No Straight Road On The PayFac Road

If the designation of being a payments facilitator, or PayFac, offers up dreams of value-added merchant services, getting there is more than half the battle. And on the journey, some corporate soul-searching is in order.

In an interview with PYMNTS’ Karen Webster, Mike Cottrell, senior vice president of business development at TSYS’ ProPay, weighed in on the challenges that merchants face when seeking to become payments facilitators.

Speaking broadly, Cottrell said there are the PayFacs that are larger organizations that can undertake risk and take on the process of moving money with sufficient infrastructure in place. That is not to be confused with, say, the registered independent sales organization (ISO) existing in the payments processing space.

And then there are the payments facilitators who are just software providers “that want payment facilitator-type capabilities.” They want flexibility in boarding clients quickly, among other activities. “There are a lot of companies,” Cottrell told Webster, “where payments are a means to an end for their software.” There are, of course, hurdles in the form of all the different governing bodies that manage the process of becoming a PayFac, which means that companies starting the journey must self-examine and determine what it will take to get registered with that designation.

The enterprise, then, as Webster noted, may be placed squarely into the payments sphere – which is not their core business to begin with.

By way of example, Cottrell posited a donation management software platform, which brings tools together for different organization verticals (faith-based or fraternal, for example) and whose services have grown beyond the purview of managing member databases to communications.

For firms that want to take donations, payments can be far-flung across different gateways, or with PayPal. Eventually, the subject comes up as payments continue to be conducted outside the platform environment — namely, there’s a need to integrate payments to add more value to clients.

But moving money in and out on behalf of constituents is a lot different than creating a platform replete with business management tools, he said – and is not so simple as just adding payments functionality.

The payment facilitator model eventually emerged from the traditional players (where card fees would be levied on different merchant accounts) and software providers who, said Cottrell, built out software that looked to provide a seamless experience by “getting their customers up and running quickly.” The advantage to a software provider working as, or with, a PayFac? Terms and conditions can be integrated into the platform’s online application.

“So, what does that do to your abandonment rate?” theorized the executive, who, of course, noted that those stats would improve. A firm offering tax software for accountants would be able to offer additional services through their software platform and, with a click of a button, access bank information, an online signature for agreements and data satisfying Know Your Customer (KYC) requirements –getting up and running instantaneously and helping to smooth the front-end boarding process. The disjointed process of finding and linking up with a merchant provider, or of using different payments gateways, would disappear.

However, legal and regulatory issues, said Webster, pose sticky problems. Cottrell noted that a master merchant or merchant of record takes on all the liabilities – but, in linking up with the underwriting institution, questions arise. Consider the PayFac that must shoulder liability along with risk. What if there is fraud on the platform, asked Cottrell, or “what if your clients cannot pay?” Along with underwriting (which itself takes a lot of work) comes policies and procedures that govern KYC and anti-money laundering (AML) processes. As a true payment facilitator, these are roles the provider needs to take on, many of which do not exist within their organization.

Looming rules on beneficial ownership (which debut this coming May) mean in the payments space that information and KYC must apply to anyone who has more than 20 percent of ownership in a company. It can be tricky to enable some of these regulatory components to be part of the sign-up process just to kick-start payments.

Another issue on the legal and regulatory side is the money transmitter issue, he said. TSYS is seeing incidences where providers are being shut down by the card brands and regulatory bodies (or told they are operating as aggregators and need sub-merchant environments) as they move money across the card networks, through ACH or checks, while running afoul of regulations by dint of offering these services to constituents.

“A lot of what we do when we sit down with the software providers is we … look and we ask where they are, in what stage of their business and what are their long-term goals.” A startup focused on growing the company may just need payment facilitator-type services. “Let’s get you registered,” he said, down the road, “but maybe you do not need to register right up front.” In the meantime, the smaller firm might benefit from seeking legal advice or services tied to disbursement of payments to affiliate partners, or those due commissions from the platform.

How to get down the road to those services? Said Cottrell, “considerations include if the brand is important and top of mind to the consumer – a component that the end user needs to know about throughout the transaction.” Think of GrubHub, where seeing both GrubHub and a local bagel shop on the consumer statement is important.

If one wants to register as a payments facilitator, the question needs to be asked, “Why? There are platforms,” said Cottrell, “that can let firms act as a payments facilitator (say, through ProPay or Stripe).” And then there needs to be discussion of terms and conditions set between the provider, the sub-merchant and the sponsor bank the firm may want to register as a PayFac. Taking the time to explore options and growth paths prior to development can pay big dividends down the road.

“If payments are a means to an end, do you really want to put in all that infrastructure and become a payments facilitator, or do you just want to partner with someone who can give you all of those tools and do it in a fair, equitable and fast manner?” Cottrell queried.