There has been explosive growth in the market for payment facilitators (PayFacs), led by the enormous success of well-known PayFacs like PayPal, Square and Stripe as well more than one thousand ISVs and SaaS companies with vertical segment expertise. The number of payment facilitators worldwide is forecast to grow from 1,244 in 2020 to 2,381 in five years, and the associated payment volume will top $4 trillion annually by 2025.
Merchant aggregation has proven to be an effective way to reduce friction in processes related to boarding, pricing, and funding by aggregating sub-merchants under a master account held by a payment facilitator. Visa has published an explanation here.
Turns out that the promise of integrated payments, streamlined boarding processes, simplified pricing programs and seamless transaction processing is attractive for a range of merchants. This includes merchants interested in a software platform that offers consolidated, industry-specific features to help start, manage, and grow a business.
Owning both sides of the equation—software and payments— makes sense for enterprise companies that have invested tremendous time, talent, and money into building trusted solution platforms for the customers they serve.
In this article, we’ll break down the common myths surrounding the path to becoming a payment facilitator—and what you should look for in a payments partner— so you gain a clear picture of the path to profiting from payments.
Some existing payment facilitators appear keen on creating fear, uncertainty and doubt for any software company considering the path to becoming a registered payment facilitator. They say it’s too hard. That it requires too much heavy lifting and a ton of additional investment and resources. It’s even been likened to becoming a rock star, playing major league baseball, or flying to the edge of space. Imagine Jeff Bezos or Richard Branson saying “Forget it. It’s too hard. I’ll just ride along with the other guy.”
Truth is, seamlessly offering the combination of software and payments helps ISVs win and retain more business. The key is working with the right sponsor as you embark on the journey of becoming a successful PayFac. The long-term benefit of becoming a registered payment facilitator is a lucrative recurring revenue model that adds enterprise value for software providers, especially those interested in operating at a global scale, now or in the future.
The primary benefits of becoming a registered payment facilitator are clear:
The growth of ISV and SaaS solutions can be directly attributed to their founders’ deep segment knowledge that informs decisions on everything necessary to succeed. Payment acceptance is a part of that. You understand the types of solutions needed based on the type of customers, commerce channels, billing practices, and risk factors. So, it makes sense that, just like so many other features of your solution and service model, you can bring forth a successful full stack of integrated payment capabilities. It just takes partnership and teamwork (and a bit of elbow grease).
This is not rocket science. You’ve already done the work to integrate payments. Becoming a payment facilitator is a change to your operational and support models, has and it pays long-term benefits. Registered payment facilitators earn 20-40 basis points more per transaction than they would riding the rails of another wholesale PayFac.
Chances are, you won’t be starting with a blank slate. You simply need to work with a sponsor that has the expertise, systems, and solutions—readily white labeled—in place to use as the foundation for establishing your own underwriting, onboarding, compliance, funding, and support operations.
You’ll benefit from working with an acquiring sponsor that has a robust and feature-rich technology stack and offers a choice of funding models so that sub-merchant accounts—whether under one consolidated merchant ID, or with unique MIDs—can be seamlessly settled on your behalf, eliminating the need for you to register for money transfer licenses in every state.
You already took the risk of starting your own software company. You know your customers and have a deep understanding of the industries you serve. Many segments best suited for a payment facilitator are low risk (companies with deep customer relationships or contracts, transactional businesses like restaurants and salons, field services, etc.), where losses are typically less than 1 basis point (.01 percent). Why pay a third-party 20 times that amount for taking on the losses related to so little actual risk? No one knows your clients as well as you do.
A strong sponsor-partner with a robust suite of underwriting tools helps you weed out bad actors from ever boarding onto your platform in the first place. On top of that, partners that have best-in-class solutions to detect fraud and protect data mitigate risk in your portfolio.
Finally, words like “compliance” and “regulatory oversight” make becoming a payment facilitator seem scary. Yes, rules must be followed, but your sponsor has a vested interest in ensuring that these standards are met. Their experts are there to help you succeed.
One good way for enterprise ISVs to obtain scale is to expand globally. Some payment facilitators make you believe that achieving global scale requires multiple relationships, solutions and overhead.
The truth is that working with an acquirer-sponsor with global reach means you can operate your PayFac platform under one relationship, while extending customers a wide variety of currencies and payment methods. In-country expertise, unified APIs and support for local payment schemes will be important differentiators to help you win and retain sub-merchants.
And the ability to support it all under one contract means you can focus on growth, not paperwork!
Everything changes. It’s called progress. Witness how quickly the shift to digital happened during the COVID-19 pandemic. Companies everywhere reacted swiftly to implement contactless payments and new remote service models. Emerging solutions like Buy Now Pay Later, digital payouts, and card-linked offers improve the customer experience across the commerce journey.
Working with a financially secure, global provider dedicated to payments across all channels means that you’ll always have access to modern payment and value-added solutions that address changes at the point of sale, online, or through emerging digital channels in the connected commerce world.
Don’t believe the warnings about becoming a payment facilitator. It takes dedication and hard work, but the rewards are worth it. Start the conversation by speaking with an expert at Carat. Carat empowers ISOs, ISVs, and SaaS providers to become Payment Facilitators and easily replace referral fees with residual revenue. Now is the time to take control, stop passing leads to others (or giving up part of the revenue pie), start creating additional value for your business, sell more software, and earn more money through integrated payments.
Carat prepares ISVs to make the transition to PayFac, and we are the only ones to do it on a true global scale with a direct acquirer-sponsor relationship. Carat’s experts help define the opportunity and provide the necessary support to empower an ISV to become a PayFac. The comprehensive approach includes:
To learn more about Carat Payment Facilitation, contact us today.