Sooner or later, most vertical SaaS companies will have to become some form of a payment facilitator (a.k.a. PayFac) in order to stay competitive and capture the revenue required to scale. With payments as a feature of your software, you can finally offer a seamless payments experience and other valuable efficiencies to your merchants. You also gain a new line of revenue from payment processing fees.
Like all things worthwhile, becoming and successfully operating as a PayFac takes work. In some cases, a tremendous amount of work at a high price. Deciding if becoming a PayFac makes sense for your business is the first of many strategic decisions you’ll have to make on your journey to embedded payments. A strategy is definitely in order. A partner who understands the endless nuisances of the payments ecosystem is also a must, if you don’t have the requisite experience yourself.
What’s your ultimate goal? What’s your deadline? How much time, money, and manpower can you afford to invest? These are basic questions you’d ask yourself starting any new business venture, because payment facilitation can be like running a business in and of itself.
Taking a Closer Look
There are many considerations in becoming a PayFac. Your approach to achieving what’s involved will depend on how you answer basic questions as mentioned above. For example, if you’re up against a tight deadline, you probably need to be shopping for an embedded payments technology partner who has already developed the necessary technology and infrastructure to shoulder most of the issues around compliance and risk.
Well, that gives you a little preview of what’s involved in becoming a PayFac, so let’s get to it.
- Being a PayFac means you’ve successfully established a master merchant identification account with an acquiring bank. As a master merchant, you can take on the responsibility of facilitating payments for your software customers (sub-merchants) under your master account.
- Responsibility is a keyword. You have control as a master merchant, but you also have new liabilities. Master merchants designated as money services businesses are subject to laws and regulations at both the state and federal level. You’ll have to set up and actively manage several programs and systems, including ways to:
- Perform KYC (Know Your Customer) due diligence on customers before accepting them as sub-merchants.
- Monitor and report sub-merchants for suspicious activity, including money laundering, fraud, and tax evasion, and mitigate risks as needed.
- Ensure you don’t do business with sub-merchants who are on OFAC or terrorist lists.
- Identify and eliminate sales of counterfeit products sold by sub-merchants.
- Control how you receive, store, and report sub-merchant information.
- Potentially register as a money transmitter in each state you do business.
- File annual tax forms to report payment transactions you process for sub-merchants.
- On a related note, there are also industry-governed, payment processing regulations that require your compliance as a PayFac. These are rules and regulations set out by Visa, Mastercard, Discover, and American Express. In addition to annual registration as a PayFac with each card network, you’ll most importantly have to meet and maintain the Payment Card Industry Data Security Standard (PCI DSS) to ensure the sensitive data moving through your systems is secure.
- Regarding systems and development, PayFacs invest a substantial amount of money and time building out their payments infrastructure. Since you’re new to payment facilitation, it’s easy to underestimate the costs. You’ll need to:
- Integrate payment gateways into your payment platform that connect sub-merchants’ checkout pages to the processing network. The same functionality, for example, as a point-of-service device that reads your card, when you check out at the grocery store.
- Build a settlement and reconciliation engine that pays out what is due to sub-merchants in a timely and accurate way. Basically, funds from processed payments will need to be transferred from your master merchant account to the sub-merchant account, minus processing fees and other charges.
- Build a compliance infrastructure to identify and manage risk, including systems for due diligence and internal employee policies.
- Build a system for identifying and managing chargebacks and disputed payments. PayFacs incur a chargeback fee from its acquiring bank on every refund given to a sub-merchant’s customer. Those fees can add up if they’re not properly collected from the sub-merchant.
- Build and service a sub-merchant dashboard that documents and reports on all the sub-merchant’s payments activity.
This isn’t an exhaustive list by any means. You’ll also need to develop a pricing and fee strategy, figure out additional staffing needs, understand the impact on your core software business, and obviously have available capital to stand up and maintain your payments business.
Again, having a payments expert on your side, one who has worked the day-to-day of payment facilitation, is the way to go for software companies with big dreams. Payrix is the leading expert and embedded payments technology partner who offers two solutions – a PayFac as a service model to get you up and running quickly and maximizing every transaction and a payment infrastructure as a service model for registered payment facilitators.
