Software-as-a-Service companies are increasingly looking to Payment Facilitation (PayFac)
Payment Facilitation or Payment Aggregation has been gaining traction among applications in the last few years, mainly due to the ability to attract and quickly onboard new clients. This payment aggregation, or the payment facilitation model, is considered to be quite attractive for various SaaS platforms.
PayPal originally used this model, and when the company first started the concept of the whole aggregation model of merchant accounts was quite unknown. PayPal was using it for the first time, which included backend credit card processing. With the growth of PayPal and an increase in volume, acquiring bank partners offered support to the model. Recently, Square has gotten into the space and carried out the same functions.
However, it comes at a price — namely, high costs. A business can spend up to $200,000 on compliance costs. The road to becoming a PayFac or a complete payment facilitator comes with the following:
- High expenses
- It becomes necessary for the application to mention that the platform is also becoming a payments company.
This is quite different from what the companies desire. Such companies will not have to worry about risk mitigation. The desire is to be able to accept payments in quite a simple way. Thus, companies recognize that a gap exists between what the merchants need at the moment and what is available.
In this gap, what kind of requirements do PayFacs need to invest in so that they are able to support such a business?
There are a few new options available for the SaaS platform range, which include, “We just need our payment embedded and we need to go to the market as quickly as possible.”
In such a model, the company can go to market in just two weeks. A payment solution is provided and clients are asked to fill out the form, and have their payment processing done in just 15 minutes. In this case, the merchant record is the payment facilitator partner, and that’s the base.
But, when the company slowly moves from a base model to full-blown model, there will be some kind of give and take. But with such an ability, there is an associated drawback as well.
The expenses will be high when the company assumes more responsibility and risk. If any business wishes to get in the market quickly, and if payment-related revenue is not too important, then this is certainly a great option.
PayFac Global Expansion Plans
There is an increasing demand for global capabilities. Expansion has occurred in the EU and in the UK, but it is observed that Asia is a bit behind the curve. A little progress has taken place but there is also a geographic weakness in the model. Such kind of problem does stress the need of having partners rather than having a full operation in new jurisdiction.
Companies are now slowly moving in different areas, but are not always aware of the different legalities, or about how things work in that area.
Challenges of Payment Facilitator
The different card associations need copious amounts of information related to a company, as they have to trust a company and merchants that they might not have complete control over. They also do not have control on the fraud risk which comes with the ecosystem.
In order to be a true PayFac, companies need to go through an underwriting process where the business models and principles of the company thoroughly examined. Any startup company that thinks about a full blown model needs to have adequate investment capital. Also, it takes more than 6 months to get approval and to have the integration valid.