Alternatives to Payment Facilitation: What ISVs & ISOs Should Consider

Independent Software Vendors (ISVs) and Independent Sales Organizations (ISOs) face a pivotal challenge in choosing the right payment facilitation model that aligns with their business strategy, enhances customer satisfaction, and drives revenue growth. With the rise of the Payment Facilitator (PayFac) model, businesses have been presented with an innovative way to streamline payment processing, offering a seamless integration within their platforms and the ability to own the payments experience.

As the financial ecosystem becomes increasingly complex, it’s crucial for ISVs and ISOs to explore and understand the array of available payment solutions beyond traditional PayFac models. This exploration not only involves analyzing the advantages and potential pitfalls of becoming a PayFac but also considering alternative payment models that might better suit their unique needs and objectives.

What is a Payment Facilitator (PayFac)?

A Payment Facilitator, often referred to as a PayFac, is a business model that enables software companies or platforms to streamline payment processing for their clients. Instead of each client setting up a separate merchant account with a bank or payment processor, a PayFac acts as a merchant account and allows its users to process payments under its umbrella. This arrangement simplifies the onboarding process, reduces time and costs associated with individual merchant accounts, and provides a seamless payment experience for end-users. PayFacs are responsible for underwriting, fraud monitoring, and compliance, and they typically offer embedded payment solutions within their software or platform.

Related Article: What Are Payment Facilitators?

Why is the payment facilitation model growing so quickly?

Many ISVs and ISOs see the PayFac model as the gold standard for monetizing payments because it has become synonymous with a very strong residual. It also reduces friction during the onboarding process, streamlines underwriting and provides more control over the payment experience.

However, these benefits come at a cost. Along with increased profit comes increased risk, more regulatory requirements, increased fees, and other ongoing overhead costs, like hiring multiple employees to manage payment-related functions, such as risk, underwriting and PCI compliance. Once you tally up these expenses, there is a strong chance they can easily outweigh any initial functional or financial gains.  

Related Article: How to Become a Payment Facilitator?

Which use cases make the most sense for the PayFac model?

The payment facilitation model can be a great solution for SaaS providers whose customers have a very similar profile and are relatively small in terms of card volume. Having customers who look and feel the same is particularly important from an underwriting perspective so merchants can be approved quickly. Homogenous customers are also more likely to be in alignment with the same type of pricing. Once you step out of these parameters it may be best to set up customers with a full merchant account. This process can be greatly simplified if your payments partner has a boarding API.

What alternative partnership models benefit SaaS providers?

The growing popularity of the PayFac model often causes many ISVs and ISOs to overlook the benefits associated with more traditional merchant processing partnerships. Let’s take a look at these options which are listed below in order of increasing involvement required from the SaaS provider.

Referral Relationships: This type of partnership is the least involved for an ISV or ISO. They build the integration and then lean on their payment processing partner to sell and service accounts. It is the easiest to implement, but it is typically the least lucrative.

ISO/ISAs: Next moving up the ladder in terms of involvement, you have the Independant Sales Agent (ISA) model. This is where you build the integration, but it requires greater responsibility, resources and infrastructure. For example, the ISA would likely handle sales and support. Registered ISOs operate in a similar manner, and have the added benefit of being able to white label the solution, which gives them more control over the merchant experience.

Hybrid PayFac or PayFac as a Service: This model is often seen as the best of both worlds because it allows the SaaS provider to walk into enhanced functionality instead of running full steam ahead into a true payment facilitator model. In addition to the term Hybrid PayFac, you may hear this model referred to as a PayFac as a Service, Managed PayFac, PayFac Light or PayFac Out of the Box.

Related Articles: What is Payment Facilitation as a Service? 

However, if your business needs and customer type do not align with the typical use cases we mentioned above, a PayFac as a Service model still might not be for you. At Clearent, we understand your sales flow and customer types might not always be one size fits all. With our PayFac as a Service model, our partners will see the benefits of leveraging an out of the box PayFac solution while being supported by a partner that will offer a referral model when a more in-depth sale and pricing strategy is required. This situation can arise when taking on a larger multi-location merchant that doesn’t fit your traditional merchant size.

Are there ways to boost margins without adding risk?

Creating margin is one of the most important aspects of a payments partnership. The ISV or ISO is able to monetize payments and grow their portfolio because they’re encouraging users to adopt their payment solution right away. If their partner has a boarding API they can offer a frictionless boarding experience and control the flow of funds without taking on the burden of costs and resources.

When we think about other ways to drive margin, it’s important to do so in a way that does not take on additional risk. This is especially true since PayFacs are liable for their customers’ losses and assume all risk.

At Clearent, we are seeing a huge up-tick in enhanced pricing programs, such as cash discounting, surcharging and convenience fees. The programs are popular with ISVs and ISOs because they add value to their customers and help reduce attrition. The average Clearent merchant saves $9,500 a year while creating an exponentially higher margin pool, earning the ISV or ISO substantially more money. These programs can also help subsidize some, or even all, of the subscription costs associated with the software platform.  

How do you determine which model is best?

When evaluating partnership models, it’s easy to get locked into a program that you think will drive the most revenue, even if it’s not necessarily the best fit. Try not to get hung up on things like will your customers be sub-merchants or merchants. Remember, your goal is to monetize payments and make sure your customers get the service they deserve. There are many ways to achieve this, depending on your resources and how much skin you want to have in the game.

Find a processor who will help you weigh the pros and cons for each option so you can make an informed decision that will help you enhance the user experience, increase the value of your software, and set you up for long-term success. If you’d like to chat with a member of our team, please don’t hesitate to contact us.

What ISVs & ISOs Should Consider When Seeking Payment Solutions

1. Risk and Compliance

2. Cost vs. Benefit:

3. Customer Experience:

4. Scalability:

Wrap Up

As ISVs and ISOs delve into the myriad of payment processing options, the journey toward selecting the most suitable model involves a careful consideration of risk and compliance, cost versus benefit, customer experience, and scalability. Whether it’s embracing the full responsibility of a PayFac, leveraging the advantages of payment gateway integration, forming partnerships with Payment Service Providers (PSPs), or exploring hybrid models, the decision must be guided by a strategic assessment of how each option aligns with your company’s goals, customer demographics, and growth aspirations. In this complex terrain, the key to success lies in finding a balance between maximizing revenue opportunities and managing the inherent risks and costs of payment processing.

By prioritizing the needs of their customers and staying adaptable to the changing dynamics of the payment industry, ISVs and ISOs can forge partnerships that not only enhance the value of their software but also set the stage for sustained success and innovation in the digital economy.

Chat with one of our experts to learn about our Flexible Partnership Model and PayFac as a Service solution.

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