PayFac as a Service: 13 Questions You Must Have Answers To
Payment Facilitation as a Service or Payfac as a Service is relatively new. While traditional Payment Facilitation has been around for years, the expense, time-consuming implementation, and risk exposure make it prohibitive for all but large organizations with a substantial customer base. The reason for this is that the expense must be offset by revenue from payment processing. Without a significant payments revenue stream, it simply does not provide a sufficient ROI.
PayFac as a Service enables platforms to quickly add payments as a revenue generation tool, offer instant boarding and offload compliance and risk management. This is accomplished by allowing the platform to essentially act as a sub Payment Facilitator, using a master PayFac’s technology and experience to quickly go to market and create new revenue streams.
There are multiple providers all with their own API’s and their way of doing things. This can be confusing for platforms looking at the PayFac as a Service option. For the purposes of this discussion, we are looking at platforms that primarily have card-not-present needs. If you are developing a POS solution and need consumer-facing hardware these questions are a good starting point but you will need hardware-specific questions addressed.
Here are 13 questions you want addressed before making any decision:
1-Is the API easy to work with, fast to implement and does it automate just about everything?
One reason that Stripe has been successful is the well-thought-out, elegant API. Your development team should have a Stripe-like experience. The right API will shortcut your speed to market dramatically. With the right partner a week or less is possible.
2-What does the revenue share model look like?
The vast majority of PayFac as a Service providers offer a revenue share rather than a buy rate.
Revenue share is based on the difference between costs (Interchange rates set by MasterCard/Visa and potentially a slight padding % from your master PayFac) and the platform sell rate. Costs are not known until payments begin to be processed. Estimated costs depend on average sale amount and type of card usage. 1.8–2% is typically reasonable. If your sell rate is 2.9% and 30 cents the potential margin is about 1% and 24 cents. If your rev share is 60% you can calculate potential income.
Very few PayFac as Service providers publish pricing to sub PayFac’s and there is a reason. Every platform and team is different. Some have only a good application idea but little to no payments understanding. Moreover, they have zero customers at the time.
Payment Facilitation is inherently risky and requires oversight to mitigate risk and compliance concerns. Other platforms may have an established customer base who are currently processing payments or an established platform with no payments functionality, but where payments are a logical add. In some cases the master PayFac platform would need a monthly minimum $ commitment to make boarding the SaaS application as a sub PayFac worth the effort.
Here is a rough pricing guideline for education purposes.
**Revenue share is based on the difference between costs (Interchange rates set by MasterCard/Visa and platform sell rate. Costs are not known until payments begin to be processed. Estimated costs depend on average sale amount and type of card usage. 1.9–2% is typically reasonable. If your sell rate is 2.9% and 30 cents the potential margin is about 1% and 24 cents.
Approximate card not present base rates [including assessments for most common cards]:
Debit: 1.77% | Regulated Debit .05% plus 22 cents
Non Rewards MC/V/Discover: 2.02%
Rewards cards: 2.22%
Business cards: 2.82%
****Why the monthly minimum?
Payment Facilitation creates significant compliance and regulatory burdens as well as potential risk that must be mitigated. Coupled with ongoing technical costs it just does not make financial sense to allow a platform to leverage Payment Facilitation without a strong potential ROI. The minimum does two things: 1-creates more revenue to offset the expense involved and 2-separates the platforms that are serious from those with a good idea. In some cases, this can be waived.
3-Can the platform get faster access to rev share payments?
Almost all PayFac as a service providers payout to the platform one month in arrears. So payments activity for April is not paid out until May. In many cases it would be much more beneficial for the platform to receive bi-monthly or even weekly payments.
4-Do you have gross and net Funding Options?
The majority of PayFac as a Service providers offer only net settlement. Eg sell rate is 2.9% and 30 cents on a $100 transaction means the merchant receives $96.80. The reason for this is primarily risk mitigation. You have no worries about collecting fees if they are deducted from sales.
For certain business types this net funding creates accounting issues. They expect $100 not $96.80. Having the flexibility to offer both gross and net funding can be very important.
5-What are the split payment capabilities
Look at the example above, where from the $100 sale the merchant gets $96.80 Where does the $3.20 go? The $100 is split between the merchant and the master PayFac. The $3.20 is revenue but not profit. Once true payment costs are known you then have the $ amount that the master PayFac and platform split based on rev %.
This split payment functionality should be a very well defined part of the API. Unfortunately for some providers the split payment functionality can be an area of weakness.
6-Can we offer flat rate and Interchange plus* pricing?
Most providers only offer flat rate options as they are more profitable. For a customer base that is more price sensitive an Interchange plus plan may be needed to win the payments business.
*Interchange plus refers to a plan where the end merchant pays costs from MasterCard/Visa PLUS a uniform markup, eg .25%. Depending on many factors it could offer ½ % savings versus flat rate at 2.9%.
7-Do you offer Level 2 and Level 3 payments capabilities
If your customer base is doing B2B billing or B2G (business to government) then Level 2 and Level 3 support reduces the base costs or processing payments. Typically business credit cards cost more to process (the reasoning is the business has the repayment obligation not an individual and potentially there is more risk). Level 2 and Level 3 offer lower processing fees but in return there must be more transaction data to qualify. Most PayFac providers do not offer this capability.
8-Do you have native text payment support
Texting as a communication and payment collection medium is becoming a must have. This is an area where most PayFac as a Service partners are playing catch up or just do not support. Find out if texting is on the dev roadmap.
9-What analytics and data capabilities are offered?
The de facto solution is that you use the API to construct reporting for your clients. The level of insight you can provide is a function of the API capabilities. You want that reporting to be detailed so that you offer self-service for your client base. Some providers also offer a merchant facing dashboard that is pre-built for reconciliation. The platform should also have access to a dashboard that lets them view their client base both holistically and on a drill down level.
10-What are my financial liabilities and PCI compliance obligations?
In the PayFac as a Service model your master PayFac partner should be assuming liability for $ loss (eg fraud/non-payment of fees). The API’s should offer tools that offer you no-touch options for protecting sensitive data (eg full credit card data). From there you are storing reference tokens for potential future payments.
11-What measures are in place around Chargeback+Fraud management/protection?
Chargebacks are inevitable and a messy part of payment processing. What are your obligations? How are they reported? Who is responsible for addressing? Again, your master PayFac partner can play an important role in how much or little work you and your client base have to do.
12-Alternative payment options
ACH payments should be supported. Push payments to a debit card is becoming more mainstream-ask about any plans to implement. For medical platforms, how are FSA and HSA payments supported?
13-Will we as the platform have help in driving payment adoption from our client base?
Although this is the last question, the answer to this and the PLAN will be the single biggest factor in your success or failure in your attempt to create a revenue stream from payments. You can have a wonderful solution but if your client base does not, in turn, have their customers using the payment solution, what has been accomplished?
There are multiple areas where strategic development and an ongoing customer education plan can ensure you are driving maximum payment usage.
Summary: Using the PayFac as a Service model your platform can easily and quickly monetize payments, onboard users instantly, control the UX and offload expensive compliance and risk concerns.
The next step is a conversation to discuss your goals and questions. You could be offering a new payment solution and on your way to creating a more valuable business in weeks.
Contact us at sales@AgilePayments.com or 888.729.4968