Once upon a time, merchants had direct contractual agreements with the acquirers who signed them up to accept payments. The process was time-consuming, expensive and didn’t always come out the other end with a merchant account. To expand and scale the business, acquirers realized that they needed more feet on the street and invited a middle man to the party — the ISO.
These ISOs helped to add more volume to the merchant pipeline and expanded the types of businesses served by focusing on a specific merchant vertical — say, serving all the optometrists in the area. But adding that layer did little to speed the merchant onboarding process or streamline the underwriting requirements to give those merchants an account.
Recently, a new layer has been added to the acquiring ecosystem that has: the Payment Facilitator, or PayFac. PayFacs onboard merchants who become sub-merchants to that PayFac. That submerchant has the benefit of getting all of the payments bells and whistles that they need or want to have without having to invest in those things themselves. Or, alternatively, be limited to the features and functions of the ISO or acquirer.
In a new series, Rich Aberman, co-founder of WePay, and Karen Webster set the record straight on what a PayFac is and isn’t, how a company can become one (and what it costs), the value equation that PayFacs bring to merchant services and what companies shouldn’t.
In Episode One, Aberman outlines the basics: What’s a Payment Facilitator and why are software platforms gravitating toward this model?
Merchant Experience Is Priority One
“Everyone always wants to get closer to the merchant and add as much value at that layer as they can,” Aberman said. “When people say ISOs are threatened by payment facilitators, what they’re really saying is … we’re able to deliver a much better merchant experience with a lot more value at a much lower cost than a pure ISO.”
Merchants today, he emphasized, expect a faster onboarding process, simplified pricing, a single point of contact for support, the ability to integrate their account into whatever software platform they’re using to run the business and consolidated reporting throughout that platform.
ISOs are hard-pressed to deliver that. Their model is an extension of the acquirer they have a relationship with — collect a full application, get it approved by the acquirer and then pass it on to underwriting — not exactly instant.
A PayFac collects minimal data up front and supplements it with other real-time data to get merchants up and running, literally, in minutes.
“FinTech companies — PayPal, Square, Stripe, WePay — have gravitated toward that model because what they’re innovating on is merchant experience, or user experience,” said Aberman. “In order to provide the experience that we as FinTech innovators believe that we’re capable of — without being bottlenecked by the traditional legacy processes, requirements, policies, technology of the acquirer — the way to do that is by becoming a PayFac and building those functions in house,” Aberman said.
Choose Your Own Destiny
To whom much is given, much is expected. And after PayFacs do the initial onboarding, the work begins: accepting a variety of payments, reconciling payments in to payments out, factoring in a pricing and billing engine and mapping it all to the local card rails of the country where the business is based.
By outsourcing all that to an acquirer, an ISO saves on risk, regulatory, technical and operational overhead. But as Aberman sees it, that ISO is now beholden to the acquirer and locked into the capabilities that acquirer is able to deliver.
“Payment Facilitators have gravitated to this model because it has allowed us to take our destiny into our own hands,” Aberman said.
Instead of focusing on how to build value on top of payments for merchants, platforms that become PayFacs have to continuously invest in keeping pace with payments innovation and regulation. They have to be experts in both software and payments. That way, sub-merchants don’t have to choose between keeping up or investing in their business and brand.
These days, Aberman contends, software platforms that serve small and micro businesses — think accounting software, shopping cart software, marketplaces — are well-positioned to enable payments for the merchants, accounting firms, delivery services and others who use them. The more seamlessly they can integrate payments into the platform, the better the user experience.
One way to accomplish that is by becoming a PayFac. But great power comes with great responsibility: For PayFacs, user experience advantages are bundled with huge risk, regulatory and operational responsibilities. That’s a friction that Aberman said he and his co-founder built WePay to overcome: giving those software platforms the best of being a PayFac without requiring them to manage those sensitive functions directly.
Can things go wrong? Of course, but no more things than can go wrong with any other model.
“We’re taking on risk in the sense that any payment company that offers payment services to merchants takes on risk,” said Aberman, “but we’re not taking on greater risk because we’re trusting software platforms to perform key sensitive functions on our behalf.”
This way, the platform owns the end-to-end merchant experience, but through a deep integration, WePay gets the data it needs to manage risk and compliance. The platform gets the best of both worlds: the ability to optimize user experience and minimize overhead. Traditional acquirers require PayFacs to manage risk, compliance and payment operations, which is a significant undertaking for most platforms.
By contrast, an acquirer has the clout to shut things down if a merchant isn’t addressing ongoing issues, but the mechanisms that are in place to catch those issues can create friction and administrative overhead, said Aberman, whereas a PayFac automates all of that. It’s proactive where an acquirer, by nature, can only be reactive.
“The magic of our solution is that we don’t have to trust [platforms] to do that, while still giving them the control that they need to deliver a great user experience,” said Aberman. “That’s the technological approach that acquirers are not currently taking.”
Next, Aberman and Webster will discuss the difference between a PayFac and a Merchant of Record. Later, they’ll explore what it takes to become a PayFac. Many ISOs already have the resources and relationships they need to do so, but there are other costs — is becoming a PayFac the right move for all of them?
Guess you’ll just have to tune in.