No Shortcuts To Becoming a PayFac

As the payment-facilitator model gains favor, understanding the process to become one has become more important than ever.

A few years ago, deciding on a payment model was a simple choice for a software vendor or event organizer: Find an independent sales organization to work with or become one. Then, along came the payment-facilitator model, first used by the likes of PayPal Holdings Inc. and Square Inc. to make it easy for smaller merchants to accept payments.

The payment-facilitator model enables entities to accept payments without going through the complicated process of setting up their own merchant account. Instead, the merchant signs up to accept payments using a master account provided by the payment facilitator.

Both Visa Inc. and Mastercard Inc. enable submerchants to have charge-volume amounts up to $1,000,000 annually before requiring them to establish their own, independent merchant account.

‘A Good Fit’

The benefit for the submerchant is that it is a quicker and simpler way to begin accepting payments. For the payment facilitator, the benefit is the ability to service vast numbers of other organizations while maintaining control and having access to their payment data.

While the payment-facilitator model continues to serve small merchants well for general payment card acceptance, it has quickly become the darling of software developers. These companies want an expeditious, simple, and secure way to offer payment acceptance to their merchants.

It also has become highly favored among event-organizing companies. Rather than trying to arrange payment acceptance for participants in thousands of 5K runs and triathlons, the organizers turn to companies like Active Network LLC or SignUpGenius Inc., which already have this capability.

Part of the appeal of the payment-facilitator model for software developers is that it can sidestep a potentially cumbersome EMV integration.

The multitude of unique software products that traditionally offered a built-in payments function was complicated by the EMV standard, which required certification of each configuration. If the point-of-sale hardware changes, a recertification is necessary. If the software is updated, a recertification is necessary.

Another aspect that might be appealing is that payment facilitators often rely on online customer acquisition, which doesn’t entail such elements as direct mail or using sales agents to recruit merchants. “Payment facilitators are much better at online acquisitions,” says Todd Ablowitz, chief executive and founder of software company Infinicept and consulting firm Double Diamond Group.

The operational costs of onboarding merchants may be less expensive, in the end, for payment facilitators, too. Relying on a risk-based approach in this regard might prevent boarding a merchant that will only process $1,000 a year, he notes.

This in particular created a unique opportunity for payment facilitators to court independent software developers.

“Our research suggests there are more than 10,000 software companies that are a good fit for the payment facilitator model,” Ablowitz says.

Double Diamond Group research forecasts that independent software vendors (ISVs) and software-as-a-service providers will reach $513 billion in gross payments volume by 2021, generating $4.4 billion in revenue.

‘Very Proprietary’

The potential growth in the model is vast. A 2016 presentation from Mastercard on its registration programs said there were 818 payment-facilitator registrations, with 158 of them in the United States. Visa counts 624 worldwide, but that tally does not include Europe.

Many organizations are willing to accept the challenge, especially because the revenue potential is greater than with some other payment models, says Holli Targan, an attorney at Jaffe Raitt Heuer & Weiss, a Southfield, Mich.-based law firm. Without a middleman they must pay to process their transactions, payment facilitators typically retain a larger revenue share. They also benefit from having more control over the payments element.

“There is a little less friction because it is the payment facilitator deciding as opposed to someone else,” Targan says. “They’re very proprietary about their customers. Frankly, they’re tired of the bad service their payment processors have been giving their customers.”

Becoming a payment facilitator, however, is not a super-simple task. The prospective payment facilitator will have to determine if its customer base is a good fit for the model. If so, other considerations must be addressed.

The first task is to find a sponsor, Targan says. Candidates can include such companies as First Data Inc., Total System Services Inc. (TSYS), or Worldpay Inc., the company newly formed from the Vantiv Inc. and Worldpay plc merger.

“The sponsor is required by the card brands to do a due diligence on [prospective payment facilitators],” Targan says. Requirements that must be met include demonstrating the company has good capitalization and showing that management has strong acquiring experience.

“They’ll have to indicate to the sponsor they have the wherewithal to perform the obligations required to be a payment facilitator,” she says.

They’ll also have to comply with various regulations, not just state and federal ones, but also those established by the card brands.

“Once they become registered with the card brands, there are rules they have to comply with,” Targan says. Examples include ensuring submerchants comply with card-brand rules, maintaining PCI compliance, and monitoring submerchants for fraud. Among federal regulations are the Bank Secrecy Act and anti-money laundering compliance programs.

They also must determine whether becoming a payment facilitator qualifies the company as a money transmitter, an entity subject to various state laws.

‘More Than One Model Going’

The sponsor, too, will want to see a business plan, says Ablowitz. If the sponsor is going to underwrite a payment facilitator, it’ll need to know how the business operates. Policies and procedures outlining the submerchant underwriting are necessary.

“That can be a thing that trips people up if they don’t understand,” Ablowitz says. His advice is to either hire staff that know underwriting or bring in a third party.

“From an expertise perspective, if they’re looking for someone who knows how to do underwriting, they’re hiring personnel,” says Targan. “They’re initiating a whole new division of their company that is now payments.”

Once all this is ready, the prospective payment facilitator should hire a payments attorney, Ablowitz says, and get its technology ready to connect to the sponsor. That process may take between three and six months, Targan says. Payment facilitators also must pay registration and annual renewal fees of $5,000 each to Mastercard and Visa.

Other considerations include devising a plan for boarding existing merchants. Usually, the payment facilitator will assign an employee to manage this project, Ablowitz says. Typically, that entails checking the payments experience of existing merchants in the payment-facilitator model as well as their systems.

Migrating existing merchants to the new model often is not done wholesale, but in segments or by channel, Ablowitz says. “It wouldn’t be unusual to have more than one model going,” he says.

“One other thing a payment facilitator needs once they are ready to launch—even the smallest payment facilitator—is someone to manage the operation day-to-day,” Ablowitz says. “You can’t launch with no staff.”

‘A Challenge for New Players’

There are other sources to help companies become payment facilitators. The Electronic Transactions Association, a Washington, D.C.-based trade group for the acquiring industry, publishes the “Payment Facilitator Guidelines,” a document that helps companies in incorporating risk and compliance practices associated with the model. Released in 2016, the guidelines are to be updated this year, says Amy Zirkle, ETA vice president of industry affairs.

“It’s a challenge for new players,” Zirkle says. “There are roles and responsibilities that payment facilitators have to agree to support and abide by.”

For companies that have limited exposure to the payments industry, and specifically the acquiring aspect, the prospect of becoming a payment facilitator can be daunting.

“That’s tied to the core of what’s going on in traditional sales channels, in the ability to underwrite merchants, manage settlement for merchants, and provide customer service for merchants,” Zirkle says.

The payment-facilitator model has matured to the point the ETA formed a committee last year dedicated to it. “What we’re really trying to do with that committee is create an environment where we can have proactive discussions on a variety of issues that relate to payment facilitators,” Zirkle says.

‘In the First Inning’

Most experts agree that the payment-facilitator model has a lot of growth ahead. “We’re ending the first inning,” Ablowitz says, in describing how far the model, which originally labeled providers as aggregators, has come. “The next wave is all these software companies are going to become their own payment facilitator.”

Other organizations are trying to determine whether the model might be good for them. “We’ve had inquiries from traditional ISOs who are looking at it and trying to figure out if it’s something they want to take advantage of,” Targan says. “It’s not just ISVs and value-added resellers.”

An experienced payments provider may understand the challenges of becoming a payment facilitator, but not all companies, regardless of their size. “More of our inquiries are coming from software companies,” Targan says, “who have a payments aspect to their software or want to have a payments aspect.”

“They know their software, they know their services they can offer their software clients, but they don’t necessarily know payments,” she says. “They start peeling back the onion and realize it’s much more complicated than anticipated.”