What is a Payment Facilitator? The Future of Payment Processing

Like any other industry, payment processing has seen its fair share of changes. Though the industry is relatively young--the first credit card was introduced in 1950--payments technology has evolved at a rapid pace. Transactions once completed with carbon copy paper and telephone verification can now happen in seconds using digital cards and smartphones. The industry has grown more and more customer-friendly over the years, and merchant services providers have evolved with it.
While traditional providers have adapted well to the changing payments landscape, recent trends suggest that independent sales organizations (ISO) and integrated payment providers may be nearing extinction. Instead, software companies appear to be taking the reigns in the payment processing industry. This is largely due to the emergence of payment facilitators, also called PayFacs. In this article, we’ll discuss what PayFacs are, why they’re becoming so common, and how adopting a PayFac model might affect your business.

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What is a Payment Facilitator? In the simplest possible terms, a payment facilitator is a software that facilitates payments between businesses or individuals. There’s one important word to recognize here: software. PayFacs do not integrate into software or work alongside it. For software to be considered a payment facilitator, the product must host payments as part of its offering without requiring users to leave their platform to create a merchant account.
To understand this, it’s best to consider some examples:

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Point-of-sale software often has payment functionality built-in. In these cases, funds are not transferred directly from the customer’s bank to the merchant’s bank. Instead, they are sent from the customer to the POS, then on to the merchant. Square is a good example of this. Food delivery apps (think DoorDash or Postmates) act as a payment facilitator between restaurants and hungry people. When ordering from their favorite restaurant via an app, the customer does not have to visit the restaurant’s website to complete their transaction. Instead, the customer pays the app, and the app pays the restaurant. Many eCommerce platforms are payment facilitators. Payments are sent and received through the seller platform without sellers needing to create outside merchant accounts. Another important characteristic of payment facilitators is that while each individual participant has their own merchant account, they don't have to go through the traditional application and underwriting process. Rather than fully vetting each merchant, the payment facilitator itself maintains a master merchant account and accepts individual participants on as sub-merchants. This means that the payment facilitator takes on some or all of the risk from their sub-merchants.
For merchants, this is both positive and negative. On the positive side, it makes getting started very simple. Most facilitators simply require you to accept their terms and conditions, and you’ll be ready to go. However, payment facilitators tend to be much more strict on fraud and security measures than a traditional payment processor because of their low barriers to entry.

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Three Phases of Payment Processing: How PayFacs Came to Be Over the years, merchant services have evolved in three main phases. Of course, there’s plenty of overlap between the eras, but they broadly represent how the industry has changed over time:

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1. Direct Partnerships Between Processor and Merchant In the early days of processing, processors and merchants formed direct partnerships. Providers sent sales representatives door-to-door (or gave them desks in local banks) and sold solutions based on convenience. Merchants held their own merchant accounts and transactions traveled directly from the customer’s bank account into the merchant’s. This is how merchant services operated for most of its lifespan and still does in many businesses today. 
2. Integrations and Revenue Sharing As businesses entered the digital realm and grew more complex, traditional merchant services were no longer sufficient to meet their needs. With many businesses now juggling online and physical businesses, providers saw the need to integrate their service with other services commonly used by business owners. This led to processors forming partnerships with products, such as accounting software or inventory management systems. Basically, these services would refer merchants to their merchant services partner and revenue from the deal would be shared between the two.
3. Payment Facilitators Reduce the Role of Traditional Processors In recent years, payment facilitators have emerged as a considerable force in the payment processing industry. Platforms that once partnered with processors have begun to take payments into their own hands, removing the need to refer customers elsewhere. The payment facilitator model has made this possible. These software companies take on greater risk but pocket a much larger portion of the processing revenues.
   Benefits of Adopting a PayFac Model While becoming a payment facilitator is a complicated process, there are a number of considerable benefits that come with it. 
   

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Improve the product: If you want your software experience to be as smooth as possible, it’s wise to keep the entire customer experience within your control. For this reason, we wouldn’t recommend referring your customers to a traditional processing partner. Even when there’s a partnership in place, traditional merchant accounts are tough to get running and offer a less satisfying customer experience. By removing the burden of setting up the merchant account, your customer experience can be much smoother. Broaden revenue streams: Bypassing a standard integrated revenue sharing partnership allows your software to take in a greater percentage of revenue from your customer’s transactions. PayFacs make money not just by selling their software, but by processing payments through the platform as well. Become an essential piece of your customer’s business: Customers might be able to survive without your software on its own, but by broadening the services you offer, you make your software harder to abandon. Payment processing is a particularly effective way to make your software essential -- no business can just drop their ability to accept cards without serious consideration first. Increase your company valuation: Investors dream of consistent, reliable revenue streams.

PayFac models add that to your base product, making your business much more valuable. Possible Issues With the Payment Facilitator Model Of course, PayFacs are not all sunshine and daisies. There are some significant negatives that can’t be overlooked:

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Increased risk: As a payment facilitator, your business will have to take on some portion of the risk posed by your sub-merchants. In some cases, your business will hold financial responsibility for fraudulent transactions made on your platform. This can be extremely costly if not properly managed. Possible alienation of customers: To compensate for the extra risk, many payment facilitators are exceptionally strict when it comes to possible fraud. Unfortunately, legitimate businesses are often flagged for fraud by payment facilitators, which can be frustrating for your customers. Greater responsibility: Broadening your product offerings means broadening the support you offer to customers as well. Without the partnership of a traditional processor, your business is left to handle processing hiccups like deposit delays, declined transactions, and shuttered accounts all on your own.  PCI compliance concerns: The payment card industry data security standards (PCI DSS) are a set of security guidelines that all merchants must follow. As a payment facilitator, you are responsible for ensuring the compliance of all the sub-merchants under your account. This could mean a huge investment into servers and hardware, though in some cases this can be outsourced to third parties and paid for on a by-transaction basis.

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If your software business is interested in pursuing a payment facilitator model, SwipeSum would love to help. We have assisted dozens of businesses in setting up and running their payment facilitator software. As your outsourced Chief Payments Officer, SwipeSum will work to find a solution that betters your product, customer satisfaction, and increases revenues. Click here to get started!

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