Agile Payments Blog

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Is Frictionless Onboarding Worth the Risk?

If you’ve considered becoming a Payment Facilitator (PayFac) for your SaaS customer base, you’re familiar with the term “KYC,” or Know Your Customer. As the payment processing industry continues its trend of explosive growth, however, KYC might be more accurately termed “CYA.”

Why? Because when it comes to processing payments for your customers, there are significant risks involved, so you’d certainly better cover your “you know what.” The good news is there is another option — hybrid aggregation — that can mitigate those risks. We’ll talk more about that later.

The massive growth of payment processing and the ensuing potential revenue streams from processing fees has made Payment Facilitation an attractive option for SaaS providers. Becoming a PayFac allows the 

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SaaS to become the merchant of record for their user base that want to process credit and debit card payments for their own customers. This allows for easy onboarding and simple enrollment.

Payment Service Providers including Square and Stripe — which provide their clients payment acceptancetools and handle underwriting — can onboard their customers almost immediately. A SaaS application looking to compete must also offer the feeling the pressure to compete frictionless onboarding processes.

But, for the potential PayFacs or Payment Aggregators, is frictionless onboarding worth the risk? Can you really KYC well enough to CYA?

While approving customers quickly can be an obvious selling point for PayFacs’ payment processing revenues, it also significantly increases your exposure to risk from various types of fraud. Card Not Present, or CNP fraud is predicted to jump a whopping 80% by 2020, costing businesses some $7.2 billion.

The revenue in the PayFac model is generated from the difference in the PayFac’s cost to process payments and the rate they sell to their user base. Maximizing this revenue while mitigating associated risks in one of the biggest challenges in the decision to pursue becoming a Payment Facilitator.

Liability Challenges for PayFacs

While PayFacs want to operate like their larger counterparts and keep more money in their pockets in the process, they cannot mitigate risk in the same way.

The reality too often is that PayFacs have no underwriting process in place at all to vet their SaaS customer base beyond simply beginning to process payments for them and hoping nothing goes wrong. There is no one there to assume liability for fraud and other issues as there is for SaaS companies that partner with a large PSP like Stripe or PayPal.

And while selling the idea of payments processing to your SaaS customer base is simple, onboarding them is much trickier. Once they’ve signed up there are several verifications that need to take place.

First and foremost, you must verify that they are real users. This is a challenge that requires a detailed multi-layered process (not frictionless!) to verify that you aren’t dealing with a fake or fraudulent company for which you could be hung out to dry as their merchant. Verification authenticity is increasingly difficult, particularly with Web-based businesses.  

Next, you must verify that your customer actually owns the information they’re providing to you as their merchant. Then you’ll need to ensure that they are a good fit for your payment services based on the services they’re in turn providing to the customers from which they’re accepting payments.

You must also consider each customer’s needs in each onboarding process to ensure you can serve them adequately and conveniently. Then you have to balance your potential revenue benefit with the risk you’re assuming in taking on the customer.  

In order to really KYC (aka, CYA), there is a significant amount of information that needs to be obtained and verified and there are fraud-prevention rules that must be followed. Failing to comply with KYC regulations can result in fines that can be costly, and put your company at serious risk. In worst-case scenarios, fraud and noncompliance could even cost you your business.

While speedy client onboarding can be appealing, for most SaaS companies it poses too great of a risk.

The good news is that there are alternatives to becoming a PayFac. A hybrid payment aggregation model offers many of the benefits of true aggregation but with significantly lower risk, and strong revenue-generation potential.

If you’d like more information on how a hybrid payment aggregation model can work for your SaaS company, contact Agile Payments today.

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Wayne Akey

Wayne Akey works collaboratively with SAAS providers whose clients have recurring billing needs to create innovative payment solutions and new revenue..

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