PayFac as a Service—also called Payment Facilitation as a Service, Embedded Payments, and Managed PayFac—is emerging as a winning solution for tech-forward Software as a Service (SaaS) businesses interested in deepening customer relationships and creating a sustainable source of recurring revenue.

This is an informational article so that you can learn about PayFac as a Service.

The appeal of embedded payments for software providers is evident in its growth. A study from Juniper Research [1] reveals that the global revenue from embedded payments will reach $59 billion in 2027, from $32 billion in 2023, representing a growth of 84%. Consumer preferences for alternative payment methods, especially in digital channels, will fuel much of the growth.

Independent software vendors (ISVs) can choose from multiple models when monetizing payments on their cloud-based platforms, depending on their stage along the maturity curve:

1. Referral/rev-share model: Integrate payments and refer business to a payment processor
2. Integrated API: Add payments acceptance using a tech stack
3. Registered ISO: Become an Independent Sales Organization to resell payments
4. PayFac as a Service: Offer payments in your software, under your brand by working with a registered Payment Facilitator like Paysafe
   Note: Paysafe offers PayFac services in the US and Canada only.
5. Registered Payment Facilitator (full PayFac): Build the underwriting, risk, compliance and funding infrastructure to manage sub-merchants.

This article will focus on the Payment Facilitation models and contains everything you need to know about how PayFac as a Service can benefit your business without the investment, risk and compliance overhead associated with becoming a fully registered PayFac.

A registered Payment Facilitator, also known as a “PayFac” or “merchant aggregator” is a third-party business or platform that contracts with an acquirer to provide payment services to their customers, referred to as “sub-merchants.” Square, Stripe, PayPal, AirBnB and Uber are well-known examples of PayFacs. The PayFac is sponsored by an acquiring bank and is the merchant of record, which means it receives all funds and settles respective deposits to each of its customers’ bank accounts.

Payment Facilitators must complete a thorough risk and financial review. Registered PayFacs handle everything from underwriting to card brand compliance, risk, and sub-merchant funding. ISVs who register as PayFacs usually have the potential to make more profit, but they also take on responsibility for any fraud and write-offs on their platform.

Becoming a PayFac requires funding, in-house talent and time. The setup process can take up to two years, and the upfront and ongoing costs can add up to millions of dollars, depending on the geographic footprint. You’ll pay for money transmitter licenses, PCI assessments, card brand registration fees, annual audits and specialized employees. ISVs attempting to successfully implement this model should be prepared to invest substantially in technology and talent to support a significant undertaking that will scale.

The upside to becoming a registered PayFac is that because you are taking ownership of the infrastructure and owning the risk, you can earn 1% or more on the total annual volume of payments processed on your platform.

PayFacs serve three primary customer segments: platforms, direct merchants and Independent Software Vendors (ISVs) that build cloud-based software systems including point-of-sale (POS), customer records management (CRM), enterprise resource planning (ERP), property management system (PMS), electronic medical records (EMR), and more.

The Payment Facilitator model benefits SaaS companies that develop industry-specific software to help businesses operate more efficiently. Examples include fitness software (Mindbody), home repair and maintenance platforms (ServiceTitan), nonprofit/charity software (RunSignup), retail POS (Square) and restaurant systems (Toast).

The end-to-end steps in processing a credit or debit transaction are complicated, which is surprising, given that it takes seconds from start to finish. Add in similar-sounding terms and overlap in the role each plays, and it’s easy to get confused. Here’s a brief definition of each, and the main differences:

• Payment processor: The bank or financial organization responsible for routing transactions to the card brands or debit networks, approving/declining a transaction, and ensuring that funds are settled correctly between the cardholder’s and merchant’s banks. Payment processors underwrite each merchant account on behalf of its acquiring (“sponsor”) bank and manage risk and compliance.
• Payment gateway: A Payment Gateway is middleware technology that securely captures, stores and transmits cardholder data to the payment processor for authorization. It communicates the acceptance or decline notification received back to the customer. Some payment gateways are independent third-party intermediaries, while others are owned and operated by an ISO or a payment processor.
• PayFac: A PayFac essentially takes on some of the duties of a payment processor and a payment gateway and acts as the merchant-of-record for the acquirer, servicing its submerchants (customers). All transactions are aggregated under one master merchant account and all funds are settled in the PayFac’s bank account. The PayFac is responsible for paying out its submerchants. Payfacs handle onboarding, risk, compliance and reporting for their customers, and are responsible for any chargebacks.
• PayFac as a Service: PayFac as a Service is a model that allows SaaS companies to take advantage of all the benefits of being a PayFac without the upfront investment and ongoing overhead. The software provider markets integrated payments as features in their software, under their brand, while earning revenue from payment transactions.

Full PayFacs earn higher profits and have more control of the end-to-end experience, but initial investments and ongoing operating costs are high. Your business must process large volumes of transactions to generate a positive ROI.

Becoming a registered PayFac requires setting up a payment gateway and providing merchant accounts and all the operational services including underwriting, compliance, fraud monitoring and prevention, chargeback management, reporting and customer service.

Here is a summary of the steps it takes to become a registered Payment Facilitator:

1. Register with an Acquiring (“Sponsor”) Bank: This requires a thorough audit of business plans, financials, technology and operational processes.
2. Set up a payment gateway: Build or partner with a gateway provider to facilitate the secure transmission of sensitive payment data for validation and processing. Connect with credit and debit networks, alternative payment methods and digital wallets in each region or country you plan to offer services.
3. Establish a merchant account and funding capabilities: Funds from all approved transactions will settle into an account used to pay out sub-merchants.
4. Develop underwriting, risk and compliance policies: Document processes for fraud monitoring, chargebacks, and underwriting policies such as credit checks, Know Your Customer (KYC) and Anti-Money Laundering (AML).
5. Comply with data security standards and regulatory requirements: Obtain Level 1 PCI DSS certification to ensure the security of sensitive data. Validate compliance and renew card brand and money transmitter licenses annually.
6. Build a merchant management system: Implement report dashboards, payout systems, tax reporting and chargeback dispute management systems.
7. Build a support infrastructure: Hire and train customer service teams to help merchants with questions about payment acceptance.

Does becoming a full PayFac sound complicated, risky and expensive? Fortunately, there’s a better way to bring payments in-house: partner with a registered Payment Facilitator to provide payments as a feature in your software, under your brand, without significant costs and overhead. You’ll earn revenue from your submerchants’ transactions—typically .50% - 1%—and free time for your teams to focus on your core software.

You’ll benefit from becoming a PayFac without the upfront investment or ongoing overhead. Your customers will enjoy instant onboarding and streamlined payment acceptance.

Instead of building the technology, processes and support infrastructure into your platform to support a full-fledged PayFac offering, you can tap into the heavy lifting already done by a registered PayFac and white label their services as features in your software. The PayFac becomes your third-party partner behind the scenes, allowing you to bundle payment acceptance into your software while benefitting from the ideal combination of fast time to market, increased revenue and reduced risk.

Here's all It takes to tap into a PayFac as a Service solution for embedded payments:

1. Sign up with a registered PayFac to white label their services: Research their capabilities and terms regarding revenue share, sub-merchant portability and early termination fees.
2. Integrate payment acceptance features in your software: Make it easy for your customers to initiate payments from the same software they use to run their business. Transaction information seamlessly flows through to customer management, account reconciliation and reporting systems.
3. Offer a frictionless onboarding experience: An application API allows customers to sign up for payments and submit necessary business information in just a few clicks, typically getting same-day approvals to start accepting payments.
4. Set up a pricing program aligned with your business model: Bundle the cost of acceptance into your software subscription tiers, add a marginal fee above the transaction costs you’re charged by your PayFac partner, or offer one simple, flat rate for payment acceptance.
5. Support customers: Become the front-line contact for any questions or customer problems about payments.

PayFac as a Service offers ISVs a quick and convenient way to monetize payments on their platform without developing and managing all the core competencies in-house. Developers and staff can focus on their core software and business operations, allowing them to attract new customers and create better lifetime value.

Embedded payments have effectively reduced friction in boarding, pricing, and funding processes by aggregating sub-merchants under a master account held by a registered payment facilitator.

Here are the benefits for ISVs:

1. Monetize payments: Increase recurring revenue 2–5x per customer versus a stand-alone software subscription [3].
2. Enter new vertical segments: Eliminate barriers of a previously small total addressable market or high customer acquisition costs [3].
3. Quickly get to market: Use developer-friendly APIs to integrate payments and onboarding through your software.
4. Own your brand: White-label payments as a feature under your brand.
5. Instantly onboard merchants: Replace time-consuming individual merchant underwriting practices with elegant signup for immediate payment acceptance.
6. Simplify compliance: Increase data security to protect against fraud and data breaches. Reduce PCI DSS compliance requirements.
7. Keep up with payment trends: Quickly activate new features as they become available.
8. Focus on your business: Eliminate the overhead and investments of operating a full PayFac.
9. Monitor and measure success: Gain insights into sub-merchant transactions and track your payment revenue growth and profitability to define success strategies.

Increasingly, businesses are turning to purpose-built SaaS platforms that offer specialized features to meet the needs of their vertical market: fitness centers, hair salons, subscription services, home repair and maintenance, childcare/education services, property management, retail, restaurant, and more. The ability to accept payments from within the same software used to manage a business drives value and efficiency.

Here are the benefits for sub-merchants:

1. Boost operational efficiencies: Businesses can speed up the checkout process and minimize human errors, giving staff more time to concentrate on higher-value tasks that truly matter.
2. Simplify workflows: Seamlessly integrate payment transactions into your everyday business software, streamlining processes for smoother and more efficient operations.
3. Enhance the customer experience: Your customers will love the faster checkout experience whether they're making payments online, in apps or through invoices and recurring subscription plans.
4. Gain actionable insights: Integrated payments eliminate the hassle of gathering information from multiple systems. As a result, business owners can easily track company performance and analyze customer purchase behaviors across various channels, departments, and locations.

Independent Software Providers (ISV) increasingly embed payments into their software to create a seamless, branded experience for their clients so that transaction data automatically flows between systems.

ISVs are interested in differentiating their solutions by offering more than credit card payments. They need a simple way to offer merchants the ability to accept cards, bank transfers, and various alternative and local payment methods. An advanced developer platform should have all the tools and resources necessary to integrate payments quickly and easily within your software.

Merchant onboarding must be swift and accessible through an automated white-label online form or an Applications API that allows them to create customized workflows. Know-you-customer (KYC) data must be easily captured and validated, which leads to higher approval rates.

ISVs prefer providers that support Split Payouts so that they can automatically receive their share of service fees directly from their merchants' accounts as a part of each transaction. The ability to automatically settle one payment among multiple bank accounts simplifies reconciliation, especially for companies that use multiple providers.

Discovering the optimal PayFac as a Service partner that aligns seamlessly with the needs of your business and the customers you serve necessitates a comprehensive assessment of various functional aspects and support capabilities.

Look for a PayFac as a Service provider that:

• Offers an outstanding developer experience: Choose a PayFac that offers a choice of integration methods to connect their services to your software. A single payments API makes it easier to join everything together without causing confusion.
• Handles an array of payment types: Pick a partner that supports an array of traditional and alternative payment methods, from credit and debit cards to ACH bank transfers and eCash. Consider the kinds of payments your business takes now and those you might need in the future, especially as you expand to new regions.
• Ensures swift customer onboarding: Work with an experienced organization with the systems and processes necessary to get your sub-merchants up and running in minutes. Look for a company that offers a white-label branded experience and supports digital agreements such as DocuSign. Onboarding should support multiple languages, locations and currencies.
• Helps you stay compliant and secure: Make sure the PayFac you choose adheres to regulatory standards like PCI-DSS that create a safe and secure environment. Make sure they offer advanced security technology, including tokenization, network tokens, encryption, and fraud detection.
• Has transparent pricing: Check out the costs and pricing of different PayFacs to ensure you're getting good value. Look for ones that explain their prices clearly and show you exactly what you're paying for.
• Provides outstanding customer support: Make sure your provider offers high-touch, dedicated support for developers and customers. This might include 24/7 phone and email help, as well as online resources like FAQs and guides.
• Generates useful reports and insights: Be sure your provider offers tools to track transactions, see your account balances, and manage your payments. Accessing rich payment data helps you understand your sub-merchants and their customers. It's ideal to find a partner that helps you make sense of all that information.
• Grows with you: Choose a PayFac partner that can scale as your business grows. This means handling more transactions, entering new geographies, offering alternative payment methods and keeping up with evolving technology.

Sources:

1. Juniper Research, Feb 2023
2. Payment Facilitator Global Opportunity Analysis and Industry Forecast
3. Fintech Scales Vertical SaaS, Aug 2020