A recent survey by Forbes Advisor revealed that only 9% of Americans still pay for their purchases using cash. For frequent purchases like gas and groceries, they are increasingly choosing to use credit and debit cards. Naturally for businesses, accepting payment cards has become unavoidable.
As a direct consequence, independent software vendors (ISVs) that can process payments have a lucrative opportunity to grow their customer base and revenue by becoming a traditional or managed PayFac (or payment facilitator). In fact, Juniper Research predicts an 84% growth in revenue from embedded payments or PayFac-as-a-Service from 2023 to 2027, which translates to $59 billion.
In this article, we’ll explore the key features that SaaS businesses should look for in a managed PayFac solution.
- For SaaS providers, becoming a PayFac may be a particularly lucrative opportunity as it can help them add a new revenue stream. However, becoming a traditional PayFac requires fulfilling strict compliance and regulatory obligations, building your own payment infrastructure, managing legal dealings with sub-merchants, partnering with payment processors, and taking care of many other operational aspects.
- In contrast, partnering with a managed PayFac solution provider takes far less money, effort, and time. The managed PayFac handles all compliance and infrastructure requirements while providing a payment facilitator model to its own customers or sub-merchants.
- The key features SaaS providers must look for in a managed PayFac solution are integrated payment processing, robust security measures, instant onboarding, dynamic pricing management, automated settlements and payouts, and an extensive partner ecosystem—all of which is offered by Stax Connect.
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Payment facilitators or PayFacs emerged in the 1990s and have now become a staple in the payments processing industry. Small- and medium-sized businesses would use traditional payment facilitators to accept online and cashless payments.
Square and Stripe were some of the earliest PayFacs but today there are numerous options for businesses to choose from. Even SaaS vendors may choose to become traditional payment facilitators or adopt a managed PayFac solution by partnering with companies that offer PayFac-as-a-service.
Before we delve further, let’s try to understand what a payment facilitator business model means. Simply put, a PayFac is a third-party company or service provider that allows businesses to accept cashless payments (from debit and credit cards) and online payments. You may think of it as a master merchant that can process payments for sub-merchants within their payment app.
Without a PayFac, a business must go through the formidable process of identifying the right merchant acquirer (an acquiring bank that will host the business’ merchant account) and payment processor. They would also have to go through the traditional merchant account application and approval process which typically takes substantial time.
In contrast, a PayFac offers a quicker merchant onboarding process so sub-merchants can enroll and start accepting payments from customers in just a few hours.
What Is a Managed PayFac?
As a SaaS provider, becoming a PayFac may be a particularly lucrative opportunity for you as it can help you add a new revenue stream. However, becoming a traditional PayFac can be quite daunting. You must fulfill strict compliance and regulatory obligations, build your own payment infrastructure, manage legal dealings with sub-merchants, partner with payment processors, and take care of many other operational aspects. All this requires significant investments of time and money.
In contrast, partnering with a managed PayFac solution provider takes far less money, effort, and time. The managed PayFac handles all compliance and infrastructure requirements while providing a payment facilitator model to its own customers or sub-merchants. This can, therefore, be a low-risk option for SaaS businesses that don’t have the resources and financial/technical know-how to become a true PayFac.
PayFac vs. payment gateway
Sometimes, there’s a bit of confusion with the terms payment gateway, payment processor, and payment facilitator (PayFac). So let’s clear that up before we delve into the important features of a managed PayFac.
A payment processor is essentially a financial organization, such as a bank, that connects a business to a card network (like Visa or Mastercard) and handles underwriting. It sends transactions to the networks, manages the transactions by approving or declining them, and oversees the settlement of funds among the banks of cardholders and businesses.
A payment gateway is the technology used by a payment processor to process transactions. The technology collects, records, and transmits a cardholder’s data for authorization to a payment processor. Based on the result of the authorization, it then lets the cardholder know if their payment has been accepted or declined.
Key Features of a Managed PayFac Solution
Let us now take a look at the features you should be looking for when choosing a managed PayFac solution provider.
Integrated payment processing
As a PayFac, you must allow your sub-merchants to accept multiple types of cashless payments. This includes card-not-present payments such as online payments and other remote payments that happen over fax, phone, and mail.
Your managed PayFac solution should also be able to simplify recurring payments and invoices. Plus, it should help you cater to a global customer base by allowing payments worldwide.
With a managed PayFac model, your fintech business can focus on attracting more customers and building your core product while the PayFac handles and streamlines payments for your sub-merchants. Moreover, your SaaS business will earn a percentage of the payments made through your platform. So not only will you earn from your core offerings but also from these payment transactions.
Robust security measures
With a managed PayFac, you do not need to worry about enforcing and meeting compliance standards. It’s their job to ensure that your platform as well as the sub-merchants that use it are PCI DSS compliant. The managed PayFac is also responsible for running KYC (Know Your Customer) checks as well as any other compliance or regulatory standards required for your business.
Managed PayFacs are also responsible for monitoring the transaction activity of sub-merchants to identify fraud, terrorism financing, and money laundering. With their technological capabilities, they also ensure data security through the encryption of transactions and cardholder data. Plus, they must provide secure data storage to avoid data breaches.
With a managed PayFac, you don’t need to worry about setting up payment options, opening accounts for sub-merchants with payment processors, or maintaining a traditional merchant account with banks when onboarding new users on your platform.
Instead, you can add new users with just a few simple electronic forms and minimal paperwork. Since sub-merchants don’t need to have individual merchant accounts, they can be added and approved to accept payments through your platform almost instantaneously. This is perhaps the most useful functionality that a managed PayFac solution offers.
A managed PayFac solution will also offer a centralized platform management system that not only allows you to add customers quickly but also edit their information, view, and generate reports. It will also provide an overview of all your sub-merchants as simple dashboards.
The right solution provider will ensure that their software integrates easily with yours and that the resulting platform has an easy-to-use interface.
Dynamic pricing management
As a PayFac, you can help your sub-merchants create more customized payment and billing features and thereby have dynamic pricing and flexible contracts based on the unique services they have chosen.
With constant monitoring available to you from your managed PayFac solution, you can identify merchants that require additional payment services. You can then upsell or cross-sell to such customers, which creates new revenue streams.
Automated settlements and payouts
By providing an all-in-one payment solution to your sub-merchants, you can ensure that funds are transferred quickly (as the managed PayFac solution provider will have long-standing relationships with sponsor banks and payment processors).
A managed PayFac can also track all the transactions of your sub-merchants to identify any issues with payments and help resolve them quickly. Best of all, all these features are all automated.
Merchant transactions will also be categorized and processed automatically in batches without any intervention from your business or your sub-merchants. Batch processing of payments reduces delays, cost overheads, and blockages in transactions.
Extensive partner ecosystem
A good managed PayFac solution will come with APIs that are developer-friendly, while also being robust. This allows developers to easily integrate the PayFac software with your fintech product. Developer-friendly APIs also allow for easier integration later on with various third-party software if requested by your sub-merchants or when it is necessary to keep up with industry trends.
A managed PayFac can also allow you to white-label the payment experience so you may create a strong brand identity and become more recognizable to your customers. By offering customization suggestions based on data analysis, the PayFac can help you improve the customer experience of your SaaS platform.
Why Stax Connect Stands Out
Stax Connect is an excellent option for software providers looking for a managed PayFac solution, especially those looking for web-based functionality.
One of the notable benefits of opting for Stax Connect is that we offer a dedicated partner success manager and assistance from an acclaimed customer support team. They will guide you with the integration of Stax Connect, implementation of payment processing, etc., which is way better than being handed documentation that you may have to figure out with minimal support (which is often the case with other PayFac solutions).
A SaaS provider needs to consider their budget, goals, and resources before shopping for a managed PayFac solution. With the right one, you can expand your SaaS offerings and generate income from processing transactions with a low initial investment. Stax Connect is a great option not only because of its highly-rated customer service but also the ease with which it can get your sub-merchants to start accepting payments through your platform.
FAQs about Managed PayFac
Q: What is a PayFac?
A Payment Facilitator (PayFac) is a third-party company that allows businesses to accept cashless and online payments. Essentially, a PayFac acts as a master merchant that processes payments for sub-merchants using its platform. PayFacs make it easier for businesses to onboard quickly and start accepting a variety of payments, eliminating the need to go through traditional merchant account applications.
Q: What is a managed PayFac?
A managed PayFac is a specialized service that handles all the operational aspects of payment processing, including compliance, infrastructure, and onboarding of sub-merchants, on behalf of another business. This is an ideal solution for SaaS providers who want to add payment processing to their services without the burden of building and maintaining the infrastructure themselves. Managed PayFacs like Stax Connect offer a low-risk, high-reward solution for SaaS businesses.
Q: What should companies look for in a PayFac?
If you’re evaluating payment facilitators, be sure to ask them about their:
- Payment integration capabilities
- Security measures
- Onboarding process
- Pay processes
- Partners and API capabilities