9 PayFac Platform Myths and Why They’re Wrong

For any ISV or SaaS business deciding to implement embedded payments, there are now many solutions and options. However, there are also a lot of misconceptions about PayFac platforms that can lead you to make a mistaken decision.

The financial world is changing rapidly and fintech is truly upending the old bank and ISO methods for accepting and processing payments. New solutions and providers seem to appear every day and many of them are deliberately blurring the lines between offerings and solutions to create uncertainty and doubt about what the right approach should be. Here are nine myths about PayFac platforms that are rooted in that past and in an environment of fear, uncertainty, and doubt.

1. You have to decide on a payments solution right now because you won’t be able to change or pivot later

Creating a false sense of urgency is a key element in the Fear Uncertainty Doubt (FUD) playbook. It’s nonsense. Yes, there are costs to changing directions and solutions, but they aren’t insurmountable. In particular, you can start small and grow no matter what. Good providers will offer options and scalability that will make it easy to grow as your business matures. For example, perhaps you start out using a PayFac-as-a-Service (PFaaS) solution but later expand to become a PayFac. 

2. A PayFac or PayFac platform is the same as an ISO

Both ISOs and PayFacs accept and process payments on behalf of their customers. But the ISO is really just a reseller, selling the services of a payment processor or acquiring bank. They sell merchant accounts issued by processors and/or acquiring banks — they can’t issue merchant accounts on their own. In almost all cases, ISOs are “hands-off” in that they aren’t directly involved in the process outside of actually accepting card data and processing payments. 

In contrast, PayFacs are actively involved in the payment process and handle underwriting, onboarding, settlements, reporting, and chargebacks, along with payment processing. They are essentially mini-payment processors. This means that for an ISV or SaaS business, the PayFac model lends itself far, far more closely to integration into the business’ platform, reducing friction and increasing usability dramatically. And PayFac platforms like PayFac-as-a-Service solutions simplify the process of offering payment acceptance, making them an even more attractive solution to SaaS businesses. 

3. You have to build an infrastructure to act as a PayFac 

It is absolutely true that becoming a PayFac requires more work, and that includes building some infrastructure, taking on new tasks and roles, and redoing some aspects of your business. The cost of doing that by yourself is indeed large and can exceed $1 million. However, modern solutions have arisen in PayFac platforms and PFaaS platforms. These solution providers take on much, if not all, of the infrastructure, implementation, and maintenance work so that the operational and investment burden on the ISV or SaaS business is significantly less than with other solutions. Businesses that can use PayFac don’t have to have millions on hand to do it.

4. You take on too much risk becoming a PayFac

Becoming a traditional PayFac does mean taking on the risks of payment processing. And some business types are more qualified as “PayFac eligible” business types as opposed to those that are already considered high risk industries. However, a wide range of organizations are well-suited to handle this risk, given the level of reward.

Small- to mid-sized organizations can use a PFaaS solution because these providers take on a portion of, or even all, the risk involved. Their customers can choose what level of risk and exposure they want to handle themselves and what level they want the PFaaS provider to handle for them.

5. PayFacs make 100% of revenue generated from payments

It is true that PayFacs do not have to share revenue with third parties, and for most customers, it is an exciting possibility and why so many are interested in a PayFac platform as a solution. One of the most popular PayFac use cases is the story of Shopify becoming a PayFac and making more revenue from payments than its core business is often repeated as a reason to consider PayFac. It should, however, come with a caveat. There are also a variety of expenses, particularly if you build a PayFac line of business from scratch. There are basic costs you must bear, including startup, operational, legal, compliance, personnel, and risk expenses — all of which can become prohibitive if you are not a skilled payment expert. Again, modern solutions like PFaaS can alleviate these expenses by offering a foundational infrastructure, customer service, and expertise to simplify and reduce these costs to a point where the return on investment becomes clear.

6. The cost or overhead of becoming a PayFac is way too high

Here is the flip side to the previous myth. It is a reality that the cost and overhead of becoming a PayFac is relatively high — just see myths #3 and #4 above. And, if you choose to become a pure PayFac by yourself without help from external solution providers, this is a valid criticism — the cost can get as high as, or even higher than, $1 million. It doesn’t mean that it isn’t worth doing or there wouldn’t be companies doing it and doing it successfully. Again, building your own PayFac infrastructure isn’t the only path to payment monetization. PFaaS and PayFac platform providers can simplify the process and provide much of the infrastructure and operations pre-built and pre-managed, effectively cutting the cost and overhead dramatically. 

7. You have to continually update and adapt if you become a PayFac

It’s true that the world of payments keeps shifting, and there are continual nuances and legal requirements you must meet to learn and adapt. For example, if you expand to new markets, you can expect to be met with new challenges to solve and divergent preferences to meet, such as new currencies, payment methods, or regulations. As a traditional PayFac you will have to keep investing in new technology to keep up. However, if you work with a respected PFaaS provider or PayFac platform, for example, they will continually provide updates and enhancements, keeping you current with the latest technology. 

8. You will dilute your focus by becoming a PayFac

This is perhaps the silliest myth and the one most likely to unnecessarily spook a SaaS business or ISV. Why? Because they know that a focus on their customers is key to ongoing success and keeping their business growing. It is no coincidence that customer retention is a key metric for these businesses. PayFac industries and PayFac applications range from the non-profit industry to accounting and sports and camp management. These vertical software providers run payments alongside their existing business without diluting their focus.

But the reality is that adding a payment solution in the right way, like by using a PFaaS, means outsourcing all the payment complexity, like compliance and hiring a team, freeing up more resources for the core business. Adding embedded payments to software should improve customer experience, add more functionality and value, and ultimately increase customer retention.

9. It takes too long to become a PayFac

There is some truth to this myth if you are planning to become a full-fledged PayFac. Getting up and running can take between one year to 18 months, and reaching profitability another several years — depending on initial costs and processing volumes. However, as you’ve probably guessed, alternative PayFac platform solutions can help you bypass years of work. 

PFaaS solutions require a minimal level of development lift, allowing SaaS businesses to onboard merchants in a matter of weeks. With automated underwriting, online applications, and same-day approvals, PFaaS makes it faster than ever to take advantage of all that the PayFac platform has to offer. 

What other myths have you heard? Adding payments is an important and complex undertaking and should be thoroughly thought out. That means looking closely at all the possible solutions, including PayFac platforms like PFaaS, and evaluating which is best for your particular situation. Exact Payments is always happy to discuss the range of options with any potential customer. Get in touch for a consultation today.