Payment facilitation or payment aggregation allows one entity, the master merchant, to process or facilitate payments for a base of sub-merchants. For SaaS providers these are typically application end users or customers.
While revenue generation within a payment facilitation model is attractive, for many SaaS businesses becoming a Payfac is not the right choice. Timing, resources and industry knowledge all play into preparedness. As you explore this model, here are three key signs that your application may not be ready for facilitation.
- 1-You can’t afford the initial PayFac startup phase
Preparatory investment around application development, legal, compliance, due-diligence and associated staffing can easily exceed $50,000 and is some cases, $100,000 on an annual basis.
- 2-You don’t have a thorough understanding of payments; especially compliance and risk requirements.
There are staffing minimums to maintain basic monitoring around compliance and risk mitigation. Any business involved in payments faces risk of fraud, non-payment and reputational risk concerns. Not having defined processes that manage these risks on an ongoing basis makes for certain financial loss. Industry examples where payfacs have endured heavy financial loses exist – and these loses and financial obligations can mount quickly. Consider a sub-merchant that has a list of fraudulently obtained credit cards. If they debit $100,000 and you fund them, the likely stream of chargebacks and fraud claims ultimately become your financial obligation.
- 3-You don’t have the right customer base profile.
In order to offset the initial and ongoing expenses, including the opportunity cost surrounding payment facilitation, processing must generate reasonable revenues. This means, your customer or client base must transact over a minimum threshold to warrant the investment.
As an example, if your margin is 0.3% on every credit card transaction and you have 500 customers billing $5,000 per month through your application, then your monthly revenue is just $7,500. Not nearly enough to justify the facilitation decision.
If your business is positioned to address the three basic Payfac hurdles above, then you may consider pursuing payment facilitation. If not, Hybrid Payment Facilitation may be an attractive alternative. As a Hybrid Payfac, you can experience many of the benefits of a traditional facilitation model, without the prohibitive front end and ongoing financial commitment.
To discuss Payfac or Hybrid Payfac options, contact the AgilePayments team.