At Finix we are on a mission to demystify payments. Payment facilitation is now ten years old, and while the benefits of this model are well known (e.g. increased revenue, increased business valuation, and ownership over the merchant relationship), the daily operations can be confusing and unclear.
We often get asked what it truly looks like to be a payment facilitator (PayFac). We recently hosted a webinar at the Electronic Transaction Association (ETA)’s “PayFac Day” detailing the daily operations of a PayFac. In this post, we will break down a PayFac's day-to-day into three pillars, each with distinct activities.
The three pillars of payment facilitation are:
- Boarding and underwriting
- Transaction monitoring
- Funding and reconciliation
Payment Facilitator daily activities
To help explain the three pillars, we’ll use GymLife, a fictional SaaS company providing software and payments to gyms and fitness studios in the U.S. GymLife is leveraging Finix’s payment facilitation platform to manage and own their payments experience.
Boarding and underwriting
In the payment facilitator model, sub-merchant boarding and underwriting is managed by the PayFac rather than the payment processor, as it might be under a referral agreement. The goal of boarding and underwriting is to determine if it is a good idea to process transactions for a sub-merchant based on your risk criteria and after the completion of certain regulatory requirements such as Know Your Customer (KYC) verifications. Boarding and underwriting includes but is not limited to: (1) ensuring businesses and sub-merchants are selling the goods and services they say they are selling, (2) performing checks to guard against money laundering, terrorist funding, and other criminal activity, and (3) enabling the sub-merchant for transaction processing.
To prevent fraudsters from coming onto the platform, the payments team must review all pending sub-merchants (manual or automated) before and after boarding to ensure no fraudulent activity is taking place. The effort necessary to manage the boarding and underwriting process can vary depending on the business vertical, level of experience and effort, and technology stack.
Finix’s Core platform streamlines this process, allowing GymLife to focus on sub-merchants whose applications need further attention. Using Finix’s Dashboard, GymLife can view the status of the sub-merchant applications. On the Dashboard, GymLife can assign members of their payments team to review and approve or reject a sub-merchant. See the image below of the review sub-merchant page from our mock sandbox environment.
Once a sub-merchant is successfully boarded they can begin processing payments. Rapid sub-merchant boarding is only possible because the PayFac is financially responsible for the activities of its sub-merchants. In order to mitigate risk from sub-merchants, the PayFac must create processes and policies to monitor the transaction activity of its sub-merchants.
Effective transaction monitoring will identify abnormalities and allow the payments team to take appropriate action. Abnormalities may include:
- Spikes and dips in processing volume
- Repeat business from suspicious buyers
- Questionable transactions (e.g. a merchant who normally completes Card-Present transactions completes a large Card-Not-Present transaction)
- Increased chargebacks/returns
Using the Dashboard, GymLife can reject questionable settlements as a whole or even remove suspect transfers from a pending settlement. This functionality gives full control to GymLife to determine which settlements get funded, particularly those that do not pass the payment team’s risk review.
Funding and reconciliation
The last and most important pillar of daily activities is funding and reconciliation. Now that sub-merchants are successfully boarded and actively processing transactions, it is critical to pay them out in a timely manner. Often manual adjustments must be made to settlement amounts and since most PayFacs are using the Automated Clearing House (ACH) to send funds to sub-merchants (which has a daily cut-off time), they only have a few hours each day to review their sub-merchants transactions, apply necessary (if any) adjustments, and approve/release funds. The Finix platform automates the settlement processing workflow, which allows the payments team to only focus on flagging and removing transactions that do not pass risk management policies.
Whether you’re ready to take on the responsibilities of becoming a PayFac today or not, get in touch with our team at Finix to learn how owning your payments stack can transform your business.