Just the FACs: Unlock the Power of PayFac

Payments have evolved from branded to integrated to truly embedded solutions powered by modern payment facilitators. Through collaborations with independent software vendor (ISV) partners, PayFacs create secure, seamless, and simple customer experiences with payments baked into B2B and B2C software.

Payment technology is no longer a plug-in but an integral part of larger retail, hospitality, and the Internet of Things ecosystems. The embedded payments journey has taken us from PIN pads in POS terminals and payment cards in virtual wallets to commerce that just happens as payment flows assimilate into the ebb and flow of physical, virtual, and mobile business. 

Concepts of embeddedness are also evolving. Buy now, pay later, security standards, and other emerging trends reflect our transformation from fragmented, standalone systems to a connected digital commerce ecosystem. 

Expand Opportunities
With electronic transactions increasingly woven into our businesses and lives, this 3-part series concludes with ETA member perspectives on the future and potential of payment facilitation. 

Greg Hatcher, head of payments at iClassPro, a class management software provider for children’s activity centers, expects PayFac to continue to evolve with user needs and expectations. 

“The evolution of ISOs and the emergence of PayFac-as-a-Service (PFaaS) have largely solved the UX problem with economics that make sense for the Gross Payment Volume (GPV) of most SaaS platforms,” he said. “This will change the landscape of ‘who’ becomes a PayFac as we move forward, and, for the most part, PayFacs will come from one of two camps: 

1. We will have the PFaaS providers and software platforms increasingly opt for a joint Go-To-Market (GTM) strategy. The UX issues have largely been solved, and the economic advantages of PayFac only work at a significant GPV scale in the billions of transaction volume, so partnering usually makes sense.
2. We will also see a new archetype emerge due to larger shifts in the technology space. Equity firms and holding companies have recognized the value of payment revenue streams; many are shifting their strategy to invest primarily in SaaS platforms with a payments opportunity.

As the mix shifts in these portfolios, aggregate GPV can easily climb to levels where it makes economic sense to spin up a PayFac that serves their portfolio companies.”

Serve All Stakeholders
Hatcher pointed out that PayFac models enable stakeholders to access and manage use cases and partnerships that were previously complex, costly, or risky. More importantly, it unlocks efficient growth and scale that would be more difficult to obtain in one-on-one merchant sales.

“As software continues to eat the world and vertically focused platforms proliferate, stakeholders have an incredible opportunity to ‘sell once’ to platforms that bring one-to-many merchants,” he said. “The investment ratio of direct sales to platform partner business development will be an important KPI as companies transition.” 

Brian Abernethy, the founder of Utopaya, a boutique consultancy specializing in integrated payments, observed that PayFacs had aligned the process for software providers and users by making payments a platform feature rather than a third-party service. Consider, for example, a SaaS provider that caters to summer camps. 

“It’s so much easier to get payments attached during the summer camp enrollment process,” he said. “Terms and conditions are embedded within the Software User License Agreement, which is something you can do with facilitation – just embed the T’s and C’s, they click to agree, and boom, they’ve opened a merchant account.” 

Catch the PayFac Wave
Abernethy said that SaaS providers could capture more customers with PayFac models because reps don’t have to ask new customers if they are interested in payments and throw them over the fence to a partner at XYZ Processing. He stated that the representatives can close business at any margin. When payments are part of the package, it’s a more aligned experience for a software customer and a huge value from an ISV perspective.

Hatcher suggested that PayFacs will facilitate more than just payments. Embedded finance (EmFi), he said, will be the next big thing. What will that be? 

Ruston Miles, the founder of Payfactory, a service provider specializing in embedded payment facilitation for ISVs and vertical SaaS companies, agreed facilitating payments was just the beginning. He expects the convergence of PayFac and EmFi to make great waves in the near-term future. 

“From a merchant perspective, I think the next big thing in PayFac will be expanding payment facilitation rails to bring embedded financial (EmFi) services to merchants and cardholders,” he said, adding that merchants want to run their entire businesses, not just the vertical work, through a single software platform, which means embedding all sorts of financial services, such as banking, bill pay, payroll, expense management, loans, loyalty, and card issuance, into the software.

“From a vendor perspective,” Miles added, “I see PayFac providers implementing AI for underwriting and transaction risk monitoring to scale faster, reduce risk, lower costs and allow humans to focus on high-value tasks.”

Abernethy sees subscription service models replacing early iterations of registered payment facilitators. He asked why a mature organization, whether ISO, bank, or software provider, wants to register as a PayFac when they can capture most of the benefits and features with far less investment. PayFac-as-a-Service seems to be the next big thing, he said, and with improved accessibility and time-to-market, we’ll see more new entrants in the market. 

Miles stated that revenue is at the core of any business, and for many businesses, that means accepting electronic payments and providing access to relevant financial services through vertical software. 

“Market research shows that by 2025 most payments will come in through software, and of that, most payments revenue will come in from small and mid-size businesses,” he said. “It’s no wonder that embedded payments acceptance is taking over right now, and that software is leading that charge.”

About
Dale S. Laszig is a payments industry journalist and guest columnist for Payfactory. Previous to her writing career, she managed business development for leading payments acquirers and POS manufacturers. Connect with her at [email protected], LinkedIn and Twitter.