Guest Post: Adopting the Payfac Model May be Easier than You Think
By Nick Starai, Chief Strategy Officer, NMI.
Independent software vendors (ISVs) like to integrate payments into their software to enable seamless onboarding and transaction processing from directly within their applications. Integrating payments provides their customers with a host of benefits, including streamlined accounting processes, fewer errors and greater efficiencies. When integrating, ISVs can partner with payments companies in order to receive referral compensation. But to gain more control and share in a greater portion of the revenue, some ISVs, as well as independent sales organizations (ISOs) and value-added resellers (VARs), are adopting the payment facilitator (payfac) model instead.
What is the Payfac Model?
Payfacs enable businesses to simply and quickly accept payments without going through the complicated process of setting up a traditional merchant account. Rather than having a unique merchant identification number (MID), they become sub-merchants who are boarded through the payfac’s master account. Visa and Mastercard allow sub-merchants to process up to $1 million in annual charge volume before requiring them to establish their own, independent merchant accounts.
This relatively new payfac business model is experiencing rapid growth. Research firm Statista estimates payfac transaction volume totaled $88 billion last year, and is projecting it to grow to $513 billion by 2021.
Pros and Cons of Becoming a Payfac
There are some compelling reasons to adopt the payfac model:
- Monetize payments: Payfacs can collect fees based on a percentage of transaction amounts, earning more revenue than by simply integrating a third party payment provider. For example, an ISV that provides management solutions for fitness centers or HVAC companies could become a payment facilitator for its clients, who would become sub-merchants under their MID, giving the ISV an opportunity to earn a percentage of their transactions.
- Gain control: A payfac controls all aspects of sub-merchant customer experience, including access to their data, rather than relying on a third party. This begins with instant onboarding and continues through ongoing servicing by the payfac, who typically has expertise in its clients’ industry vertical and better understands their unique payment processing needs. The relationship with clients becomes stickier, which improves retention.
- Increase business valuation: Investors or businesses interested in acquiring your company may be more attracted and place a higher premium on your company’s worth if you have a portfolio that’s easier to port, instead a customer base that’s tied to a specific payment processor.
Consequential aspects of being a payfac are related to operational activities and merchant risk. You must perform underwriting and assume liability for risk, distribute funds, maintain reserves and manage compliance. This typically means hiring new employees with relevant skill sets, establishing new processes and putting new technologies in place.
Adopting the Payfac Model
Being able to support a new payfac business model can seem somewhat daunting, but with the right resources and tools, becoming a payfac may be easier than you think. An industry is emerging that can advise, help and give you software to make the leap a lot easier and with a short ramp-up time frame.
For example, there are consultancies focused on guiding companies on how to become a payfac. And comprehensive software stack solutions are available to help payfacs manage underwriting, onboarding, billing, distribution of funds and chargebacks taking most of the heavy lifting off a new payfac’s shoulders.
Although the payment facilitator model is a smart move for some businesses, it may not be appropriate for others. You have to look at the types of merchants you’re dealing with because payment processors don’t like horizontal plays. It may be better to focus on a single vertical with lower risk and less propensity for fraud.
At the end of the day, businesses who find success with the payfac model will have a high degree of commitment, the right resources and the right tools. There’s an old adage: no risk, no reward. For payfacs, the reality is no risk, no underwriting, no software, no reward.
About NMI and Chief Strategy Officer Nick Starai
NMI is driving transformation in the payments industry through the power of unified commerce enablement. Its FACe gateway platform accelerates time to market for new payfacs. Nick Starai is chief strategy officer and one of the co-founders of NMI who played an integral role in the formation and launch of the NMI payments platform in 2001. He drives the strategic direction of the company and supports NMI’s enterprise clients and overall partner success. He also brings 17 years of experience in the payments and technology industry.