PayFac Insights: Pros, Cons, and Making the Right Choice

In the fast-paced world of payment processing, we're always on the lookout for efficient and flexible solutions to make our lives easier and improve customer experiences. One such solution that's been gaining some serious popularity in recent years is the Payment Facilitator, or as it's affectionately known, the PayFac. So, you might be thinking, "Is this PayFac thing right for me?" Well, fret not, because, in this blog, we'll dive into the nitty-gritty of Payment Facilitators, their perks, things to consider, and whether your business could be a perfect match for this payment model.

What is a Payment Facilitator (PayFac)?

First things first, what exactly is a Payment Facilitator? Well, think of it as a master merchant who's here to save the day by simplifying your payment processing game. As a PayFac, you'll be aggregating transactions not only for yourself but also for your sub-merchants (a provider of goods or services to End Users aka your customers) under one nifty merchant account. No more fussing around with separate merchant accounts for each business using your software.

Advantages of Embracing the PayFac Journey

• Streamlined Onboarding: As a PayFac, you have the advantage of faster onboarding for your sub-merchants. You can skip the traditional merchant account underwriting process for each individual sub-merchant, reducing the time and paperwork involved.  This allows you to instantly provision account credentials for processing.
• Revenue Generation: Becoming a PayFac opens up new revenue streams. You can charge your sub-merchants a processing fee, and depending on your business model, you may also earn a share of the transaction fees, which can contribute to your overall revenue growth.
• Increased Control: As a PayFac, you have greater control over the payment process and can offer a consistent user experience to your sub-merchants. This control extends to customer service, monitoring transactions, handling disputes, and managing the entire payment flow.
• Enhanced Customer Experience: By providing a seamless payment experience to your sub-merchants, you indirectly improve the customer experience for end-users. A streamlined payment process can lead to higher customer satisfaction, more referrals, and repeat business.

Key considerations Before Embarking on the PayFac Adventure

• Regulatory Compliance: Operating as a Payment Facilitator involves compliance with various financial regulations, including anti-money laundering (AML) and Know Your Customer (KYC) requirements. You'll need to ensure that your onboarding processes are thorough and meet all legal obligations.  This may result in hiring an in-house specialist to manage your new risk and underwriting department.
• Risk Management: As a PayFac, you assume the risk for the transactions processed by your sub-merchants. This means you must implement robust risk management practices to mitigate potential fraud and chargebacks, which could impact your profitability and reputation.
• Financial Liability: In the event of any issues or discrepancies with transactions, the ultimate financial liability rests with the Payment Facilitator. Before becoming a PayFac, it's essential to assess your financial capacity to handle potential losses.
• Payment Card Industry Data Security Standard (PCI DSS) Compliance: Payment Facilitators must adhere to stringent PCI DSS requirements to ensure the security of cardholder data. Compliance can be complex and costly, requiring ongoing efforts to maintain the necessary security standards by outsourcing to PCI Quality Certified Assessors (QSAs).  
• Technical Infrastructure: Establishing and maintaining the technical infrastructure to support thousands of sub-merchants can be demanding. You'll need a robust payment gateway and other systems to manage the aggregation and settlement processes effectively.  This can take months of development, or be outsourced, the cost can quickly reach six figures.

Payfac, ISO, and Referral Partner Cost Considerations 

In the landscape of integrated payments, there are three distinct avenues to consider: PayFac, ISO (Independent Sales Organization) as a traditional Merchant Service Provider (MSP), and Referral Partnering with an established Merchant Service Provider. These options are ranked in ascending order of their entry costs, control levels, and revenue potential. 

• The PayFac model boasts high revenue opportunities, yet the associated costs – encompassing employee management, risk factors, and technology investments (whether insourced or outsourced) – tend to exceed the grasp of many companies. In reality, this approach can translate to a quarter of a million dollars in expenses for your organization. 
• In contrast, the ISO route involves bringing sales operations in-house while collaborating with a prominent Processor for Risk and Underwriting. Leveraging their gateways and risk departments, you can generate substantial income while entering the field with a considerably more manageable cost structure. Furthermore, there's no need to outsource functions like Qualified Security Assessor (QSA), Risk, or PayFac platforms. 
• Lastly, the Referral Partner avenue proves to be the easiest and most budget-friendly entry point. By coding to the appropriate gateway, you leave the majority of tasks in the capable hands of the Merchant Service Provider (MSP). Despite the straightforward nature of this path, the revenue share remains robust. This option holds particular appeal for burgeoning Software-as-a-Service (SaaS) companies seeking to maximize revenue while keeping overheads in check.

Is the PayFac Model  Right for My Business?

Alright, now the big question - is being a PayFac the right move for your business? Well, it all depends on your business model, goals, and risk appetite. If you're dealing with thousands of sub-merchants and looking to streamline their payment processes while raking in some extra dough, then becoming a PayFac might just be your golden ticket.

Remember that the PayFac path isn't all sunshine and rainbows. You'll face challenges with regulatory compliance, risk management, and the need for some serious technical capabilities. So, for some businesses, cozying up with an established Payment Facilitator might be the smarter choice. You can still enjoy the perks of the PayFac model while benefiting from their expertise, infrastructure, and compliance processes.

Embrace the PayFac Path Wisely

To wrap it up, the Payment Facilitator model has its fair share of advantages, especially for those looking to simplify payment processing for themselves and their sub-merchants. With faster onboarding, more control, and the potential for extra revenue, it's an attractive option for many. But always keep your business objectives and capabilities in mind. You might want to tap into the wisdom of payment processing experts or industry pros to figure out if the PayFac model is your perfect match.

In conclusion, becoming a Payment Facilitator, or PayFac, can be a game-changer for streamlining payment processing and unlocking new revenue streams, especially if your business involves serving hundreds if not thousands of sub-merchants. However, it's essential to consider the regulatory, financial, and technical challenges that come with this path. To make an informed decision, align the PayFac model with your business objectives and capabilities, and don't hesitate to seek advice from payment processing experts or industry professionals. Take your time to evaluate whether the PayFac adventure is right for you, as finding the best fit for your business will lead to a successful journey. For any questions or further assistance, don't hesitate to reach out to Paystri, your reliable payment processing partner.