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 facilitator, there exists a variety of deployment approaches as well -- each providing distinct advantages while delivering ease and speed of onboarding to new clients. While facilitation benefits exist regardless of the model, there are costs and profit distinctives in each and thoughtful consideration of how to approach the process is an essential first step.
On one end of the spectrum there exists a “super facilitator” dynamic a la Stripe, PayPal and Square. These are industry juggernauts providing convenient payment acceptance to any business that needs to take payments.
An alternate payment facilitation model is one aimed at the SaaS provider with a web-based payments component: consider Freshbooks, Xero or Quickbooks Online as examples. Each provides a suite of accounting features with embedded payment processing and reconciliation as critical components. By acting as the facilitation layer, these SaaS providers’ clients can quickly submit basic business information and be processing payments within minutes.
Without the support of a payment facilitator, merchants or businesses that want to transact with credit cards would otherwise need to apply and be underwritten by an acquiring credit card bank. To mitigate risks around fraud and non-payment of fees, these banks employ verification processes. The information and vetting process can be prohibitively burdensome to small businesses, ultimately leading to decisions to forgo accepting credit card payments. This refusal perpetuates cycles of revenue loss, scale and convenience up and down the customer, merchant and facilitator value chain.
While becoming a payment facilitator appears an obvious choice for SaaS businesses, there are factors to consider with respect to pursuing payment aggregation or facilitation. Each business profile is different and distinctives around levels of maturity, client profile type and cash flow should all be weighed.
Here are the five key components that make becoming a PayFac viable option:
- Available Capital: Facilitation is a development intensive effort. Associated payment facilitation costs, including engineering, due diligence and maintenance, can easily exceed $100,000 annually with upfront costs in excess of 100k.
- Headcount: Risk mitigation and compliance requirements mean devoting full-time headcount to focus on ongoing payment infrastructure maintenance.
- Payments Understanding: Pursuing payment facilitation means taking on additional obligations. Companies need to intuitively understand what can wrong, what comprises their financial costs (and what can be done about them!) and where they are exposed to financial risks.
- Critical Mass: To clear the setup and ongoing maintenance expenses of facilitation, you need to generate enough offsetting revenue. Without enough clients (minimally multiple hundreds) and subsequent volume, you likely will not have the revenue needed to cover the costs involved. For example, as merchant of record, let’s say you are able to net .4% on every credit card transaction processed. If your base processes $10,000,000 per year in aggregate, you would drive $40,000 in revenue. If the average business processes $5,000 per month you need 170 clients to make the $40,000. So if your ongoing annual costs related to payment facilitation are $100,000, you can see why there is a need for a sizeable, active base or the growth prospects to justify the investment.
- The Right client base. For a SaaS provider, payment facilitation may have a cost basis of 2.4% or more. To sustain the facilitation process, you need to sell your clients at a reasonable margin - likely 2.*% or more. For more sophisticated businesses, the incremental payment processing fees may be material and become reason to stick with a traditional merchant account. For smaller businesses the convenience of the application makes paying higher payment processing fees worthwhile. Rationalizing your decision should take the nature of your client base into account.
As you begin to explore the payment facilitation process, keep in mind the above factors.
If costs, risks and compliance are concerns, you may consider hybrid payment facilitation or aggregation. While your cost basis will start substantially higher, upfront investment costs are lower and revenue generation potential remains strong. And if you may have a client base more disposed toward higher fees or strong subscription revenues to offset the reduced margin, the hybrid approach may be attractive.
If the aggregation model is ultimately not a fit, consider a Payment Processing Partnership. This model effectively transfers the inherent facilitator risks to a third party, while still offering revenue generation opportunity. For more on payment processing partnerships, click here.