. Our experts are available to assist and answer any questions you may have about becoming a payment facilitator. Feel free to reach out for more information regarding any of the following topics:

Contact us today to get started on planning for success!

FAQs

What is a Payment Facilitator (PayFac) and How Does It Relate to Software Companies?

A Payment Facilitator (PayFac) is a service provider that eases the merchant service processes by maintaining a master merchant account, under which it sets up sub-accounts for its clients, known as sub-merchants. This arrangement simplifies the onboarding process, as the PayFac manages the complex aspects of payment processing, such as compliance and risk management. For software companies, particularly those in business management or e-commerce, becoming a PayFac offers a strategic edge. It allows them to integrate payment processing services directly into their software, providing clients with a seamless experience of managing payments alongside other business functions. This not only enhances the software’s value and user experience but also creates a new revenue channel for the software company through a share in transaction fees, thereby strengthening client relationships and diversifying income.

What are the Benefits of Registering as a PayFac for Software Companies?

Registering as a Payment Facilitator (PayFac) offers numerous benefits for software companies, particularly in enhancing their service portfolio and business model. One of the key advantages is the acceleration of the merchant onboarding process. As a PayFac, a software company can quickly set up payment processing for its clients, bypassing the often lengthy and complex traditional merchant account setup process. This swift onboarding is not only more convenient for clients but also enhances the overall user experience, making the software more attractive to potential users.

Being a PayFac allows software companies greater control over the payment process, enabling them to tailor the payment experience to their platform’s specific needs and their clients’ preferences. This control extends to new revenue streams, as companies earn a portion of the transaction fees and can offer value-added services related to payments. Additionally, embedding payment capabilities directly into their platform gives software companies a competitive edge, positioning them as comprehensive solutions providers. This integrated approach can significantly boost customer satisfaction and loyalty, setting the software apart in a crowded market.

What Responsibilities Come with Being a PayFac?

Becoming a Payment Facilitator (PayFac) brings with it a range of responsibilities that are crucial for maintaining a secure and efficient payment processing environment. At the forefront of these responsibilities is the process of merchant underwriting and onboarding. As a PayFac, a company is responsible for evaluating potential clients (sub-merchants) to assess their creditworthiness and risk factors before allowing them to use the payment processing services. This due diligence is essential not only for the financial stability of the PayFac but also to prevent fraudulent activities. Additionally, the PayFac is tasked with managing the entire onboarding process for these sub-merchants, ensuring they are set up correctly and efficiently to start processing payments.

Beyond the initial setup, a PayFac is also responsible for ongoing risk management and handling chargebacks. This includes monitoring transactions for fraudulent activities, managing disputes, and resolving issues related to reversed transactions. Providing reliable and effective payment services is another critical responsibility, which involves ensuring the payment system is always operational, secure, and user-friendly. Customer support is also a significant aspect of a PayFac’s responsibilities, as they must assist sub-merchants with any payment-related inquiries or problems. Moreover, compliance with Payment Card Industry Data Security Standard (PCI DSS) is mandatory to ensure the security of cardholder data. Additionally, PayFacs must adhere to legal and regulatory requirements, including Anti-Money Laundering (AML) and Know Your Customer (KYC) policies. These regulations are critical for preventing financial crimes and ensuring the integrity of the payment processing system. Overall, the role of a PayFac involves a comprehensive approach to managing payment processing, requiring a balance of technical efficiency, legal compliance, and customer service excellence.

Are There Any Risks or Downsides for Software Companies Becoming PayFacs?

For software companies considering becoming Payment Facilitators (PayFacs), there are certain risks and downsides to be aware of. The shift to a PayFac model involves taking on increased responsibilities, particularly in managing risk, underwriting, and handling chargebacks. As a PayFac, the company is not just a software provider but also assumes the role of a financial intermediary, which means it must vigilantly monitor for fraudulent transactions and effectively manage disputes and reversed transactions. This responsibility requires a robust infrastructure for risk management, potentially diverting focus and resources from the company’s core software development activities.
Additionally, compliance with regulatory requirements becomes a critical and sometimes challenging aspect for software companies as PayFacs. They are required to adhere to various financial regulations, including PCI DSS standards, Anti-Money Laundering (AML) policies, and Know Your Customer (KYC) norms. Ensuring compliance with these regulations involves a significant financial investment in compliance and infrastructure development. This investment can be a substantial burden, especially for smaller or emerging software companies. The need for ongoing vigilance and updating systems in line with regulatory changes can also be resource-intensive, requiring dedicated staff and continuous monitoring. These challenges, while manageable, represent a shift from the traditional scope of software companies and need careful consideration before transitioning to a PayFac model.

What Are Some Alternatives to Becoming a PayFac?

Alternatives include becoming an Independent Sales Organization (ISO), which provides similar benefits but with potentially less responsibility, or becoming a referral partner for a payment processor, which requires minimal investment.

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