What Is The Payment Facilitator Model?
A payment facilitator, or PayFac, is a company that facilitates other online businesses/merchants that want to accept online payments.
Why is a payment facilitator necessary? To answer this, we have to first understand that there are two main ways for online businesses to accept payments online:
- Via a payment processor: a payment processor will connect you to the credit card acquirer directly, and you’ll get your own merchant account for your business. You‘ll get more freedom and versatility to custom-tailor your online payment according to your needs and your customer’s preferences in this method. However, in this method, the requirement is much stricter and it can take a long time before you can get
- Via a payment facilitator: In this model, the payment facilitator is the one possessing a merchant account, and will give you a sub-merchant account under this account. PayPal (News - Alert) and Stripe, for example, are two popular examples of payment facilitators. If you are registering an account (technically, a sub-merchant account) on PayPal, you are not dealing with the credit card companies directly, but you are essentially dealing with them under PayPal.
As we can see, the key advantage of using a payment facilitator over the payment processor method is that the process is typically quicker and more affordable. The payment facilitator company (i.e. PayPal) has been pre-approved for a master account with a credit card publisher or acquirer, and so online merchants can bypass the often difficult qualification process of getting a merchant account.
This is why using a payment facilitator is now preferred by many businesses, especially in today’s agile business environment where speed is often key.
Starting a Payment Facilitator Business
With how so many businesses are now looking to move their operations online and enable online transactions, becoming a payment facilitator on your own is now a lucrative business opportunity.
A key advantage of the payment facilitator model is the ability to onboard new clients quickly and easily, so you can bring in a potentially large revenue stream by charging fees to end-users (sub-merchants) for every online payment they’ve received.
So, how can you become a payment facilitation company? Here are some key considerations:
The Regulations for Starting Your Payment Facilitator
Obviously, electronic payment processing is a heavily-regulated industry and various different federal and state regulations have been made both for the payment processing businesses and the customers.
You can check out Electronic Transactions Association (ETA) underwriting and payment facilitator guidelines to understand the Operating Regulations of the existing payment networks, governmental regulations, and risk management best practices. Recently ETA has just released their 2020 update for the guidelines, which also covers the updates related to the COVID-19 pandemic, eCommerce, privacy, and updates regarding the FinCEN Beneficial Ownership CDD program. You can access the payment facilitator guidelines by becoming an ETA member here.
Estimate Your ROI
Since your objective in starting a payment facilitator business is to create a profitable and successful business, then you’ll first need to make sure that you’ll achieve a positive ROI.
Starting a payment facilitator business can take a significant amount of time, and the initial investment can also be quite significant. Thus, conducting a proper ROI analysis is recommended so we can have a solid foundation for the business model.
You should especially estimate the volume of transactions, the margin on payments, and the amount of revenue share for payments you’ll make to figure out whether the ROI is adequate.
Setting up Policies and Procedures
Being a payment facilitator means that you are putting yourself at risk for malicious and/or negligent sub-merchants, so setting up policies and procedures for underwriting these sub-merchants is very important to protect your business.
You should consider:
- How to perform due diligence for each (potential) sub-merchant
- Schedule for performing manual reviews
- How to deal with ownership changes or change of business practices
- Criteria for KYB (Know Your Business) and KYC (Kow Your Customer)
- Policies about when anomalous transactions need to be manually reviewed based on different factors/thresholds
- How to review potentially high-risk transactions
- Specific steps to take when investigating potentially fraudulent transactions
- How to efficiently and safely handle chargebacks
Implementing these various policies in order to be in compliance with credit card issuers, as well as government regulations can be challenging, and this is where getting the help of a payment consultant can help so you can work together in creating unique policies specific to your company that meets your customer’s needs and can be applied to your specific workflow to improve their effectiveness.
Registration and Approval as a Payment Facilitator
Being approved as a payment facilitator can be a very challenging process and you might go through various detailed examinations. Also, you can’t get help from banking institutions due to the potential conflict of interests. This is where getting the help of payments consultants at RPY Innovations can be very important.
Conclusion
With online transactions becoming more widely accepted by more and more people all over the world, a fast and easy online payment process is now a necessity for any business that enables online transactions. The payment facilitator model can allow any business to offer reliable online payment options to any customers, making starting a payment facilitator business a lucrative opportunity at the moment.
Becoming a payment facilitator can be an interesting opportunity to explore, and payment project consultants like RPY innovation can help you become a payment facilitator with a 100% approval rate.
