Becoming a ‘PayFac’ or Payments Facilitator is a growing trend within the SaaS industry. The reason this is happening is that SaaS vendors whose client’s process significant funds represent a real revenue opportunity for SaaS vendors.
If you are say a hotel booking software company and you charge your customers an average of $150 and the hotel turns over $10,000 per month in payments taking 60-100 basis points will net a cool $60-$100 in incremental revenue per month.
It’s a quite significant shift in business models for SaaS companies and I think is good for their customers as they are closely aligned in terms of goals. Higher revenue for one is higher revenue for the other.
Why you don’t really want to be a full PayFac
A full PayFac is essentially a payments services provider. While on paper it sounds like a great idea in reality there’s a significant cost overhead in becoming a PSP, especially in-terms of salaries, technology and operational overheads.
In order to get to this point you have to have a couple of things that most SaaS companies don’t want:
- Regional authorisations – Often miscalled ‘licenses’ after their banking counterparts but you’ll need to get operating authority from the financial regulators in the regions you want to operate in, in Europe this would usually be a Payments Institution (PI) or Small Payments Institution (SPI) if you were just getting started;
- MLRO (Money Laundering Reporting Officer(s)) – You’ll need these in each country or region you’re operating in. Plus some regions like the US require you to have your MLRO and their core team locally. They act as an internal balance in financial institutions to ensure they are following the rules. Often they will require specific qualifications and may also need to be vetted/approved by the regulator;
- Risk & Underwriting – While from a consumer perspective card payments are quite safe if you are providing card services to merchants you can find yourself liable for reversed payments (chargebacks) as well as the risks around money laundering;
If you’re turning over $1bn per year however, it might be worthwhile so read on.
Vendors and providers
There are a wide variety of vendors in the PayFac market. Within payments and finance at the basic services end of the market everything is quite straight forwards.
However, as you move up the stack there is quite significant cross-over between vendors. Not only that often finance vendors will offer services and products that they do not generally advertise.
As a result there is an ever fragmented market with emerging players and technology platforms.
There are two ways to look at the PayFac vendor landscape…
by culture:
- Technology led: Vendors who are tech led are generally run by geeks who love building amazing API driven products;
- Sales led: Vendors who are sales led are generally run by sales people who buy in a 3rd parties technology or who’s top engineers left a long time ago;
and by business model:
- Vanilla: Stripe like services where you can integrate a payment flow and you make zero (0) revenue from transactions;
- Referral: All the tech, relationships and connections are provided. Your client is charged a rate say 1.5% and you take a referral fee within that say 60-100bp;
- Technology only: Where the vendor provides only the technology and you bring your authorisations, processes and relationships;
We’ll do a payfac vendor comparison separately as there’s probably too much to reasonably cover in one post.
Card readers and why they’re important
Today a lot of payments are taken online, largely for bookings and product purchases. However, for key industries such as hospitality, coworking offices etc. card present payments still make up a significant chunk of sales.
The majority of these organisations take card readers from their banks, occasionally from a payments startup like SumUp. Sometimes they’re getting good rates other times they’re being taken advantage of.
In a lot of cases those transactions won’t be automatically reconciling into their POS and so there’s a good SaaS value add opportunity to do that and make their life a little easier.
Technology considerations
It is essential when choosing a payments provider to look at how their card readers work as well as features available.
- Connection: How does it connect to the internet (WiFi, 4G, Wired?);
- Transaction initiation: Local or server-side?
- Offline: Can the device take a payment if your app isn’t working?
- Apps on reader: Can you install a mobile app onto the provider’s reader to provide a unique checkout experience for tipping, rebooking, account management etc?
I’ll do a full article on card readers compared as there are a lot of different options out there and while they appear similar the differences can have quite a significant impact.
How to become a full PayFac
So if all of this doesn’t sound too scary maybe you want to go for it and become a full PayFac.
A few things you’ll need to have a handle on beyond what’s mentioned above include:
- Fraud: Fraud detection, management and possibly a 24/7 team to operationally manage held/blocked transactions;
- KYC: A way to onboard your clients in a way that your regulator(s) are happy with;
- AML: A way to consistently detect money laundering patterns in particular if you’re in a higher risk industry such as gaming or cross-border transfers;
- Underwriting: A way to risk score new clients and a reasonable process to monitor them once they’re actively trading;
- Banking partner: You will need an acquiring bank to sponsor you to be able to send transactions over the main card networks (Visa, Mastercard etc);
If you’re a SaaS company and are interested in going down this path or are on it and want some help then let me know.