With changes happening all around us every day, the highly adaptive and evolutionary tendencies of technology in the closing years of the 2010s sometimes mean big changes — seismic changes — can happen in a way that is almost kind of quiet.
Case in point, according to WePay’s co-founder, Richard Aberman: cloud computing.
“If I went to my board 15 years ago and said we were going to host in the cloud, they probably would have threatened to fire me,” Aberman said. “How could a tech company not own its environment and infrastructure? It would have been obvious that co-locating in a data center, and [having] a data farm of our own, [would] lead to better margins and more control than we would have [had] if we tried to pay some kind of service provider.”
But the world has a way of changing, Aberman noted, and what would have gotten him laughed out of a boardroom or potentially pink-slipped a decade and a half ago is a regular part of the tech world today. Proposing the opposite now would seem crazy, Aberman told PYMNTS’ Karen Webster, and if he marched into his board today and proudly proposed building the company’s own server farms, they probably would threaten to fire him.
“The reality at this point,” he noted, “is that the level of control, flexibility and scale you can enjoy through the cloud is [much] better when you get it through the service provider than owning it yourself and trying to build and maintain it in-house. There is a reason Snap pays Google something like $400 million a year for the service.”
A similar dynamic can be found in 2017, with software platforms considering the age-old and important question: to become a payments facilitator, or to not become a payment facilitator and instead work with a third-party payments as a service (PaaS) provider like WePay or Stripe.
“Honestly, at this phase of the game, it almost never makes sense to become a payment facilitator,” Aberman admitted.
A bold statement, to be sure, and Aberman has a vested interest in talking software platforms out of going it on their own, of course. After all, option No. 2 could very well involve companies hiring his firm to serve as PayFac.
But, he noted, the software firms themselves have a much more vested interest in outsourcing the payments facilitation part of their business. It’s an extremely difficult process to set up, rather expensive and unlikely to give the software provider what it really wants out of the experience.
“Whether the market has come around to it or not, I think the situation is very much the same as the one for servers and data farms,” Aberman said. “The reality for a software platform going the route of becoming a PayFac is that, for all the resources it is going to suck up, and all the overhead it is going to suck up, the juice just isn’t worth the squeeze.”
Because, he added, firms like WePay can take those providers to the place they want to be regarding payments, and they can do it without all the pain that goes into establishing themselves in the payments facilitation realm.
So, Why Consider Becoming A Payments Facilitator?
When one looks at the providers wired into payments facilitation, Shopify for example, or Uber, those companies are looking at 50 basis point of gross profit on their transactions. Not enough to pay the bill, but “pretty good” for a gross, Aberman said.
Still, though, not paying the bills.
Plus, Aberman noted, the payment facilitation route will often seem like the best way to get the software provider the things it wants: better economics from acquirers, more ability to create the user experience it wants and maximal control over its relationship with clients. Moreover, companies know these platforms are subject to the same evolutionary processes in tech as everyone else, Aberman said. That means they are thinking about how to grow and expand their own revenue lines.
“More and more of those platforms are looking at transactional revenue to supplement software as a service fees [SaaS] or to replace them entirely with transactional revenue,” he explained. “And, when you look at the companies that have successfully built payments businesses, they are making as much money on those transactions as they were on the SaaS line.”
While all those things are desirable, Aberman notes, they come at a higher cost that software providers don’t necessarily have to pay.
“I think there is an incorrect assumption that [when] working with a firm like WePay that offers payment facilitation as a service, they won’t have the magical ability to work with acquirers or really have that control over their process that they want,” Aberman said. “They think they really want to own it, without really thinking about how with ownership comes accountability. When you build the operation from scratch, sure, there is that infinite control, but to even get to parity with what is out there on Day One, you are going to have a build a lot — and keep building for a long time.”
Or, he noted, those providers can work with WePay — or a like firm — which has already invested in building out “pure API’s to give our partners complete control of the experience with granularity they would have with a direct acquirer relationship.”
Moreover, software providers not specialized in payments, as WePay is, likely won’t be able to deliver as robust a service as they’d hoped.
“We are also constantly investing in bringing new value-adds to market, [offerings] that a historically pure provider may not have the resources or the appetite to keep pace with,” Aberman said. “We are doing this work as a benefit to our partners. If you go it alone, you are just that — alone.”
And he noted, payments facilitation is a much harder, more complex and more expensive project than most companies tend to consider when they contemplate the payments facilitator route.
Why It Costs More Than Companies Think
According to Aberman, when platform providers consider becoming payment facilitators, they tend to severely underestimate the costs by thinking the process mostly involves paying a fee to the card networks and then “paying the acquirer 10 cents above interchange.” And that, he notes, just about gets the PayFac through the price of processing the payment itself, but there are an awful lot of other costs to consider.
Disbursement and payout to sub-merchants are easy to overlook and are not things that are priced out as part of a standard offering for an acquirer, Aberman noted. Some offer it as an add on, but it’s not a particularly robust service. In fact, it basically grants access to creating ACH debits and credits.
“What is left for the software provider is to have to build a settlement engine, and a pricing and billing engine, [and] a reconciliation engine to make sure the money in and out works,” Aberman said. “The costs stack up with infrastructure they need to build to support those payout functions, and then there is a hard cost associated with every payout you send.”
Granted, Aberman noted, if a PayFac only has five payees, it is a fairly easy settlement process handled by cutting a check every week. But for Uber, Shopify, Freshbook and their ilk, which are dealing with payments to thousands of entities, funds in flight and exception cases, the “ability to deal with” does not come through an acquirer. It’s a lot to remember.
“WePay has dozens of engineers who do nothing but deal with the engines that control all the money going in and going out of the system,” Aberman said. “It is a very big undertaking.”
And, he notes, that isn’t even the biggest challenge. The biggest challenge comes when it is time to mitigate risk and fraud and build the compliance infrastructure to handle it. The process involves collecting information from merchants, then trueing it up against third-party data groups like Threat Matrix.
“And then you need to translate all of that into something that can go into the rules engine or learning model,” Aberman added.
The net result is that firms generally end up starting with one thing, then spend a lot of time and treasure incrementally fixing it, he said. Far from being a one-time, “set and forget” process, going the payment facilitator route will probably end up being a multi-year journey where one could reasonably expect to spend tens of millions of dollars, not to mention hundreds of thousands of hours.
PayFacs that survive, Aberman noted, find a way to operate at scale, but what they learn is the same lesson that WePay, Stripe, Uber, Etsy and Shopify have all learned:
“How to manage and meet risk is a constant conversation and process,” Aberman said. “None of us just plug in raw data and let it run. We have staggering amounts of data from vendors, not to mention huge operation teams who do this and only this. All risks engines aren’t built the same. As a software platform that is becoming a PayFac, they don’t just have to build a risk engine, they have to build something as well as WePay or Stripe can.”
The reality, Aberman noted, is that aspiring PayFacs probably can’t build something on par with WePay and Stripe. And, even if they could, why would they want to? The only players fighting for the privilege of building server farms these days are — for all intents and purposes — Google and Amazon, and no one fights the cloud anymore, because it would be both pointless and counterproductive. After all, if Amazon and Google can do it better and cheaper than anyone else, why fight to spend more and do worse?
That, Aberman notes, is the level of evolutionary acceptance to which firms considering going into payments facilitation should aspire. Maybe they can build it all in-house, but in a world of WePays and Stripes — where companies can have the benefits of being the payments facilitator while outsourcing the truly hard stuff — why not do it the easy way instead?