On the way to Payment Facilitator Model

on Jul14

From this article you will learn:

  • how SaaS and POS platform providers can increase their revenues if they start offering merchant services
  • what options a software platform provider has if it decides to become a merchant service provider
  • what is the difference between an ISO, a wholesale ISO, and a payment facilitator model
  • which steps a platform provider should take to become a wholesale ISO or a PayFac

In one of our previous articles we’ve already addressed the process of payment facilitator model implementation for SaaS platforms. Previously such platforms were not earning much on merchant services. Nowadays more and more technical platforms, including POS systems and SaaS providers, are looking for ways to increase their revenue around merchant services offered to their customers.

In this article we are going to describe how software platform providers can start offering merchant services and benefit from this transition. We are going to explain the payment facilitator model from SaaS viewpoint.

A typical situation presently witnessed at the market is as follows. Either a platform provider already has an integration with a gateway and an arrangement with some ISO (processor), or it has several gateway integrations and, consequently, agreement with more than one payment processor.

Such a model allows the platform owner to get some percentage of processing fees and provides a limited degree of control over decision-making related to merchant underwriting. However, the platform is totally dependent on the processor in terms of merchant onboarding, remittance, and funding. In such a situation, the platform provider starts looking for ways to increase the revenue and get greater control over the process.

The common way to achieve this goal for the company is to assume greater responsibility for various aspects of merchant management lifecycle. Generally, that implies offering merchant services under the platform’s brand with the minimum number of intermediaries involved. This allows the platform provider to get some additional discount from the processor and on large processing volumes this discount yields significant amounts in revenues.

By assuming greater responsibility for merchant lifecycle, the platform provider agrees to handle such processes as merchant onboarding, reconciliation, remittance, chargeback disputing, funding, etc. This will allow the platform to improve the quality of service for its customers and to get greater control over the whole process. On the other hand, this arrangement removes part of the load from the processor and allows it to save some money. It is these savings that the processor can share with the platform provider.

Wholesale ISO or payment facilitator model

In essence, a platform provider performs the role of an ISO for the platform users.

The new relationship between the platform and the processor can belong to one of the two kinds. The technical platform can become either a wholesale ISO or a payment facilitator.

Wholesale ISO model implementation is a bit easier (respective underwriting requirements and responsibilities are easier to fulfill and follow), however, it provides less control over merchant onboarding and underwriting and no control over remittance process. Under this wholesale ISO scenario, the platform owner is able to earn more on processing than it earned in the case of the original classical model, but the PayFac-model scenario is still more flexible and capable of providing greater profits.

Payment facilitator model, though more lucrative, is more difficult to implement. While both wholesale ISOs and payment facilitators have to go through underwriting process and provide financial guarantees, the requirements are more difficult to follow in case of a PayFac. Besides that PayFac model requires a technical solution that would allow the prospective PayFac to handle remittance of funds to the merchants (including calculation of fees, withholding of reserves etc).

Example

A software platform provider partners with an ISO and pays of 2.9% per-transaction fees. The platform provider decides to implement a payment facilitator model and partner directly with a new processor (and assume a part of responsibility for merchant services). In return the processor is ready to offer lower per-transaction fees to the platform provider (say, 2.4%). Consolidation of merchant portfolio allows the platform provider to achieve the annual transaction processing volume is $10,000,000, so the amount of the platform owner’s savings is $500,000. Gateway maintenance costs $300,000, so net revenue amounts to $200,000. Under larger transaction volumes, the savings and revenues will also increase.

Conclusion

Although payment facilitator model implementation is a complex procedure, requiring considerable efforts, more and more platforms are becoming PayFac finding this option more profitable for them. In a way, one can say that the future of merchant services, to a large extent, is going to be shaped by payment facilitators.

If you decide to implement payment facilitator model, we recommend you to consult the specialists, as the process is, again, rather complex. You can start with PayFac white paper and quiz available on our website.

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