Payment Facilitators Versus Payment Processors – What are the Differences?
The trend of ISVs and software platforms enabling their merchants to accept payments through their SaaS (software-as-a-service) and installed software systems is exploding. In fact, McKinsey has found that about 50% of small businesses now run payments through their ISVs, and 15% are in the process of transitioning their payment processing to an ISV provider.
But the problem for small and midsize-businesses (SMBs) is that with traditional payment processing options, the signup process can be time-consuming and frustrating, the merchant approval process can take up to 7 business days, and pricing is confusing and fraught with hidden and recurring fees. And the problem for enterprises is that traditional merchant service offerings lack the dynamic funding and flexible billing options they need to access new markets while supporting existing business processes.
Software companies are in an optimal position to incorporate payments into their offerings to unlock new monetization avenues and improve customer experience. Today we look at the two primary integrated payment options – traditional merchant acquiring offered by a payment processor versus payment facilitation offered by a Payment Facilitator (Payfac).
Traditional Payment Processors (Merchant Acquirers)
A primary goal for ISVs is to provide a user experience that is simple, convenient, and consistent. ISVs believe that software and technology can make even the most difficult of back-office processes evident to the point of invisibility. Businesses sign up for practice management software to simplify and manage their business processes, thereby rewarding the ISV with subscription revenue and loyalty.
However, merchant acquiring – which can be considered the traditional payment processing model – requires significant time and effort to open an account and can be expensive. Payment processors provide the systems and technology that actually processes the payment transactions, routing them to the card networks and the banks, receiving authorization and declines, and settling funds.
Because of the way traditional processing was built, it takes time, effort, and money by the payment processor to enable and support merchants. Considerations include:
Onboarding (Underwriting and Account Setup): Full merchant onboarding can take from 3-7 business days for enrollment, which includes an application form, supplemental paperwork (merchant financials, void checks, driver license, etc.), and human underwriters.
Flexibility of Funding: Payment processors will offer a variety of digital and payment types, but typically only the largest merchant acquirers can offer split payments, convenience fees, service fees, multi-account, fast funds, and dynamic funding.
Monthly recurring fees: There are many parties in the typical payment processing chain – the payment processor (which can also be the payment gateway), the card associations, the acquiring bank, and more. A payment processing statement can contain upwards of 10 different fees charged to the merchant on a monthly basis, which can be difficult for merchants to decipher.
All this being said, in the merchant acquiring model, the processor almost always shares merchant revenue with the ISV. There are a host of factors that go into determining revenue share, from payment volume to transaction size to who is selling the account and providing first-level support.
Payment Facilitators (Payfac)
Payfacs offer payment processing to companies, known as sub-merchants, through their own links with payment processors. Payfacs serve as an intermediary, gathering sub-merchant transactions and passing them to a payment processor for completion. Payment facilitators provide three primary services to their customers:
Onboarding (including instant signup and underwriting) services
Payment processing services
Back-office functions (including settlement and reconciliation)
The Payfac model simplifies the merchant account enrollment process and provides increased levels of control to ISVs. Seamless and paperless underwriting is at the heart of this model, accelerating standup times for merchants.
Payfacs wrap all these services into APIs that software companies can integrate to, automating the entire provisioning process into a seamless merchant enrollment experience that can be completed online by a merchant in minutes. This API-centric integration and automation is very different from the traditional payment processing enrollment experience.
Our next blog on the 7 Factors to Consider When Choosing a Payment Processing Model will delve into additional considerations when choosing a processing partner, including transaction types, pricing, hardware, and compliance and security.
The Different Payfac Models
Payfacs have continued to gain prominence and have been adopted by ISVs to create a more dynamic user experience. But like with any payment option, there are different Payfac models to choose from.
Software Platform as the Payfac
Many ISVs are moving towards the value of Payfac by actually becoming Payfacs themselves. However, this is the most aggressive model typically only adopted by the largest ISVs since:
The time to become a Payfac can range from 12-18 months.
The cost can reach into the millions due to software buildout, integrations, bank sponsorships, PCI compliance, AML compliance, financial reserves, registration fees, and more.
The ISV assumes 100% of the risk and liability for their sub-merchants.
Payment industry experience is required to run underwriting, transaction risk monitoring, and daily financial settlement.
All merchant account sales and customer support must be provided by the ISV.
Without these pieces already in place, an ISV could risk becoming distracted from their core software business.
Payfac Direct Providers
There are some larger providers that now provide payment facilitation as a direct service to sub-merchants that ISVs can integrate to. Here, the ISV can integrate to the payment platform and provide the platform’s Payfac services to their merchants directly. However, this is considered more of a “pay to play” model where the ISV is leveraging their processing only. Considerations can include:
Margins: Many direct Payfac providers will not offer revenue sharing and impose a high buy rate, which can lead to limited margins for the ISV and more costly processing for the sub-merchant (the ISVs’ clients).
Merchant Ownership: In the direct model, it can be extremely difficult to support the portability of sub-merchants or transaction data to another provider, if the ISV decides to go with a new Payfac or payment processor.
Support: A complaint among merchants and ISVs with direct Payfac providers is the lack of “human” support, with companies directing SMBs to chatbots or online forms for questions.
While ISV clients will enjoy the benefits of Payfac with the direct model – fast onboarding, payment experience control, a variety of funding options – it could come at a higher price for both the ISV and their clients, and a lower margin for the ISV.
Payfac as a Service
Payfac as a Service is the newest entrant on the Payfac scene. In this hybrid payment facilitation model, the Payfac payment service provider becomes a Payfac with Sponsor Banks; they act as a master merchant account and are able to set up sub-accounts for merchants same-day. Payfac as a Service providers differ from traditional Payfacs in that they:
Offer aggressive revenue shares.
Allow portability of merchants and transactional data.
Assume all merchant risk and liability.
Provide flexible ISV and sub-merchant contracts to support specialized sub-merchant business models and state requirements.
Can provide human support to the ISVs and rapid merchant service support.
This model can be ideal for software providers that want to offer their clients same-day onboarding, provide fast funding, and control the sub-merchant experience, while making payments revenue and increasing margins.
The Payfactory Solution for ISVs
Software companies increasingly view fully integrated payment functionalities as complementary to their platforms. A payment offering not only enables software companies to capture a larger portion of the economics of a given payments transaction, but also comes at nearly zero customer acquisition cost as it is a logical cross-sell to their existing customer base.
Payfactory’s Payfac as a Service model of enablement, ownership, and revenue-sharing maximizes value for our ISVs while doing the “heavy lifting” of the Payfac model, with zero cost of building the Payfac platform. Additionally, we are the only Payfac as a Service that is gateway-agnostic, which means that you can quickly enable Payfactory on your current payment platform, or if you are in search of a new payment gateway, get Payfactory through our preferred gateway and payment security partner, Bluefin.
Access our API documentation and sandbox to see why Payfactory is the easiest and fastest way to enable merchant payments and to start making revenue today.
Still not sure if integrated payments is right for you? Check out our recent blog, Integrated Payments and Embedded Payments: A Trillion-dollar Opportunity