photo of Caleb Avery

The Day-to-Day of Operating as a Payment Facilitator

Many software companies choose Stripe or Braintree as their first payments provider and end up falling in love with the benefits of Payment Facilitation or “PayFac”. They are drawn in by the instant onboarding and frictionless signup process that it promises for their customers. However, the problem with Stripe and Braintree is that they charge exorbitant rates for their services and keep most, if not all, of the payments profit for themselves. This pushes software companies to start exploring alternatives as they scale, one such option being to become a registered payment facilitator. But here’s the hard truth about becoming a fully registered payment facilitator: it can take years and millions of dollars to complete (more on that here), and the hard work and expenses don’t stop once you’re registered. For any software platform considering this option for their business, it’s crucial to first look at the unfortunate reality of the day-to-day of operating as a PayFac.

Operating Staff

While you were working to become a PayFac, you likely hired a full-time team of developers, accountants, and payments and compliance consultants to guide you through the process. And if you thought you’d be able to stop paying them now that your registration is complete, think again. Most PayFacs will require at least 3-5 full time employees just to manage this new payments part of their business. 

You will continue to need developers to ensure the systems you’ve created stay running and keep up the regular updates from your gateway(s), processor(s), and acquiring bank(s). Expect to retain one or more full time developers just to focus on payments.

On a daily basis, you’ll need someone to review the settlement reports. Every day you will receive a batch settlement file from your acquirer. This file can be thousands of lines long and contains every single transaction from every single one of your merchants. While your systems should flag certain transactions based on the parameters you set, at the end of every day, a real, live person has to make decisions about whether or not to fund each of the thousands of transactions processed through your system. And if they’re wrong, the liability is on you. 

The biggest benefit of becoming a PayFac is to give merchants a seamless and frictionless onboarding experience to quickly begin processing payments. Sadly, what is an easy process for your customers may be more complicated for you and your team. While many accounts are approved immediately, some will need manual review and require a live person to figure out where the typo is or what went wrong. Some merchants may be flagged for various risks, and it will be up to your company to choose; Will you fully approve them? Set restrictions? Delay funding? Institute processing reserves? It’s your responsibility to make the right decision or deal with the consequences. Expect to hire at least one employee to oversee Risk, Underwriting, and Compliance.

Merchants also require further monitoring after approval. Are they staying within the expectations they listed on their application? If a merchant told you they rarely process transactions over $100, but then process three transactions over $10,000 in a row, will you fund those payments? Remember, merchants want their money — and fast. 

Take into consideration that these employees and consultants are not cheap. These are not entry-level positions, so prepare to pay them $75,000 per year in salary minimum, plus benefits. 

Liability Losses

It’s estimated that in your first year operating as a PayFac, you can expect to lose 10 basis points to fraud, uncollectable chargebacks, and ACH rejects. That’s $1,000 for every $1 million processed in your first year. While it’s likely to stabilize in later years, estimates still predict approximately 5 basis points per year for even the more experienced PayFacs. That’s $500 for every $1 million processed, every year for the life of your business. Processing $100M a year in payments volume? That means you can expect $100,000 in losses your first year and $50,000 in losses per year after that. These losses really cut into the extra profits that software companies were hoping to earn by becoming a payment facilitator. 

We should note that these estimates are merely averages. Depending on your niche vertical and the risks associated with your specific business, it could be less — or more. Regardless, in the early days of operating as a PayFac, you won’t be an expert. Does your business have the cash flow and adequate reserves to take an unexpected liability hit? 

Beyond just the monetary losses, are you prepared for possible legal action if your business approves the wrong submerchant or partner, or ends up doing business with the wrong customers? Can you fix any potential problems without damaging your underlying business?

These questions are important to consider, because ultimately the sponsorship with your acquirer is at stake. If your bank sees that you have a higher chargeback rate than you anticipated in your application process, or that you are suffering too many losses, they will start asking questions. As a large sponsoring bank, they have access to terabytes of data and they know what to expect in terms of losses and liability. If you start reaching outside of those ranges, they start worrying about your ability to operate. It could mean fines from the bank or card networks, or even a loss of your sponsorship.

Merchant Costs

There are also onboarding and monthly fees that will need to be paid for each merchant. When you underwrite a merchant, you will need to verify they are real using existing systems and databases. Depending on which one you use, the fixed costs of verifying a tax ID, banking information and other data can vary, but will be a real cost every time you bring on a new merchant. Expect to pay at least $5 to various vendors for each merchant that you plan to underwrite.

Don’t forget about transaction fees for fraud prevention, chargeback management, and payout and funds routing. And every day, when you pay out your merchants, you’ll pay a fee to route it through the ACH networks. If you’re hoping to have thousands of customers, those fees can add up quickly. 

While some of these fees can be passed along to your merchants, that requires monthly reporting, statements and billing. You will likely need a full-time employee to create these items, ensure bills are being paid, collect on those that aren’t, and properly account for and record it all. That’s important, because annually you’re required to provide every merchant with a 1099K form, which you will need personnel, software (and licensing fees) to generate.

Annual Costs

On top of all of the above, you also have several annual responsibilities and costs as a registered payment facilitator . 

At a minimum, you will need to renew your PCI DSS Certification each year. You’ll also need to renew it any time you make changes to your PCI environment, no matter what time of year it is. Maintaining your PCI certification typically costs north of $50K per year and requires a significant amount of time each year.

Your licenses and regulatory registration fees with card brands will also need to be paid each year. That’s another $5,000 to Visa and $5,000 to Mastercard, every 12 months. 

Finally, your acquirer will require an annual audit. While it may be less cumbersome than the initial application process, it can still tie up days or weeks of your team’s time preparing documents and data and going through your records and processes. 

The Bottom Line of Being a Payment Facilitator

Taking into consideration everything mentioned above, you’ll notice that none of these requirements have anything to do with your product or your core competencies. They have next to nothing to do with what you’re selling, and offer little value to your product or your customers. While each are absolutely necessary to operate as a fully registered PayFac, these things are a huge distraction — especially for smaller organizations.

They also make becoming a fully registered PayFac an even more expensive proposition. Even with the best technology systems available to mitigate loss and risk, there are real costs associated with liability, personnel, software licensing, and regulatory registrations. To truly justify the upfront and ongoing expenses, we estimate a software company would need to process more than $2 billion (yes, with a B) in transactions each year. 

What About Other Options?

When you look at all that it takes to be a fully registered PayFac, it’s easy to see why software companies choose services like Stripe, Square, and Braintree — despite their poor economics. They take away the distractions from your day-to-day business, and offer all the benefits of payment facilitation to your customers without the operational hassles. Unfortunately, they offer none of the economic benefits to you.

We felt that software companies shouldn’t have to choose between the convenience of options like Stripe, Square, and Braintree and the economics of becoming a fully registered payment facilitator. That’s why we created Tilled. 

Welcome to PayFac-as-a-Service

With Tilled’s PayFac-as-a-Service model, we offer all the benefits of payment facilitation like easy onboarding and instant approvals just like Stripe, Square, and Braintree, along with creating a substantial additional revenue stream for your business (link to add 500K/year article?). Because we take on all the liability and hassles of operating as a PayFac, we allow you and your staff to focus on what you do best. You’re an expert in your field, let us be the experts in ours.  Start experiencing the benefits of PayFac-as-a-Service. 

Contact us to learn more about Tilled today!

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