For the SaaS provider, potential advantages in becoming a Payment Facilitator (aka Payment Aggregation) are compelling: payment facilitation drives ease of client onboarding and unlocks a new stream of revenue generation.
Enabling customers to immediately accept credit cards and bypass challenges associated with the merchant application experience is a competitive differentiator. For the SaaS provider, the ease-of-experience for users also drives drives up engagement and adoption rates. These dynamics mean more revenue derived from the payment facilitation solution.
Establishing oneself as a payment facilitator should not come without careful consideration of your business profile and capacity, however. While upside potential is strong, user base volumes, level of expense and available capital are all factors to keep in mind as they each impact your ability to generate profit.
As you explore the opportunity to become a true PayFac, your due diligence should begin with this question:
What can go wrong?
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.
Although payment facilitation can be the right option for some SaaS providers, it’s important to understand the potential risks along with the benefits.
Given the severity of financial consequences, administrative requirements and inherent risks, a hybrid payment facilitation solution may be better suited for SaaS providers. This model shrinks expenses and reduces the risk burden associated with underwriting and compliance, while still offering revenue generation and easy enrollment capability.
Interest in discussing risk-mitigating strategies of successful payment facilitators?
Curious if a hybrid payment facilitation can benefit your SaaS company?
Contact Agile Payments today.