Payment facilitation is the process by which a business, such as a software company or ISV, serves as the master merchant and processes or facilitates payments on behalf of a base of sub-merchants (often their customers). There are advantages to being a payments facilitator, including the addition of another revenue stream, but the initial cost can be daunting.
As a SaaS or tech-based business, you may be considering the option of becoming a payment facilitator (also known as a payfac). The first step is considering the time and financial resources necessary to do so. Due to the associated costs of developing the payments system, building your own payfac technology may not be an ideal solution, nor is it necessary. As a sub-merchant of a payfac, you can still offer payment processing services and allow your clients to take electronic payments, online payments, mobile payments and process transactions. Becoming a payment processor and being a sub-merchant is a much less costly and time-consuming option for SaaS payment solutions.
While becoming a payfac service provider appears to be a tempting choice for SaaS businesses, there are factors to consider when pursuing the web-based field of payment facilitation. Here are the costs to consider before deciding to become a payments facilitator or maintain a sub-merchant account.
Upfront Setup Costs
One of the largest hurdles to the self-payment facilitator model is the large upfront costs from an infrastructure and compliance perspective. Associated payment facilitation costs, including engineering and maintenance, can easily exceed $100,000 annually with upfront costs over $400k.
If you’re looking to onboard micro, small, and medium-sized businesses to your software quickly, this is what it will cost to take the first step toward becoming a payment facilitator.
Payment Systems Development & Setup
Connecting to payment processors isn’t the most straightforward process. The integration period can often take 18-24 months of development time with an experienced team. Add to that the 3-5 months and a minimum of $50,000 to obtain Level 1 PCI compliance and EMV (Europay, Mastercard, Visa) certification, if necessary.
This doesn’t include the buildout for the merchant management system including merchant dashboards, merchant payout systems, dispute management systems, and anti-money laundering protocols for different networks. With a minimum of four FTE (Full Time Equivalent) at $150,000 per year and taking anywhere from six months to a year, that’s an additional $600,000 expense.
Set Up a Payments System
To ensure that you have the internal capabilities and infrastructure required to manage settlement funds to your sub-merchant platform, you’ll need to build a secure payment system. Building automated customer dashboards, payout systems, and dispute management processes to handle chargebacks can demand a lot of time and thousands of dollars in financial backing before you’re able to begin authorizing payments as a payfac.
There is a lot to consider when developing a seamless payment processor system. User interface plays a major role in a facilitator’s success. The platform needs to be easy to install and to navigate through. Integrating cloud-based technology into your payments system makes it possible to process safe and speedy transactions. Additionally, it’s more important than ever to leverage reliable real-time data synchronization in today’s data-driven world. Data synchronization ensures accurate, secure, compliant data and a successful customer experience.
Speaking of the customer experience. Offering best-in-class customer support is also a vital part of the overall payments system experience. Once you’ve gotten your payments system off the ground you’ll need to continue to manage ongoing system maintenance.
Merchant Onboarding and Compliance System Setup
As payment facilitators, you will be responsible for onboarding, underwriting, support, and the risk of each sub-merchant. To handle these new responsibilities, your company’s headcount will need to increase to manage each of these new requirements.
You’ll need to fill positions including:
- Merchant Onboarding Team
- Underwriting Team
- Dedicated Payments Engineering Team
- Customer Support Team to field calls and questions from your sub-merchants.
Compliance can take months of work, especially if you aren’t using a vaulting solution to store the PCI data.
Learn MoreRegistrations and Obtaining Licenses
As a facilitator of the four major credit card networks, you’ll need to register with Mastercard, Visa, American Express, and Discover. Each card network requires its own initial registration fee to be paid ($10,000 per card network and transactional fees).
You should be aware that the payfac model also has ongoing license requirements to maintain a good standing and credit requirements with acquiring banks and appropriate networks.
Get Registered By Card Associations
One of the first steps needed to become a payfac is to get registered by card associations. Each card organization (Visa, MasterCard, Discover, American Express) assesses fees to merchants in connection with transactions outside of the bank’s control. These fees apply to all merchants based in the United States, regardless of bank, processor, or ISO affiliation.
You’ll also need to partner with an acquiring bank or acquiring partner that can help get you registered as a payment facilitator and provide processing and settlement functions through the networks. The general route to registering with multiple card associations is to obtain a sponsor bank. This bank/processor underwrites your business for their potential risk (fraud, suspicious transactions, negligence, etc). You and your business will be vetted to verify that everything is legitimate before moving forward. Once you’re officially approved, you can move on to integration/testing.
Related Content: What’s a Payment Facilitator?
Ongoing Costs for Payment Facilitators
Once you’ve been authorized as a payment facilitator, the ongoing costs continue often exceeding $100,000 a year. Costs, including engineering, security, and maintenance are just a few expenses to consider when determining whether or not to offer payfac-as-a-service.
Risk and Compliance
Beyond the 3-5 months and an average of $250,000 necessary to obtain Level 1 PCI compliance, payment facilitators risk and compliance programs need to be completed.
Building data retention and privacy program as well as making sure encode card networks are met (2-8 months and $300,000) increases the cost of $750,000.
A facilitator sub-merchant underwriting plan is also required and should include guidelines, a direct agreement, and tools for post-boarding operations. This includes monitoring key data points to ensure they are not engaged in inappropriate or illegal activities and ensuring adequate consumer refund policies are in place.
Approximate Minimum Cost: $250,000+ per year (1 FTE at $150,000 per year and 1 risk analyst at $100,000 per year)
Go Through Level 1 PCI Compliance
Once you’ve established a processing partnership, you’ll need to start thinking about compliance [PCI/KYC] options as well as ongoing risk mitigation. To become PCI compliant, you must meet the following 12 requirements that include security systems, organizational processes, testing, and policies that can help protect cardholder data.
- Maintain a firewall: This protects cardholder data inside the corporate network
- ALL Passwords need to be unique: Unique passwords need to be changed periodically. Do not use defaults
- Protect stored data: Implement physical and virtual measures to avoid data breaches
- Encrypt transmission of cardholder data across public networks: Data must be encrypted, and you should never store card validation data
- Use and regularly update anti-virus on all systems holding sensitive data
- Develop and maintain secure systems and applications by actively searching for vulnerabilities and remediate them
- Restrict access to cardholder data: To reduce vulnerability cardholder sensitive data should be accessible on a need-to-know basis
- Restrict access to system components: Systems holding sensitive data should be accessible only with authentication and clear user identification
- Restrict physical access to cardholder data
- Track and monitor access to network resources and cardholder data: to provide an audit trail and assist with breach investigations
- Regularly test security systems and processes: Identify weaknesses and remediate them
- Security policy: Maintain a clear policy that addresses information security for all personnel
Create Underwriting Policies and Compliance Systems
Creating underwriting policies and systems to ensure only lawful businesses that comply with card network rules are onboarded minimizes the opportunity for fraud and financial loss. First, you’ll need to verify the identities of your merchant accounts, including KYC, ownership structure, and business details.
Check Office of Foreign Assets Control (OFAC) and MasterCard Alert to Control High-risk Merchants (MATCH) lists for sub-merchants before onboarding. Assessing your sub-merchants financial health and potential risk, including fraud, financial, credit, compliance, reputational risk, and regulatory compliance is also necessary.
To manage and mitigate risks as you monetize payments you’ll also need to set up internal policies not just for the payfac system but for employees as well. This includes encoding rules and requirements from card networks and regulatory organizations, quickly identifying suspicious activity, and filing suspicious activity reports.
Customer Support
Customer support is an important part of any business model. The benefits of a good customer support team include repeat customers, more sales generation, and better cash flow. As your payfac continues to grow, you’ll need to increase the manpower to include customer support for the health of your business and quality experience for your sub-merchant platform. The enrollment and onboarding process should be seamless for your clients when you provide payment processing services and payfac as a service. This cost can vary depending on how many merchants you have and the total amount you’re processing every year.
Here are some of the potential costs of adding an in-house customer support team to your payfac model operation:
4 Customer Support Representatives
- Salaries and Benefits $141,284
- Customer Service Manager $45,726
- Hiring costs $20,645
- Software and Hardware $3,600
Total = $211,955 per year
Processing Costs and Fees
Similar to any business, payment facilitation requires hard costs that coincide with revenue generation and client acquisition. These processing costs and fees vary from basic merchant onboarding to cost per payment submission.
- Merchant Onboarding $5 per merchant
- Fraud Prevention $0.04 -$.010 per Transaction
- Chargeback $15 per dispute
- Funds Routing and Payout $0.25
- Reconciliation/ Reporting $5-$225 per form + $100,000 per year
- Annual PCI Validation $200,000 per year
- Renew Payfac Registration $10,000 per year
The Risks of Becoming a Payment Facilitator
For an independent software vendor (ISV), adding payment processing to your application or platform continues to be a growing method to build greater enterprise value. This is especially true for the software companies looking to become a payfac themselves in comparison to simply partnering with an existing payfac or becoming an Independent Sales Organization (ISO).
However, taking on the burden of payments goes much further than development and comes with a number of downsides and risks. Here are some things software companies need to know when deciding how to embed payments into their platform.
Excessive Resource Investment
Software companies have to spend time and effort developing the ability to accept payments. It is common to face challenges in building a payments platform with all the features of an established merchant services provider. Without the proper technology and experience, you’ll likely be limited to basic credit card payments.
Today, consumers want the option to pay by card, mobile wallets, bank transfers, and contactless payments. By partnering with existing payment facilitators, you can speed up integration of every payment type into your software without expending a huge amount of capital to build it. Plus, they can provide your platform with innovative features like split payments, text-to-pay, and instant onboarding for your customers.
Liability and Risk
Financial technology is under a higher level of scrutiny than other industries. To accept credit cards, the card brands require enhanced security and customer protections that you will need specialized developers to handle.
As a result, many software vendors looking to integrate payments may not be aware of the extent of financial industry regulation that they need to comply with to become a payment service provider, that is why many opt to become a payment processor and use an outside payfac that is already set up.
If you want to become your own facilitator, in contrast to partnering with an existing facilitator, you’ll need:
- Sponsorship from an acquiring bank: A bank needs to vet that you are financially stable enough to take on the risk
- Approval from card networks: Certain data security standards must be met for brands like Visa and American Express to allow you to accept their payments
- A process to vet merchants: A risk and underwriting team is needed to identify threats to your business
- Compliance with regulatory requirements: There are ever-changing rules set by banking regulations and card brands that can cost you in fines and penalties for non-compliance.
All these liability risks require considerable time, effort, and resources to mitigate. You’ll have to hire a team of underwriters to vet and onboard all your customers yourself so they can process payments. You’d also be responsible for maintaining regulatory compliance.
On the other hand, if you partner with an existing payment facilitator, they have all the necessary resources and tools to take care of all the above elements. It’s a much better choice than taking on all those requirements in-house to process.
The Financial Risks of the Self Payment Facilitator Model
If you become a payfac, you’ll be taking on the financial risk that comes with this self payment facilitator model. That means when you or one of your users encounter fraud and criminal activity during payment services, you’ll be responsible for covering the cost. The costs of merchant bankruptcy can fall to the payfac, so you’d have to take that on as well.
You’ll minimize your financial risk if you partner with a payfac since they’ll be the ones responsible for potential fraud or criminal activity. You can focus on the core features of your platform instead of taking on learning about how to facilitate payments and all the ways you can be liable for the loss. It is ultimately up to your risk management team to determine if the payfac model is worth is for your Saas company.
Benefits of Partnering with a Payment Facilitator
A New Stream of Revenue Generation
If you partner with a payfac, you’ll have a new stream of revenue for your company. You share profits with the payfac without taking on any of the costs associated with becoming a payment facilitator yourself. There’s no overhead cost to you, so it’s pure profit for your bottom line.
If you become a payfac yourself, acquiring banks and networks cut into your profits. Established payment facilitators already have these connections in place, so the transaction approval rate is much higher, and your clients can start accepting payments right away. You’ll generate more revenue without any of the risks or costs.
Access to More Features
If you become a payfac yourself, you’ll have to develop a payment platform for your customers in-house. Besides the cost, it could take months to develop a functioning platform with innovative features and capabilities. But if you partner with a payment facilitator, you’ll get access to a built-out payment platform, so you can instantly get access to the features your users need.
Your solution can begin processing payments immediately, and the onboarding process is smooth and structured, which adds to a great user experience. Access to these features adds immeasurable value to your platform, extending its capabilities without an extra cost.
Becoming a payment facilitator means committing time, money, and resources that can cut into your bottom line. Not to mention, increased vulnerability that comes with adding an additional, and large, source of financial and legal risk. When you partner with payment facilitator processing services, you are able to gain an extra revenue stream with significantly reduced risk and no overhead cost.
Your payment processing services and platform will seamlessly integrate with the platform to add new features and you’ll be able to instantly onboard your customers so they can begin payment acceptance immediately.
Partnership with a payment facilitator is a low-risk, high-reward option for adding payments to your platform. Contact Stax today to learn more about how other software providers are using Stax Connect to reduce risk and integrate payments into their platform.
What Makes Stax Connect a Viable Payments Option for Your Business
If costs, risks, and compliance are concerns, you may consider partnering with Stax Connect. Stax Connect enables a wide variety of payment formats across all business types. It would normally take six to nine months to get underwritten and then another six months to a year to build the technology to become a payfac. With Stax Connect, easily integrate our single API into your platform and begin enrolling merchants in within 30 days.
Stax Connect allows you to have access to a full payments experience, including the latest in data optimizations, analytics and reporting, and optimized payments technology. All without the need to spend millions of dollars in time and money. Additionally, your team will notice an overall enhanced customer experience due to our innovative technology infrastructure. We take care of the heavy lifting so that your business can focus on your customers and your platform.
With Stax Connect you’ll have access to:
- Access to the Stax Dashboard
- Award-winning customer support
- No need for custom engineering resource requirements
- Save costs on implementation
- Custom enrollment options so customers can begin processing payments within 20 minutes
- Access to the lowest credit card processing fees, in addition to the ability to adjust customer pricing
- Generous revenue share model and custom fee structure
You’ll also have immediate access to an award-winning Partner Success team to help make sure Stax Connect continues to work seamlessly with your platform. Your master merchant account allows merchant clients to appear as their own payment processors, while you continue to gather transactional fees in a fee structure of your choosing.
Eliminate the need to spend millions in development costs and let Stax Connect allow your business to offer custom pricing to your customers. Enable payments quickly at no cost and begin reaping rewards almost instantly.
Learn more about Stax Connect and find how you can quickly add payments to your software platform.
Our dedicated Integration Specialists will be happy to answer any questions you have and help you leverage the best all-in-one software payment processor solution for your needs.
FAQs about Payment Facilitation
Q: What is Payment Facilitation?
Payment facilitation is a process where a business, such as a tech company, functions as the master merchant to process payments on behalf of its sub-merchants (often their customers).
Q: What are the advantages of being a Payment Facilitator (Payfac)?
The main advantage is the addition of an extra revenue stream. Other benefits include the ability to offer payment processing services and allow clients to take e-payments, mobile payments, and process transactions.
Q: What are the upfront costs involved in becoming a Payfac?
The upfront costs majorly include infrastructure and compliance, which can easily exceed $100,000 annually, with upfront costs over $400K.
Q: What does Payment Systems Development and setup involve?
It involves connecting to payment processors, obtaining Level 1 PCI compliance and EMV certification, and the development of the merchant management system. The estimated cost can go beyond $600,000.
Q: What is the role of a Merchant Onboarding Team?
The Merchant Onboarding Team is responsible for onboarding, underwriting, supporting, and managing the risk of each sub-merchant.
Q: What is the cost of processing and fees in Payment Facilitation?
This includes the cost of merchant onboarding, fraud prevention, chargeback, funds routing and payout, reconciliation/reporting, annual PCI validation, and renewing Payfac registration.
Q: What are the potential financial risks of a self Payment Facilitator model?
A self Payment Facilitator model carries potential risks like the cost of merchant bankruptcy, potential fraud, or criminal activity during payment services, which all fall under the payfac’s responsibility.
Q: What are the advantages of partnering with a Payment Facilitator?
Partnering with a Payment Facilitator generates a new stream of revenue for the company, gives access to more features, and eliminates the cost, risk, and compliance concerns associated with becoming a payfac independently.
Q: What are the benefits of using Stax Connect as a Payment Facilitator for my business?
Benefits include a flexible payment experience, optimized payments technology, access to a Stax Dashboard, customer support, cost savings on implementation, access to lower credit card processing fees, and a custom fee structure. The Stax Connect service also lets you offer custom pricing to your customers quickly.
Q: What are the requirements for becoming PCI compliant?
PCI compliance involves maintaining firewalls, unique passwords, data protection measures, encrypted data transmission, use and update of anti-virus software, restriction of data access, tracking & monitoring of network resources access, regular testing of security systems, and maintaining a clear policy for information security.
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