Payment Facilitation, Payments

The PayFac Update

Over the years, we’ve written a lot about payment facilitation, whether software companies should become PayFacs, and how to go about doing that - so we thought we’d pull together a lot of what we’ve already written on the topic to make your discovery a little easier.

What is a Payment Facilitator?

Maybe you’ve heard the terms “Payment Facilitator” or “PayFac” thrown around, but never really understood what these terms mean. The Finix Payments Glossary defines a payment facilitator as “a service provider for merchants who want to accept payments online or physically." That’s pretty broad, isn’t it? But that’s because what a payment facilitator does IS broad.

A previous blog post about what a payment facilitator is says that “The solution, provided by the payment facilitator, simplifies the process of accepting payments for its sub-merchants. This payments solution:”

  • streamlines the underwriting process
  • insulates the sub-merchant from onerous compliance responsibilities
  • greatly simplifies the funds settlement process so that the effort required for reconciliation is significantly reduced

Another of our blog posts on payment facilitation lays it out like this:

A payment facilitator is a specialized merchant that has all the privileges of a payment processor: they can underwrite sub-merchants, process transactions, manage disputes, and make payouts on behalf of sub-merchants. Payment facilitators are essentially mini-payment processors.”

 

In summary, payment facilitators, or PayFacs, make it a lot easier for companies of all sizes to start accepting payments. Without having to file an application directly with an acquiring processor. The payment facilitator has already done both of those things for you (and more), so you can get up and running faster.

Why do Payment Facilitators exist?

While credit cards have been around since the 1950s, consumers have only been able to pay online with them since the early 2000s. The first wave of payment facilitation technology appeared in the form of Independent Sales Organizations (ISOs). Our previous blog post on the topic says that “These companies were then able to offer software products with ‘integrated payments’ and serve as an intermediary between their clients (the merchants) and the organizations they partnered with (the banks) to help merchants process payments more efficiently.”

The issue with the early ISO model was that it was difficult to control both the merchant and consumer experiences. Onboarding was clunky, paying was uncomfortable. In an ISO model your platform doesn’t have control over the onboarding of merchants; that onboarding needs to be done by the payments platform. This causes a disconnect between your platform experience and payment processing. The ISO model can also result in a large number of gateway integrations, which are difficult to manage and cause inconsistency for users. While the model filled a need in an increasingly digital world, it left a lot to be desired. 

It took another ten years for the new payment facilitation model to emerge, in the form of companies like Stripe, Square and Balanced. Mastercard and Visa also created their own payment facilitation programs around this time. Our blog post on the history of payment facilitation has this to say on the improvement that came with the new wave of payment facilitators: 

Like the integrated payments model, payment facilitation created an opportunity for software companies to monetize a service that complemented their existing offering. But payment facilitation increased the level of service software businesses could offer to their clients (the merchants) by making it nearly effortless to accept payments from cardholders.”

 

Ok, but what do PayFacs actually do?

We’re glad you asked. And, ta-da, we have another blog post for you: A Day in the Life of a PayFac goes into the details of what’s happening at a PayFac on a daily basis. This post breaks down the three pillars of payment facilitation:

  • Boarding and underwriting
  • Transaction monitoring
  • Funding and reconciliation

The payment facilitator takes care of the most complicated and risky parts of accepting payments so that you can focus on your core product while your merchants and their customers get to enjoy a smoother payments experience.

Should you become a Payment Facilitator?

The answer to this one is a big 'it depends.' Previously we recommended customers reach a certain level of gross payments volume in order to make it practical. Our blog post on the subject sets that level at $50 million. That number is still true for companies who want to BECOME payment facilitators and own the entire experience, but now, Finix can support software companies from $0 of volume to $50M and beyond, regardless of what model of payments you choose.

If you’ve seen our recent blog post that compares the four models of integrated payments to how you can get pizza for dinner tonight (it’s a thing, and you should read about it), then you’ll know that there’s more than one way to experience the benefits of the payment facilitation model. You can outsource to an already existing PayFac or you can become a PayFac with the help of a technology partner. Either way, there’s no need to build all the tech yourself.

So, should you become a payment facilitator? Maybe. Maybe not. But you should definitely think deeply about how you can future-proof your payments as your company grows. If you’re unsure about which direction to head, we’ve got a whole team of payments nerds that will help you find your way. Give them a shout.

What are the benefits of becoming a Payment Facilitator?

There are a lot of benefits to becoming a payment facilitator, most of which you’ll experience by outsourcing to a payment facilitator as well. Great news, right? According to our blog post about how to get started with payment facilitation, payment facilitation allows you to:

  • Add a new revenue stream. Growth is a good thing, and shouldn't cost you more money. Owning your payments means you transition your payments from a cost center to a profit center.
  • Build superior product experiences. You've worked hard to earn the trust of your merchants. With embedded payments, you can build a product that serves the specific needs of your vertical and customers.
  • Increase market share. Organizations that are serious about growth are making informed decisions now about how to retain customers and increase sales well into the future.

How do you become a Payment Facilitator?

Becoming a payment facilitator starts with making sure that the move is aligned with your business model and payments strategy. It’s not an easy undertaking, so careful planning is very important. 

Becoming a payment facilitator hinges on a relationship with an acquiring processor. They don’t approve applications easily, so you need to be prepared to do a substantial amount of work. Our blog post on how to become a payment facilitator states that the acquiring processor “will scrutinize over your business plan and if they feel as though you’re not up to the challenge, they’ll deny contracting with you. At that point, your dreams of becoming a payment facilitator will be on hold, and it’s very difficult to get back on their good graces.”

It’s because of this difficult application process that we don’t recommend becoming a payment facilitator unless you’re really ready, but we do recommend outsourcing to a PayFac in the meantime to enjoy the benefits of payment facilitation without the scary approval process. If, or when, you do decide that becoming a PayFac is the right path for you, Finix’s client services team is here to help you get approved.

Can you answer more questions about Payment Facilitation?

Definitely. It’s a concept that can take a while to wrap your head around. We *literally* answer questions about payment facilitation (and payments processing in general) all day. Chances are that we can answer any additional questions you might have. Finix takes a people first approach to payments, so if you are a person, we welcome your questions.

Webinar

How do Payment Facilitators fit into the larger payments stack? Watch our Payments Layer Cake webinar to find out.

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