The survival of the fittest is a well-known concept: the strong survive and the weak disappear. In the world of payments and technology, strong is often associated with longevity given the complexities of launching and igniting new payments technologies.
Innovators using new technologies, however, have challenged that conventional wisdom – and many of the players who occupy what were once considered unassailable positions of strength in payments now find themselves fighting for their own survival.
Payments Facilitators (PayFacs) have emerged to become one of those technology capabilities that have challenged the balance of power in the merchant services space. Karen Webster spoke with NMI CEO Roy Banks to better understand his take on the future of PayFacs and their impact on the merchant services business. As the CEO of NMI, Banks has mashed up the notion of a payments gateway with the notion of merchant aggregation to create a platform that powers this whole new category of player.
Banks takes Webster inside this new model — one that’s not only redefining the merchant services model, but also making one of the mainstays of the business, the ISO, a relic of payments days gone by.
KW: Let’s start with the basics. What is a PayFac?
RB: A payments facilitator (or PayFac) allows anyone who wants to offer merchant services on a sub-merchant platform. Those sub-merchants then no longer have to get their own MID and can instead be boarded under the master MID of the PayFac who is sponsored by a bank.
This allows merchant services to be offered in a very elegant and very efficient manner. The PayFac does not have to underwrite all merchants upfront — they are instead, underwriting the merchants essentially as they continue to process transactions for them on an ongoing basis.
RB: Precisely. Everyone knows what Square is and they know what Stripe is. And yes, basically a PayFac wants to operate like a Square or a Stripe: a merchant aggregator processing transactions under a sub-merchant platform.
What we do is we enable innovators, through technology, to become their own Square or their own Stripe – so that they have options to provide these services independent of those platforms.
KW: One of the criticisms of Square and Stripe is that they take on a lot of risk in basically “standing in” for all these different merchants that they are onboarding – and we’ve seen the downside of taking on that risk. Why is being a PayFac such a great business proposition then?
RB: There’s a risk/benefit analysis that all PayFacs have to conduct. Because there is risk, PayFacs are held to the financial losses associated with any processing risks and fraud for any of the sub-merchants they process for.
So, what’s the benefit and why would anyone want to get into this?
Well, the benefit — and the reason that anyone gets into the PayFac business — is that they are able to deliver a merchant services solution that is also highly integrated with some other offering – and they can do it quickly. A PayFac can remove the long, arduous underwriting process and get merchants up and running quickly – in a matter of minutes versus a few days or even weeks.
The risk is, whether they can deliver and have the infrastructure in place to manage the risk. That’s the biggest decision that PayFacs have to make next to technology: “What kind of risk am I undertaking and how am I exposing my company to undue or unreasonable liability?”
KW: The merchant onboarding process is always the hairball in payments and it sounds like PayFacs check that box well. But there are a lot of other things that go along with getting a merchant up and running – and thinking cross-border – that makes sure that the merchant and their customers have a good experience. How do you help PayFacs solve for that?
RB: Yes, there’s the underwriting, there’s the application processing, there’s the risk underwriting, but then PayFacs also have to have a gateway. That’s probably one of the things people most often overlook in terms of becoming a PayFac.
You can go through a registration process, but then you need technology. You have to have something to offer these people to make their life easier and allow your merchants to process transactions. You can get the merchant approved but then you have to do the merchant provisioning.
As we’ve adopted the phrase omnichannel, we have to be able to support commerce in any environment, whether it’s mobile, whether it’s online, whether it’s card present, [or] retail face-to-face. We are agnostic to environment.
Because NMI has deep experience and history as a payment gateway, we plan to leverage our experience to connect PayFacs with the processor they register with - and that's huge. And we provide them with exposure to or the ability to process any card types. We provide that capability to them in a singular platform.
KW: To sum it up, you are eliminating the friction associated with onboarding merchants, but providing the technology to deliver a good experience to the end user.
RB: With most acquiring banks, they underwrite you, and register you and presto-chango — you are now ready to become a PayFac. But what you really need is the technology and infrastructure and a gateway to process the transactions. You also need a way to onboard and provision merchants and then provide reporting, and billing and help with reconciling reporting. You have to manage and notify merchants about chargebacks. That’s where most players face big technology decisions: “Do I invest or do I go out and purchase something?”
[It used to be that] it would take 6 to 9 months to get underwritten and then another 6 to 12 to 18 months to build the technology to become a PayFac. [Now] with us, you simply plug credentials into the system and within a day or two you are up and running and can start signing up merchants.
KW: Where are you seeing the demand and also who is most at risk?
RB: We are seeing demand from existing ISOs that are feeling the pressure from PayPal and all of these PayFacs. The ISOs feel they are not competitive and they are not able to take advantage of technology. We have a lot of ISOs that [we are] working with. But the bigger opportunity is the traditional software provider or even a cloud-based business solution that requires someone to turn on a payments capability. Most ISOs are competing with Square, and not just Square but there are thousands of other [PayFac] firms coming into the marketplace.
Those people are saying "why don’t I partner with a third party to offer merchant accounts? Why can’t I just offer all this in my own solution, singularly?