Payment Facilitation is the process by which one entity, a master merchant, processes or facilitates payments on behalf of a base of sub merchants.
As a Payment Facilitator, you have distinct advantages centered around ease and speed of onboarding to new clients. While facilitation benefits exist regardless of the model [True Payment Facilitation or Managed Payment Facilitation], there are costs and profit distinct to each and thoughtful consideration of how to approach the process is an essential first step.
Answering these questions will help you quickly determine if the True PayFac or Managed Payment Facilitator model is right for you:
- Do you have the financial and personnel resources required in True Payment Facilitation? Here are the questions that will make your decision:
- Do you have 100-250k in upfront expenses for integration, compliance and risk management?
- Do you have dedicated compliance, risk and technical personnel? Ongoing annual costs will likely exceed $100k
- Are you willing to spend up to 6 months integrating the Payment Facilitation solution?
- Do you want to transition your business into becoming a payments company?
- Do you have “critical mass”? Will there be enough payment processing volume so that revenue makes costs worthwhile?
- Is your client base price sensitive? If yes they may balk at a 2.9% and 30 cent rate.
- Are you willing to assume payment related risks? This is a significant consideration.
Payment processing is inherently risky. However the scope of risk is often understood within the traditional merchant dynamic, where risk exposure is less.
To illustrate –
Say a home repair services company advertises and accept payments via their website. If they deliver home repairs of $2,500 and a homeowner is unhappy, what is the risk? A likely scenario would involve the homeowner calling her credit card company to initiate a chargeback for the $2,500.
In this case, without documentation and a strong contract, the company’s merchant account provider will debit out the fee and the home repair company forfeits the $2,500.
Now, what happens if the service provider does not have the $2,500? The processor — and as a payment facilitator, this means you — must take steps (possible legal action) to recoup this money.
While your contract with the service provider does afford legal recourse, if you don’t have the staff and resources to pursue action, you are at risk of losing the $2,500.
Now multiply that risk by 1,000 users for which you process payments. Given that they are all subject to customer chargebacks, you, as their payment facilitator, ultimately bear the burden of non-payments and financial responsibility.
Let’s take the risk scenario a step further.
What if a sophisticated criminal group is unwittingly approved to use your app’s payment solution? Over a two-week period they process $50,000 — all with stolen credit cards — which you fund. While you will likely catch on as chargebacks surface and disable their account, recovery of initial chargeback payments that you are responsible for will be a stretch.
Compounding the problem may also be fines levied by MasterCard or Visa should these card companies determine that you were not doing proper due diligence or lacked comprehensive lax security measures.
So if the answer to ALL 6 of the questions above of is not YES then a Managed Payment Facilitation solution should be looked at.
What is a Managed PayFac compared to a True PayFac?
Managed PayFacs can be thought of as “sub PayFacs.” A true PayFac assumes all of the compliance, regulatory and infrastructure costs. This creates a platform for you to leverage these tools and have your business act as a sub PayFac, the true PayFac in this scenario will have a lot of insight into your clients and their processing. This mitigates a lot of the risk that Vantiv for example faces after approving a platform to act as a true PayFac.
So why go down the true PayFac pathway at all?
The Managed PayFac model does have its downsides. In the true PayFac model a client at that medical office sees “YBN* My Medical” on their credit card statement. YBN is the abbreviation for your business name whereas in the hybrid model if your Master PayFac is “YourPay” for example you would see “YPY* My Medical” on the statement [descriptor] where YPY* indicates YourPay as master PayFac.
Another reason to act as the true PayFac is you own the payment process and that customer. There is no one in between or involved. All contracts are directly between you and your end customer.
This may not be an issue or it may depending on your business model.
To reiterate, What is a Managed PayFac?:
A Managed PayFac Solution offers many of the pros of true aggregation without the significant investments of time and money, and simpler client onboarding, provides more ownership of the payment process, and offers a recurring revenue stream from payment fees charged to end users.
Another reason to act as the true PayFac is you own the payment process and that customer. There is no one in between or involved. As the business owner it is up to you determine how important this is to your business.