Independent Software Vendors (ISVs) are continually exploring new trends that will enhance their offerings and help them stay ahead in the competitive software market. One such strategy that has gained significant traction is adopting the Payment Facilitator (PayFac) model. This approach not only simplifies the payment processing landscape for merchants but also gives ISVs control over their user experience while opening new revenue streams for their software company. All that said, with high reward comes high risk and cost.

So what are the benefits of Payment Facilitation for ISVs and what exactly are the costs? Keep reading because we will be uncovering the world of PayFacs, understanding their role, why they are important to software, and what it takes for an ISVs to become one.

What Are Payment Facilitators?

Payment Facilitators (PayFacs) are entities that streamline the process of accepting electronic payments for businesses. They establish a direct relationship with acquiring banks, allowing them to underwrite and onboard merchants under their accounts. With the rise in software, this model is especially beneficial for Software as a Service (SaaS) companies, enabling them to have more control over their payment experience.

Related Article: What is a Payment Facilitator?

The Role of PayFacs in the Digital Payment Ecosystem

PayFacs have revolutionized the payment process for businesses, especially small and medium-sized ones. They offer a simplified onboarding process, freeing businesses from the complexities of traditional merchant account setups. By managing the intricacies of payment processing, PayFacs allow businesses to focus on their core activities, providing a seamless transaction experience for both merchants and consumers​​.

The PayFac Advantage for Software Vendors

For software vendors, becoming a PayFac can unlock new revenue opportunities and enhanced control over their merchants’ experience. By embedding payment solutions within their software, vendors can offer a single source solution to their clients, by embedding the payment process within their software. Additionally, PayFacs can generate additional income through processing fees, making it an attractive option for SaaS companies looking to expand their offerings by capturing revenue from payments processed.

What Are The Costs of Becoming a Payment Facilitator?

Embarking on the journey to become a PayFac is an exciting venture for ISVs, but it’s important to be aware of the associated costs. Let’s break down both the resource and monetary costs involved in this process.

Resource Costs: Building Your Infrastructure

Technical Development: Developing a robust payment processing platform requires a significant investment in technical resources. This includes hiring a team of skilled developers, investing in secure technology infrastructure, and dedicating time to building and testing the platform.

Compliance and Legal Expertise: Navigating the complex landscape of financial regulations requires specialized knowledge. You’ll need to invest in long-term legal and compliance experts who can ensure that your platform adheres to all relevant laws and standards that are continually evolving, such as PCI DSS, KYC, and AML regulations.

Operational Resources: Setting up and maintaining a PayFac operation requires a dedicated team to manage merchant onboarding, risk assessment, customer support, and ongoing monitoring. This involves both hiring new staff and training existing employees.

Monetary Costs: Initial and Recurring Investments Required

Initial Setup Costs: The initial setup of becoming a PayFac involves various costs, including application fees for registering with card networks, legal fees for drafting agreements, and technology costs for building your platform. ISVs seeking to become a payment facilitator can expect an initial upfront investment nearing $500,000, not to mention the below annual recurring costs around likely exceeding $100,000.

Ongoing Compliance Costs: Maintaining compliance with financial regulations incurs ongoing costs. This includes regular audits, updating security measures, and renewing licenses and certifications on an ongoing basis.

Operational Expenses: Running a PayFac operation involves ongoing expenses such as salaries for your dedicated payments team, transaction processing fees, and costs associated with fraud prevention and chargeback management.

Technology Maintenance: The continuous maintenance and updating of your payment platform requires a budget for technology upgrades, security patches, and integration with new payment methods or networks.

Key Components of a Payment Facilitator Model

Now that we have summarized what to expect, it’s crucial to grasp the core components that underpin this model. Let’s dive into the essential elements that ensure the smooth functioning and security of your PayFac operations.

Merchant Onboarding and Compliance

Importance of KYC and AML Regulations

In the world of payments, trust and security are paramount. This is where Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations come into play. As a PayFac, adhering to these regulations is not just a legal requirement but a cornerstone of building a trustworthy platform. By verifying the identity of your merchants and ensuring their activities are legitimate, you not only protect your platform but also contribute to the overall security of the financial ecosystem.

The Role of Underwriting in Merchant Approval

Underwriting is the process of assessing the risk associated with onboarding a new merchant. This involves evaluating factors such as the merchant’s business model, financial stability, and potential for fraudulent activities. The underwriting process is critical in ensuring that only reputable and financially sound merchants are allowed to use your payment services. By maintaining stringent underwriting standards, you can minimize the risk of fraud and chargebacks, ensuring the long-term success of your PayFac operations.

Risk Management and Security: Safeguarding Your Platform

Handling Fraud Prevention and Chargebacks

In the digital age, fraud prevention is a never-ending battle. As a PayFac, implementing robust fraud detection and prevention mechanisms is essential to protect your platform and your merchants. This includes real-time monitoring of transactions, use of machine learning algorithms to detect suspicious patterns, and providing tools for merchants to dispute chargebacks. By staying vigilant and proactive in fraud management, you can minimize financial losses and maintain the integrity of your platform.

Ensuring PCI Compliance for Data Security

Data security is a top priority in the payment industry, and Payment Card Industry Data Security Standard (PCI DSS) compliance is the gold standard. As a PayFac, ensuring that your platform and your merchants adhere to PCI DSS requirements is crucial in protecting sensitive cardholder data. This involves implementing secure encryption methods, maintaining a secure network, and conducting regular security assessments. By upholding PCI compliance, you can instill confidence in your merchants and their customers, knowing that their data is in safe hands.

Technical Infrastructure: Building a Foundation for Success

Building and Maintaining a Robust Payment Platform

The backbone of your PayFac operations is your payment platform. Developing a platform that is secure, reliable, and scalable is no small feat. It requires a significant investment in technology and expertise. Plus, maintaining this platform involves ongoing monitoring, updates, and security measures to ensure its integrity and performance.

Integrating with Various Payment Networks and Banks

A key aspect of your PayFac platform is its ability to integrate with different payment networks and banks. This integration is crucial for processing transactions and facilitating payments. It requires building and maintaining secure connections with these entities, which can be complex due to varying protocols and standards.

Wrap Up

The journey to becoming a Payment Facilitator is a transformative journey that offers a plethora of benefits for Independent Software Vendors. As a PayFac, you gain control over the payment experience, open up new revenue streams, and enhance the value of your software offerings. This model enables you to provide a seamless, integrated payment solution that can set you apart in the competitive software market.

However, the path to becoming a PayFac is not without its challenges and it’s important to fully understand these before deciding to go down this path.The costs associated with setting up and maintaining a PayFac operation are substantial, but the potential rewards make it an attractive option for ISVs looking to expand their business horizons.

It’s crucial before you begin to weigh the benefits against the costs and challenges. With careful planning, a clear understanding of the regulatory landscape, and a commitment to building a secure and efficient payment platform, becoming a Payment Facilitator can be a game-changer for your software business.

At Clearent, we offer software providers several flexible embedded payment partnership solutions with your growth at the forefront. Plus, we will soon be unveiling our PayFac as a Service solution, which will give ISVs many of the benefits of a Payment Facilitator without all the costs and infrastructure requirements.

Speak with our team

Article by Clearent by Xplor

First published: March 15 2024

Last updated: March 15 2024