Clearent at ETA PayFac Day: Profitable Alternatives to Becoming a PayFac

Phil Ricci


Recently Mark Passifione, Clearent's VP of Strategic Partnerships, and Brian Abernethy, Director of Business Development, hosted a roundtable discussion at PayFac Day. This virtual event was hosted by the Electronic Transactions Association and featured multiple sessions and exhibits focused on the complex role of payment facilitators.

In their session titled PayFac Alternatives: Practical Ways to Increase Margins and Save Customers Money, Mark and Brian highlighted the pros and cons of becoming a PayFac. They also shed light on complimentary partnership models that offer similar degrees of control and increased profits.  


The PayFac model has exploded in recent years, but there is a lot of confusion around what it takes to become a PayFac and what it really means. At its most basic level, the PayFac model enables software providers to offer credit card processing to their customers without having to sign up for a traditional merchant account. The business then becomes a sub-merchant of PayFac and is able to quickly sign up for payments at the same time they sign up for the software platform. This simplifies the application and onboarding process and helps the business accept payments faster.  

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.  

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 other 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 the processing partner to sell and service accounts. It is the easiest to implement, but it is typically the least lucrative.

ISO/ISA. Next moving up the ladder in terms of involvement, you have the 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. 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 the PayFac model. In addition to the term Hybrid PayFac, you may hear this model referred to as a Managed PayFac, PayFac Light or PayFac Out of the Box.  

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. For example, with COVID many small businesses are struggling financially, and enhanced pricing programs offer them a way to share their processing costs with their customers. 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 need. 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.