What does it take to become a PayFac?

For many software platforms, becoming a Payment Facilitator or “PayFac” seems like an exciting way to improve your product by creating a frictionless and instant onboarding experience. In fact, it’s estimated there are over 10,000 B2B SaaS companies in the United States that could benefit from operating as a PayFac. However, there are just a few hundred registered PayFacs in the United States. So why the disconnect?

The truth is that becoming your own fully registered PayFac is a pain.

In order to get a clearer picture, let’s go through the steps it takes to become a registered PayFac.

Step 1: Register with an Acquiring Bank

Step one is to find an acquiring bank that is willing to sponsor you in facilitating payments for your sub-merchants, or customers. This will involve bringing them your business plan, financials, and allowing them to audit your technology, systems and processes. They will ask about your ability to underwrite transactions, analyze fraud and handle chargeback disputes. You’ll also have to show them how you’ll prevent money laundering, credit card theft and fraudulent payments. This requires hiring consultants, additional staff and either building out new systems to monitor/detect these activities or paying monthly software fees to access pre-built risk monitoring systems. Keep in mind how important these systems are, because if you make any mistakes and approve a fraudulent transaction or approve a sub-merchant who can’t pay their bills, the liability falls on you! Depending on the acquirer, this process can take 6+ months to complete, and the costs vary wildly depending on your specific niche vertical, your acquiring partner, and the length of time it takes to complete the contract negotiations (attorneys are not cheap).

Investment Required to complete Step 1:

• Time: High
• Cost: Moderate
• Expertise: High

Step 2: Choose your Payment Gateway

Next, you’ll need to choose a payment gateway in order to route the payments flowing through your system to your new processing partner. You can either spend a year and hundreds of thousands of dollars building your own gateway or choose one of the many pre-built gateways to integrate into your software. With hundreds of options to choose from, each with their own features, APIs and costs, it could take anywhere from one to four months to decide, negotiate and integrate your chosen gateway. Keep in mind that these gateway providers typically charge a per transaction fee and a monthly fee (the standard is usually $10/Month/Merchant and $0.05-$0.06 per transaction. And these fees are on top of whatever rates you negotiate with your acquirer.

Investment Required to complete Step 2:

• Time: Moderate
• Cost: Moderate
• Expertise: Moderate

Step 3: Obtain your PCI DSS Certification

If you decide to build your own gateway or implement your solution in a way that puts your system within the scope of PCI compliance, then you will also need to obtain your Level 1 Payment Card Industry Data Security Standard (known as PCI DSS) certification. This certifies your platform is secure while transmitting data from your software to the backend processor, ensuring cardholder data isn’t compromised and that transactions are processed in a fast and compliant manner. This process can take months and tens of thousands of dollars depending on your specific use case, and also must be renewed regularly.

Investment Required to complete Step 3:

• Time: High
• Cost: High
• Expertise: Moderate

Step 4: Buy or Build your Merchant Management Systems

The next step towards becoming a payment facilitator is creating a merchant management system. Depending on whether you choose to build these merchant dashboards, underwriting systems, payout systems, and dispute management systems yourself or pay a third-party provider, it can take months of time and significant development costs or create an expensive, and ongoing, licensing fee for your company. These systems can cost upwards of ten thousand dollars per month and have ongoing fees per merchant that you Underwrite through the platform. Keep in mind how important these systems are as they control the underwriting process and payout process for your sub merchants, which you are liable for if you get it wrong.

Investment Required to complete Step 4:

• Time: Moderate
• Cost: Moderate
• Expertise: High

Step 5: Write and Implement your Underwriting and Compliance Policies

Once all of the above setup is complete, you’re still not done yet. Now, you need to create your compliance policies and procedures for underwriting, fraud monitoring, and chargeback resolution. You have to ensure that only lawful businesses that comply with your card network and acquirer rules are onboarded. You have to build your underwriting policies to ensure you have the proper AML, KYC, and anti-money laundering protocols in place. Unless someone on your team is a compliance expert, this often involves bringing in a consultant to make sure you do it right the first time.

Investment Required to complete Step 5:

• Time: Low
• Cost: Moderate
• Expertise: High

Step 6: Pay your Registration Fees

Next you have the pleasure of paying your licenses and regulatory registration fees. You have to register with each of the card brands, that will be $5,000 to Visa and $5,000 to Mastercard. If you were hoping to control the flow of funds, then you will need to obtain Money Transfer Licenses in every state you plan to operate in. These Money Transfer Licenses typically cost about $150,000/Year if you plan to operate in all 50 states.

Investment Required to complete Step 6:

• Time: Moderate
• Cost: High
• Expertise: Moderate

Hopes of Expanding Internationally

Each of these timelines and costs can multiply exponentially if your company has any hopes of expanding outside the United States. All this to say, becoming a registered PayFac is a process that can take months if not years, and many millions of dollars to accomplish. For small startups, becoming a registered PayFac isn’t just prohibitive, it’s absolutely out of the question. In order to make a process like this worth the time and money, you would need to be processing billions of dollars each year in transaction volume. And while many startups may have their sights set on such volumes in the future, what are you planning to use in the meantime?

What about Stripe, Square, and Braintree?

For many B2B SaaS companies, this is why options like Stripe, Square, and Braintree are so attractive. The beauty of these options is they’ve gone through all of the hard work to become a payment facilitator and made it so any software company can integrate into their APIs in a matter of days. Through these services, you can enjoy some of the benefits of payment facilitation like an instant and frictionless onboarding experience, but companies who use these services typically reap none of the economic benefits from the payments flowing through their system. The entire margin to be gained off of credit card transaction processing goes directly to Stripe, Square or Braintree, with nothing going to you, the company who put in the hard work of acquiring those customers. Many software companies don’t realize exactly how much margin they are giving away to enjoy the convenience of these services. Depending on your industry, average ticket, and processing volumes, you could be leaving more than 100 basis points or 1% of margin on the table. Think about what your business could do with all of that additional margin if you were earning revenue on every payment flowing through your system.

Evolution of PayFac-in-a-Box

In the last few years, this has led some companies to look at what we call “PayFac-in-a-Box” options. These companies have attempted to cut down the time and expense of implementing a payment facilitation program, and offer many of the systems and technology you need to get up and running as a PayFac, but still can take anywhere from tIn the last few years, this has led some companies to look at what we call “PayFac-in-a-Box” options like Finix, Payrix, or Infinicept. These companies have attempted to cut down the time and expense of implementing a payment facilitation program, and offer many of the systems and technology you need to get up and running as a PayFac, but still typically take more than six months to fully implement with hundreds of thousands of dollars in upfront costs. And, at the end of the day after you’ve completed the signup and integration process, they leave all of the liability and day to day operations on your company — meaning you will be investing your team’s time and energy into becoming payments experts, instead of focusing on your core business. If you want to dive deeper into what it actually looks like to operate as a PayFac, check out this article: The day-to-day of operating as a PayFac.

To us, even 6 months is far too long, too expensive and too distracting for integrated software vendors (ISVs) and SaaS companies, taking valuable time and money away from their core competencies and products.

Welcome to PayFac-as-a-Service

Tilled is the pioneer of a new model we call Payfac-as-a-Service. This new model offers the same streamlined implementation process as managed PayFac providers like Stripe, Square, and Braintree. Any software company can come to our website, access our sandbox and developer center and have our API running on their platform in a matter of days. Tilled allows your business to enjoy the instant and frictionless onboarding experience you expect from a PayFac, while also paying you the lion’s share of the processing revenue for the payments flowing through your software system. All without asking you to take on any additional liability or overheads.

At Tilled, we have already done the hard work of negotiating with acquiring banks and processors, built our own inhouse Level 1 PCI compliant payment gateway, and obtained the necessary certifications and licenses. On top of all of that, we manage all of the underwriting, fraud monitoring, and chargeback management so you don’t have to.

For far too long options like Stripe and Braintree have had a monopoly on the market, and have charged far too much for their services. For B2B software companies looking for a better option that provides all of the benefits with none of the hassle, it’s time to try Tilled and experience Payfac-as-a-Service.