Guest Post: Why Everyone is Jumping on the Payment Facilitator Bandwagon
By Todd Ablowitz, CEO and Co-Founder, Infinicept
When the payment facilitator (payfac or PF) model was first introduced by Mastercard and Visa in 2011, many within the payments industry viewed the undertaking as either too risky or cumbersome. Despite early skepticism, the payment facilitator market is skyrocketing with total transaction volume on target to achieve nearly 80% CAGR through 2021.
Now many of the large financial institutions, including heavyweights Wells Fargo and JP Morgan Chase have entered the payment facilitator arena and there are at least 250,000 software companies worldwide that have the potential to benefit from adopting the payment facilitator model. Boston Consulting Group predicts that by 2027, software vendors will represent $154 billion of North American payment revenue, which equals 54 percent of total payment revenues.
With so much upside from card payments, it makes sense that software companies will want to keep the revenue (and improved market valuation) for themselves rather than hand it off to a third-party bank or processor. In response, payments market leaders and laggards must figure out how to take advantage of the changing market landscape or stand by and watch as software vendors eat their payments revenues.
Every Disruptive Innovation has a Silver Lining
With the slow-moving payments industry, it was more a question of “when” rather than “if” payments and software would eventually coalesce. Visa and Mastercard introduced the payment facilitator model because it provided an opportunity to bring non-card volume onto their networks, which in turn translates to more revenue through additional fees. Since its introduction in 2011, the networks have pushed the rest of the payments ecosystem to accept this new model of merchant processing. There have been plenty of obstacles to overcome along the way, but the PF market is finally reaching critical mass.
Under the payment facilitator model, an acquiring bank or other sponsoring entity enters into an agreement with a payment facilitator. This allows the payment facilitator to onboard submerchants and control the payment services provided to the submerchant, such as processing rates, funding, transaction reporting, and other services. The end result is a smoother onboarding process for the submerchant, a better payment experience, and the PF is able to keep a percentage of profits based on the transaction volume processed through their software.
While payment facilitators ride on traditional merchant acquirer rails, many pundits worry that PFs are cannibalizing acquiring bank’s revenue streams. On the flip side, payments are already a highly commoditized business, so PFs provide a strategic opportunity for acquirers to expand transaction volumes, cut the cost of doing business and offset risks.
PF business lines are typically higher margin while requiring less work to set up and maintain than traditional merchants. PFs also assume a portion of the risk and can bring net-new transaction volume to acquirers through emerging electronic payments categories such as business-to-business and government payments. Looking ahead, acquirers have an opportunity to increase profits by 5-8% with no incremental interchange or assessments by offering value added services designed to meet the unique needs of vertically focused PFs.
Payments Market Barriers are Crumbling
In the early days, becoming a payment facilitator was a difficult, complex and time-consuming task. A PF had to build the required technology stack, which involved engineers, developers, testers, and more. The PF also had to hire a payments expert and a head of risk and compliance to bring the business model to market. It took at least a year with an investment of a million dollars or more before a PF could realize one dime of revenue.
As early adopters like Square, PayPal and Shopify blazed the trail to prove the benefits and viability of model, many banks and processors sat on the sidelines, unsure how to navigate the oversight, policy and procedures necessary to sponsor PFs.
Today the market barriers are crumbling in large part because PF-as-a-service (PFaaS) companies are offering turnkey solutions that help banks and their customers dramatically decrease the time, cost and headaches of moving to the PF model. These new software platforms and API stacks take all the heavy lifting out of the equation. PFaaS customers gain access to all the underwriting, risk and compliance capabilities and expertise they need to quickly onboard and manage submerchants. This allows their sponsors to earn more revenues with less effort and risk.
The PF Model Is Mainstream-Ready
As the payment facilitator model matures, we’re seeing companies spanning every imaginable software vertical take over their payments offering. This includes wellness companies like Mindbody, restaurants like Toast, healthcare companies including Instamed and Phreesia, and countless others who are realizing they can provide a better customer experience while increasing revenues and business valuation by becoming a payment facilitator.
Fivestars recently announced they became a payment facilitator to integrate multi-tender payment services into their core loyalty and marketing automation product. Based on this move, Fivestars is projecting to generate $1 billion in annualized gross payment volume in its first year of operation and $6 billion in gross payment volume in three years.
Matt Doka who is Co-Founder and CTO of Fivestars explains, “By using a payment facilitator platform that manages our whole payments operation, from onboarding to merchant dashboards to fee collection and beyond, it only took one full-time employee to go-live and one full-time employee for underwriting and risk. And we maintain the flexibility to provide our full solution while using the client’s pre-existing merchant account, should they choose. That’s the power of this new generation of back office PF platforms.”
To keep up with the demand, banks and processors are partnering with PFSaaS companies that have deep industry expertise to build their internal policies and procedures for overseeing payment facilitators. They also offer pre-vetted technology and services that can help their customers get up and running as a payment facilitator in a matter of weeks.
From my vantage point, it seems certain that the payments industry will be largely consumed by software companies as it becomes easier and easier for them to monetize their payments operations and the advantages to sponsoring banks and acquirers become clearer.
As PFs enter into new market verticals and developing countries, they bring new opportunities for economic expansion. It’s a win for the payment facilitator, sponsor, submerchants, end-users and economy. That makes it an opportunity that is hard to resist.