A Comprehensive Guide To Integrated Payments and Payment Facilitation (PayFac) For Software Platforms

Introducing payment facilitator: What is a PayFac?

Independent software vendors have the potential to address $35 trillion in payments, or 15% of the worldwide total, by integrating payments into their platforms. With this fact in mind, many ISVs and SaaS businesses are choosing to become payment facilitators, giving them the ability to earn an extra revenue stream from the payments processed on their platform. Payment facilitators, or PayFacs, are entities that process payments on behalf of their merchant clients. PayFacs build the infrastructure, develop processes and policies, maintain compliance, and shoulder the risk of payment processing. As technology advances, many forms of the PayFac model have come into existence. Keep reading to get a full history of online payment processing, including the various embedded payment models and forms of payment facilitation available to SaaS providers.

History of online payment processing

Online payment processing started in the mid-1990s with the first secure sockets layer (SSL) encryption for transactions on the web. This allowed for secure online credit card processing. In 1998, PayPal launched, becoming one of the first widespread online payment processors. Its growth was fueled by eBay, which acquired it in 2002. The 2000s saw an explosion in online payment solutions and the rise of the first payment gateways. These platforms sat between merchants and the card networks, providing APIs and dashboards to easily process card payments for online businesses.

Recurring billing models became popular in the 2010s, led by the rise of SaaS companies. Payment gateway providers responded with robust subscription management and automated billing capabilities. For online payment processing, the 2020s are seeing newer payment methods gain traction, like digital wallets, QR codes, cryptocurrency, and buy now pay later financing. Traditional payment providers have been challenged by Payment Facilitators (PayFacs) and now, Payment Facilitation-as-a-Service (PFaaS). Key focuses for online payments for software platforms now include the ability to generate new revenue and improve customer experiences through embedding payments using developer-friendly APIs.

What does it mean to monetize SaaS payments?

For SaaS businesses, recurring billing and subscription management are crucial. These revenue streams are their lifeblood. But they aren’t the only sources of revenue.

Monetizing SaaS payments can be a dramatic boost to bottom-line revenues. In fact, one of the largest SaaS players, Shopify, has gone on record saying that payment revenues actually rival their subscription revenue. In order to implement SaaS payments like this, a SaaS platform will typically utilize one of several embedded payments models, including becoming a PayFac or partnering with a PFaaS provider.  

Vertical SaaS companies embed payments into their offering to enable their customers to accept online payments. As payments are processed on the platform, a small fee is collected from each processed credit card transaction. SaaS players earn a percentage of this fee, creating a sustainable revenue stream outside of subscriptions. 

Earning an additional revenue stream is not the only benefit of embedded SaaS payments. Models like payment facilitation can also streamline customer experiences, offering convenience when accepting and making payments online. Additionally, an embedded SaaS payment experience often makes the product offering stronger. As SaaS clients come to rely on payments for everyday use, retention rates go up.

Using payment platforms

Embedding payments can significantly benefit a SaaS platform by enabling new monetization models, better customer experiences, and higher customer retention. However, adding a payment platform can be a very different experience based on the kind of approach that a SaaS business chooses. 

One type of payment model is the ISO model and refers to partnering with an independent sales organization (ISO) to offer payments. Working with an ISO means giving up ownership in the payments process and also removes much of the customer value as payments are not fully integrated into the software. While ISOs do offer the ability to hand off regulatory and compliance operations, SaaS players lose oversight of the payments onboarding process as well as ongoing customer service opportunities. 

The best option for integrating with a payment platform is typically done by working with a PFaaS provider to embed payments using APIs. The best solution providers offer extensive expertise in payments, flexible APIs, great reporting and analytics, and optimized support for SaaS clients. PFaaS providers handle the complexity of PCI compliance, fraud prevention, global payments, and more on behalf of the SaaS platform.

Key capabilities to evaluate when looking at payment platforms include:

• Payment facilitation expertise, ensuring seamless integration and operation.
• Intuitive payment APIs and SDKs that simplify the integration process.
• Flexible pricing and merchant account options, giving you control over your payment process.
• Payment reporting and analytics to gain insights into your transaction data.
• Fraud protection and security to safeguard your transactions and sensitive customer data.
• Global payment methods and currencies to cater to a diverse customer base.
• Sub-merchant platform, enabling you to onboard sub-merchants effortlessly.

With the right payment platform, a SaaS business can offload the costs and complexities of managing payment operations. This allows SaaS businesses to focus on delivering an exceptional core product, enabling payment acceptance with minimal friction. The result will be happier customers, reduced churn, and ultimately higher long-term profitability.

What is integrated payments software?

Integrated payments software refers to solutions that enable the direct acceptance of online payments within a software application, rather than requiring a separate payments process. This embedded payments capability allows SaaS businesses to monetize transactions that occur on the SaaS platform.

Some key benefits of integrated payments software include:

• Expanded monetization. New revenue is generated from payments processed on the platform.
• Smoother user experience. Customers can conveniently generate invoices and request payments without leaving the SaaS application.
• Increased conversion. A checkout process with less friction boosts completed transactions.
• Deeper data insights. Transactions provide rich usage data to inform product and marketing.

Top integrated payments software solutions provide robust APIs and SDKs to enable accepting payments from within the SaaS interface across web, mobile, and in-person channels. They handle the entire transaction lifecycle from acceptance to payout while staying compliant.

Choosing the best payment processing software

There are a great number of factors to consider when choosing payment processing software. Here are some of the key considerations when choosing payment processing software for a SaaS business:

Ease of integration

Look for well-documented APIs, developer-friendly SDKs, and support from the payment processing provider to ease integration.

Recurring billing

You’ll want control over billing. Subscription management features, in particular, are crucial for payment processing software and typical SaaS billing models.

Payment methods

Make sure to evaluate a provider’s coverage of all the payment types you need — credit and debit cards, digital wallets, bank transfers, gift cards, etc.

Global payments

If you plan on selling internationally, ensure that there is support for the relevant currencies, taxes, and regulations in the countries you are targeting.

Fraud protection

Your provider should have robust risk and fraud tools to minimize chargebacks and protect your SaaS business.

Reporting and analytics

You should look for good reporting and analytics tools. Payment data insights can inform marketing, product, and revenue operations and can be seamlessly integrated within your SaaS platform.

Pricing model

Assess the transaction fees, monthly costs, and scalability to ensure a fit. Good solutions will offer pricing flexibility and the ability to customize partner programs rather than taking a one-size fits all approach.

PCI compliance, underwriting, and data security

Your payment processing software should handle the compliance burden, managing PCI, licensing, and checks for underwriting like Anti-Money Laundering (AML), Know Your Customer (KYC), Know Your Business (KYB), and OFAC regulations.

Brand customization

For a SaaS business, customer loyalty and retention are paramount so it is important to keep branding and consistency throughout the customer experience. Look for the ability to white-label payment pages/flows to match SaaS branding.

Credibility

Choose an established, reputable payment processing software provider known for reliability and security.

How to implement integrated payments

There are several choices when implementing integrated payments. Much of your decision-making will revolve around the stage your business is at right now, what level of resources you can put into the project and the desired level of integration. The most common options include the following payment models.

ISO referral model

SaaS brands that enter into a referral partnership with an Independent Sales Organization (ISO) refer their clients to the ISO and earn a portion of the processing revenue. The benefit of this option is that it requires very little effort on the part of the SaaS provider; however, that comes at the cost of revenue-earning potential and product customization.

Becoming an ISO

Rather than partnering with an ISO, SaaS companies can become ISOs. To do so, the software company must enter into a partnership with an acquiring bank, allowing them to underwrite and service merchant processing accounts on their own. As an ISO, you’ll rely on your relationship with banks and utilize third-party payment technology to equip your clients with payment processing capabilities. Harnessing existing solutions greatly reduces the scope of development.

Becoming a PayFac

An alternative to partnering with a managed PayFac, this option involves building a full payment facilitation infrastructure from the ground up. Becoming a PayFac can easily take more than a year, if not several years. However, for businesses that process more than $100 million in payments, becoming a full PayFac can be one of the most lucrative integrated payment options in the long run.

Using a PFaaS solution

Partnering with a managed PayFac provider – also known as a PayFac Lite, PayFac-as-a-Service, or PayFac Out-of-Box solution – allows you to enjoy greater control over the end-user experience while increasing your monetization potential. Your PayFac partner will provide you with the software and tools you need to set up merchants with merchant processing accounts and embedded, customizable payment functionality. Customers are onboarded as sub-merchants under the PayFac partner’s master merchant processing account.

This option is ideal for SaaS companies who want to embrace the benefits of the PayFac model without assuming all the risks and a multi-year in-house development process. A good PayFac tech partner like Exact Payments can get you up and running in a matter of days.

Considerations for integrating payments

Regardless of which model of integrated payments you go with, there are going to be a set of steps you need to take in terms of your software platform and in terms of your business operations. 

The following are all considerations for integrating payments, even if you decide not to implement or tackle all of them:

Integration

Assess the integration complexity of the payment provider you are considering and take a look at the technical requirements to determine if you can meet them. Is the API intuitive and easy to implement?

Customer experience

Design an intuitive, branded payment experience within your SaaS workflow. Avoid disrupting the user experience. You may also build logic to handle payment notification webhooks, and process results back into the SaaS platform.

Offer data insight

Leverage payment data to provide insights on feature usage, churn risk, revenue trends, and customer lifetime value. Implement customer dashboards or pages within the SaaS to provide transaction summaries, history, and receipts.

Data security and compliance

Ensure compliance and data security by working with the payment provider to implement fraud filtering, apply encryption and tokenization, manage chargebacks, and more.

Automate accounts receivable

Develop internal financial reconciliation processes to match payment inflows with bank statements.

Online payment API

Online payment APIs are designed to help SaaS businesses embed payment acceptance into their software in order to improve payment processes and enhance customer experiences. What online payment API features should developers look for? Here are some of the key features to look for when evaluating payment APIs:

Onboarding and underwriting

Payment APIs should let you embed the onboarding process directly into your software. Doing this creates a unified customer experience and a frictionless flow for merchant clients to sign up to accept payments. Your payment provider should build in the capability to underwrite your clients to assess the risk they pose as a part of the onboarding and enrollment process. This account approval process should happen quickly — ideally on the same day of applying.

Payment Processing

Payment APIs enable developers to integrate payment processing capabilities into their software products. While the exact functions will vary depending on the provider, you can expect features such as recurring payments and support for multiple payment options and currencies.

Ledger and Reconciliation

A payment API should log every event in the payment system, including when a merchant is onboarded, when transactions are authorized and settled, merchant/partner funding amounts, and merchant/partner fees. Transactions should be cross-referenced and reconciled, and reporting should be available to ensure fees are assessed correctly as per the merchant agreement.

Tokenization

An online payment API that handles tokens will allow the SaaS platform to securely store customer payment credentials for future billing. This will create a better experience and connection for repeat customers.

Fraud Protection

The online payment API should have robust client-side and server-side tools to help spot fraudulent transactions and handle chargebacks. If not handled intelligently these can be a significant factor in overall revenue and potentially customer experience.

Payouts

An online payment API should include the ability to pay out your merchants. The Ledger should feed a daily file with funding instructions for each merchant. Payment API capabilities should include fee and payout schedules at the portfolio or segment level, as well as calculating fees, net revenue amounts, and depositing funds in a connected sub merchant account or bank account.

Account management

A good API will have tools to save customer profiles, manage payment sources, update expired cards, and more. These are also critical for a good customer experience over time.

Reporting

An online payments API should have payment reporting and analytics capability so the SaaS and its clients can gain insights from transaction data. Good reporting is an important factor in spotting potential new product offerings and sources of revenue.

Documentation

Online payment APIs should have clear documentation and developer resources to make integration quick and seamless. Good documentation is an important factor in getting up and running quickly.

Testing

The online payments API provider should provide a sandbox and test modes to validate payments integration before launch.

Other payment integrations options

Although API integration is the most common payment integration option for SaaS businesses to adopt, there are other payment integration options. These include the following:

Platform-specific SDKs

Some payment providers offer payment integration SDKs that are customized for specific platforms like iOS or Android instead of a generic API. These simplify integration within each platform’s native environment.

Payment buttons

These are one of the most basic payment integration options. Almost anyone can use them without the need for software engineering assistance. Services like PayPal allow the creation of payment buttons that can be embedded in apps or websites to collect payments without complex integration. This solution is very limited and really just allows for collecting payment with no other form of integration.

Redirects to hosted payments

Using this option, you can send users to a hosted payment page on your provider’s domain, then redirect back upon completion. While this method is functional, it does not offer a frictionless payment flow. The advantage is that it is easier to implement, but it disrupts the user experience.

Plugins for app platforms

Plugins for platforms like WordPress are a payment integration option that allows businesses to enable payments without coding. This solution only works for the specific platform and the range of uses endorsed or anticipated by the plugin developer.

Direct integration with payment processors

Advanced developers can directly integrate with payment gateways and processors without using an API, but this is complex and requires a significantly greater level of cooperation and engineering skill.

SaaS Payment Solutions

As the SaaS industry grows more competitive, business leaders are looking for more ways to differentiate their offerings, improve client retention, and generate more revenue. Both businesses and consumers have more options than ever to meet their needs across the organization. Go-to-market strategies like product-led growth and vertical SaaS have allowed software platforms to deliver more value for their clients, opening up more opportunities for sales in their total addressable market. 

Another promising go-to-market strategy includes the idea of embedded payments. Many SaaS players are turning to SaaS payment solutions to supplement and even surpass their subscription revenues. By capturing a percentage of the processing fees collected from each transaction processed on their platform, SaaS businesses can generate a new stream of revenue, improve client experiences, and increase retention. 

There are a range of SaaS payment solutions available to embed and monetize payments. The most popular methods include working with an ISO on a referral basis, becoming an ISO, or using some form of the payment facilitator model like PFaaS. Each model has pros and cons that businesses should weigh when considering implementing a SaaS payment solution. The next few sections detail the options, explaining how they work, their benefits, and important cost considerations. You may also read more about these options in our white paper, “How To Choose an Integrated Payment Model For Your Software Platform.”

What is an ISO?

ISO stands for Independent Sales Organization. An ISO is a business that sells and markets payment processing services on behalf of a payment processor or acquiring bank. ISOs act as an intermediary between merchants and processors. They sell payment acceptance capabilities to merchants and provide customer service but rely on processors for the back-end transaction processing.

ISOs typically take a percentage of every transaction as a commission from the processor. ISOs need to partner with a payment processor — like Chase Paymentech or Fiserv — in order to provide payment services. ISOs provide value to merchants by sourcing the best processing rates and providing account management and support.

How Do ISOs work?

ISOs partner with one or more payment processors and acquiring banks to resell payment processing services to online merchants and in-person retailers. When an ISO sells payment processing capabilities to a merchant, they open a merchant account with their partner processor on the merchant’s behalf.

The processor provides the back-end technology and services to authorize and settle transactions for the merchant. The acquiring bank provides the merchant’s actual bank account into which funds are deposited. The ISO typically provides customer service, support, and account management to the merchants they enroll.

ISOs earn residual commission from the processor on each transaction run by their enrolled merchants. This may be a percentage or flat fee per transaction. The processor also takes a percentage of the transaction amount as their processing fee before settling the net funds into the merchant’s bank account. The ISO and processor split the markup, but revenue share can vary.

ISOs only provide front-end sales and account management; the processor handles all back-end transaction technology, infrastructure, and regulatory compliance. By partnering with multiple processors, ISOs can optimize costs and provide better rates to their merchants. So in essence, ISOs source merchants and share the payment revenue with their partner processing providers who handle the transaction settlement.

ISO Referral Partnership

An ISO referral partnership is an arrangement where a business entity refers merchants to another ISO or payment processor in exchange for a referral fee.

The referring party passes merchant leads on to an ISO so that the merchant can accept payments. In exchange, the referring ISO receives an ongoing residual commission on all transactions from those referred merchants.

In the case we are considering here, a SaaS platform or ISV would become the referring ISO, allowing them to provide payment services to customers more directly and cutting out the ISO middleman.

Referral partnerships work through tracked promo codes or affiliate links so each party gets credited for their role. Terms are defined in a referral agreement that specifies the commission structure, duration, and other parameters. Open communication and transparency between partners is crucial to alignment and optimizing value. Overall, referral partnerships are a scalable, cost-efficient model for customer acquisition and market expansion in the payments space.

Benefits of ISO Referral Partnerships

• Expanded distribution and sales reach. Leverage partners’ existing sales channels and merchant relationships.
• Broader payment capabilities. Offer payment methods and features like multiple currencies or digital wallets
• Faster time-to-market. Quickly roll out payment services without registering as an ISO.
• Reduced risk. Require lower capital investment compared to becoming a full ISO.
• Focus on core competencies. Avoid the distraction of managing regulatory complexity.
• Scalability. Growth is not limited by internal resources and capabilities.

By thoughtfully selecting an ISO referral partner, SaaS platforms can monetize payments with little to no risk or upfront investment. However, SaaS businesses should be aware that this model offers the least margin in terms of monetizing payments. 

The Drawbacks of ISO Referral Partnerships

• Lower revenue. Referral commissions are smaller than direct ISO revenue.
• Split incentives. Interests may diverge between partners over time, reducing cooperation.
• Dependence on the ISO’s performance. The SaaS relies on the ISO’s operations, support, pricing, and more.
• Limited control and visibility. SaaS businesses can’t directly control merchant accounts or payment experiences.
• Data limitations. Less access to merchant data and customer insights.
• Brand disparity. Differences in the partner’s brand from the SaaS platform’s brand can cause confusion or lost sales.
• Extra merchant friction. Additional touchpoints between two separate providers can provide more headaches for SaaS clients.
• Contractual constraints. Terms may limit flexibility to change or transfer merchant portfolios to another ISO.

How to become an ISO

Instead of referring their clients to an ISO, SaaS businesses can become ISOs themselves. Here are the key steps for a SaaS business to become an ISO to handle payments for their accounts and customers:

1. Research requirements for working with payment provider partners, especially capitalization, mandatory capabilities, and compliance processes.
2. Incorporate a business entity. Form a corporation or LLC specifically for the ISO business for risk management purposes and perform all the usual tasks to spin up a new line of business.
3. Get licensed. Acquire any required state licenses or money transmitter licenses for states the ISO will operate in.
4. Implement security controls. Have data, cybersecurity, and physical security measures in place per PCI DSS and industry best practices.
5. Contract processor partners. Negotiate an ISO agreement with one or more payment processors.
6. Integrate technology. Connect to processor APIs and reporting systems.
7. Train sales staff. Educate sales team on services, regulations, and processes.
8. Onboard merchants. Start soliciting and onboarding merchant accounts under the new ISO.
9. Provide support. Have customer service processes ready for assisting merchants.
10. Stay compliant. Maintain PCI DSS, KYC, and data security requirements as the ISO scales.

The process requires significant up-front investment and preparation across operations, compliance, partnerships, technology, and staffing — however, it enables fully controlling the merchant relationship.

Benefits of SaaS Businesses Becoming ISOs

Here are some potential benefits for SaaS businesses becoming ISOs for payment processing:

• Increased revenue. ISOs earn a larger share of processing volume than referral partners.
• Owning the customer. ISOs have full control and visibility over the merchant relationship.
• More control. Can directly manage risk, pricing, and support for merchants.
• Access to data. Receive raw transaction data to gain customer insights.
• More capabilities. Can support multiple billing models and specific features for the customer base.
• Branding. Payment experiences all stay on-brand, with no third-party touchpoints.
• Industry expertise. Build core payments competency within the organization.

By making the larger upfront investment as an ISO, SaaS businesses gain much more control over the payments value chain and customer relationship.

The Drawbacks of Becoming an ISO

• Larger upfront investment. More capital is required compared to the referral model, likely at least tens of thousands compared to no upfront costs for the referral model.
• Regulatory overhead. Must comply with complex regulations like PCI DSS, KYC, state licenses, bonding, and more.
• Revenue delays. Capital is required to cover chargebacks and potential losses before revenue is realized.
• Operational complexity. Building payment operations and support represents a significant new competency.
• Resource drain. Payment operations can distract focus from core platform competencies.
• Customer service burden. Acting as a merchant account provider comes with significant support expectations.
• Risk exposure. Direct liability for losses, fraud, and compliance violations by merchants.

Becoming an ISO essentially adds a new line of business for SaaS providers and requires new skills, resources, and focus. The tradeoffs between referral partnerships and insourcing payments must be carefully evaluated.

Payment Facilitation

A payment facilitator (PayFac) helps other businesses accept all forms of payments. It does this by setting up the systems and infrastructure for its customers to process and manage payments, reconcile transactions, provide reporting, meet compliance standards, and manage fraud and risk. The words payment facilitation refer to the process of making payments easier for all parties. Typically a PayFac will put systems and technology in place to make various steps of the process faster, safer, and simpler for its customers. 

Payment facilitation allows SaaS and digital platform businesses to onboard merchants, provide payment processing on their behalf, and handle the myriad complexities of managing transactions. The PayFac manages regulatory compliance, merchant onboarding, funding to bank accounts, and more on behalf of sub-merchants. This simplifies payments for small businesses by removing much of the friction and barriers they would otherwise face working directly with processors and banks. 

Payment facilitators simplify and tailor the payment process for their customers so that they can set up and start processing payments far more quickly. For example, a payment facilitator usually uses software to automate key compliance processes like KYC and KYB and only flags potential problems for slower manual processes. Payment facilitators also provide customer service on behalf of their customers, removing another barrier to integrating payments. Similarly, payment facilitators manage the chargeback process for their customers, again using advanced software to make the process more efficient.

Payfac Definition

A good PayFac definition is a business entity providing payment processing services to merchants. PayFacs enable businesses to accept different forms of electronic payments, such as credit and debit cards, ACH, and echecks. Payment facilitation encompasses a range of activities, including setting up and managing payment methods, processing payments, reconciling transactions, and protecting merchants from fraud. The goal of payment facilitation is to simplify the payment process for businesses and ensure that payments are secure, efficient, and accessible. 

Payment facilitators use technology to streamline otherwise manual onboarding processes, making a seller’s path to accepting payments much faster. Many software platforms have become PayFacs to own the payment relationship with their customers and to keep all the revenue from payments rather than splitting it with another party.

Here are some defining characteristics of PayFacs:

• Acts as a merchant of record. The PayFac owns the direct relationship with the payment processor and acquiring bank.
• Facilitates payments for sub-merchants. The PayFac provides payment acceptance capabilities to downstream sub-merchants.
• Consolidates transactions. Batches together transactions from sub-merchants before sending them to processors.
• Manages regulatory compliance and underwriting. Responsible for PCI DSS, KYC, etc., on behalf of sub-merchants.
• Provides payment technology. Enables sub-merchants to accept online payments.
• Offers additional services. PayFacs provide account management, support, reconciliation, and reporting for sub-merchants.
• Reduces burden for sub-merchants. Simplifies payments for small businesses by managing payment operations such as security, compliance, and regulatory overhead.

What is a PayFac platform?

A PayFac platform refers to the technology, tools, and services offered by a Payment Facilitator (PayFac) to enable and manage payments for sub-merchants. Key components of a PayFac platform include:

Onboarding

A PayFac utilizes online tools to onboard its merchant clients and underwrite risk. Instead of a manual process, merchants can apply for payment processing online and be approved same-day with advanced automation tools.

Payment gateway

The payment gateway is the actual software and tools that facilitate the processing of online payments. Payment gateways provide an interface between customers’ bank accounts or credit cards and the merchant’s website. They also validate customer information and ensure secure payment processing.

Processor connections

Part of the attraction of PayFacs is that they are taking on all the difficult parts of the payment process. Not least of these complexities is making seamless connections to acquiring banks and payment card networks.

Funds disbursement

Because PayFacs are managing the whole process they can build in efficiencies. And one of the most important is quickly dispersing settled funds to each sub-merchant’s bank account.

Reporting and reconciliation

The PayFac platform is also going to be able to provide full merchant reporting on processing volumes, fees, payments, and settlements.

Subscription management

For SaaS customers and ISVs an important part of a PayFac platform is support for recurring billing of subscription payments.

Tokenization

One of the more complex technical parts of managing payments securely is tokenization or the process of securely encrypting and storing payment details for use in future transactions.

Dashboard

A good PayFac platform will have a dashboard with a unified interface for sub-merchants to access reporting, billing, payouts, and more.

Compliance, underwriting, and data security tools

PayFac platforms streamline PCI DSS certification, KYB, KYC, and other underwriting checks. They also support data security features such as encryption and tokenization.

Support

A critical feature for any PayFac platform to have a successful integration and onboarding is a full suite of documentation, training, and integration assistance for sub-merchants.

By providing this breadth of payment functionality, a PayFac model allows software businesses to own the payments relationship with their customers.

How to become a PayFac

Some SaaS businesses opt to become payment facilitators versus other payment models. If you’re wondering how to become a PayFac, here are the main steps:

1. Register as a PayFac. Apply for registration and legal designations required in the states you will operate.
2. Open a master merchant processing account. Set up a master merchant account with an acquirer bank to enable payment acceptance.
3. Integrate with processor APIs. Connect to payment processing APIs and reporting systems.
4. Build a PayFac onboarding platform. Develop or license a technology platform for onboarding and managing sub-merchants risk assessments.
5. Implement reconciliation. Build processes to reconcile incoming payments with sub-merchant transactions.
6. Distribute funds. Develop a system for disbursing funds out to each sub-merchant’s bank account.
7. Handle back-office payment operations. Streamline PCI DSS certification, implement KYC checks, develop processes for chargebacks, put security protocols in place, and much more.
8. Provide reporting. Give sub-merchants and banks visibility into processing volumes, fees, payments, etc.
9. Develop self-service features. Enable sub-merchants to access reports, statements, and tax forms online.
10. Offer support. Create documentation and training materials and employ customer service for sub-merchants.
11. Set fee structure. Establish PayFac fees charged to sub-merchants.

By making the platform investment, SaaS businesses can own the payments relationship while offloading regulatory burdens for their customers.

What benefits do payment facilitators receive?

When a SaaS platform decides to become a payment facilitator, there are usually some compelling reasons, dependent on their particular circumstances. The most common of these, and the most interesting to SaaS businesses and ISVs revolve around the customer and customer experience since retaining and growing customers is a primary objective for these businesses. 

However, the commonest reason is very straightforward — increased revenue. There is the opportunity for significantly more payments revenue by becoming a PayFac compared to becoming an ISO or referral partner. Beyond that lies the customer experience. Becoming a PayFac allows the business to deliver more customized, branded, and better-integrated payments experiences entirely within their own app meaning less friction and a streamlined onboarding, payout, and support experience. A secondary benefit of this is that the SaaS business then fully owns the customer — there are no external relationships to dilute customer experience. Because of that ownership, the data available from payments is much richer and can be directly connected to the data from the business itself, allowing the ISV or SaaS business to get deep visibility into customer transaction patterns. 

All of these factors combine to mean that becoming a PayFac will allow the business to retain customers better with more product stickiness and less churn.

There are other additional benefits to becoming a Payment Facilitator (PayFac) besides those mentioned above. These include:

• Enhanced products. Can tailor payment processing to integrate seamlessly with the SaaS platform and workflows.
• Additional capabilities. Develop proprietary payment solutions like invoicing or financing tailored to the vertical.
• Upsell opportunities. More opportunities to cross-sell value-added financial services.
• Operational efficiency. Consolidated view of all customer payment activity and billin.
• Competitive differentiation. Unique selling proposition compared to other SaaS players.

By making the investment to become a PayFac, SaaS companies can reap larger financial rewards while providing a more integrated payments experience.

What are the drawbacks of becoming a PayFac?

Here are some potential drawbacks or challenges for a SaaS platform in becoming a Payment Facilitator (PayFac):

• High capital requirements. You’ll need adequate financial reserves, likely at least $1-$2 million, to get started.
• Regulatory complexity. Increased compliance burden across PCI DSS, KYC, state laws, etc.
• Operational overhead. Building payment operations is a major competency requiring specialized staff.
• Increased liability. Fully accountable for losses, fraud, and compliance issues across all sub-merchants.
• Resource drain. Managing payment operations can divert the focus from improving the core SaaS product.
• Customer service. Expectations to provide support as a payment services provider.
• Opportunity cost. Becoming a PayFac is a major investment that may be better spent improving the SaaS product versus managing payments.

SaaS companies should carefully weigh whether the benefits outweigh these substantial costs, risks, and distractions before pursuing a PayFac model.

PayFac-as-a-Service

PayFac-as-a-Service is an alternative to becoming a full-fledged PayFac. The PayFac-as-a-Service model enables software companies to act as payment facilitators, earning a portion of the payments revenue processed on their platform without taking on the required costs, risks, and ongoing management inherent to independently running payment operations. Enabling SaaS businesses to outsource their payment processing, rather than constructing and maintaining their own payment facilitation infrastructure, requires a fraction of the resources while still generating a significant revenue stream.

PayFac-as-Service Definition

PayFac-as-a-Service (PFaaS) refers to solutions that allow companies to leverage payment facilitator capabilities without having to build and manage their own PayFac operation. Using a PFaaS allows SaaS businesses to get most of the benefits of becoming a PayFac without the cost and operational headaches. These include creating a new revenue stream for the SaaS without building out a completely new line of business and a faster time-to-market because there is no need to build out a payments infrastructure in-house.

Since someone else is building and maintaining the technology, it also means that the full suite of technological benefits is available immediately to onboard sub-merchants, collect payments, disburse funds, manage reporting, etc.

One of the biggest challenges in becoming a PayFac is managing compliance and risk. Working with a PFaaS means they handle the compliance, security, and risk monitoring for the operation — another layer of complexity you don’t have to build and from which you gain the benefit.

You’ll also get the benefit of built-in banking and card network relationships making for a faster time to market. Combined with the PFaaS also managing the infrastructure, this dramatically cuts the upfront development, legal, and capital costs. One other cost-cutting benefit is that compared with building your own PayFac you are only going to have to pay for the actual services you use rather than building out infrastructure you are required to have but do not really use. 

The final benefit is that the onus is on the PFaaS to continue innovating to keep its customers happy and also to provide the needed levels of operational support.

An example of PFaaS would be a SaaS inventory management and invoicing tool that offers payments capability to retail flower shops. SaaS platform customers (retail flower shops) could then invoice customers and get paid through the platform. With PFaaS, the SaaS platform becomes a payment provider to its customers with all the benefits of becoming a PayFac, but without the cost of building its own payments facilitator’s operation.

ISO versus PayFac

ISOs function only as resellers, they do not create or issue merchant accounts themselves. Instead, they are agents for acquiring banks and sell merchant accounts issued by processors and acquiring banks. But PayFacs are actively involved in the whole process of accepting payments. They handle underwriting, onboarding, settlements, reporting, and chargebacks, along with payment processing.

The biggest difference between ISOs and PayFacs for customers comes in onboarding. Immediately upon signing up a merchant, the ISO passes the whole process on to a payment processor as part of its deal with the acquiring bank and the processor handles the onboarding. For customers, this is understandably frustrating since they are no longer dealing with the entity that sold them the contract for payment processing. In contrast, PayFacs handle the whole process, including underwriting and compliance.

ISOs must include the payment processor as part of their contracts — and in fact, most ISOs set up contracts between the merchants and the acquiring bank but do not enter into a contract themselves because they do not want to be liable for any risk. Whereas PayFacs are facilitating the whole process and thus are fully contractually involved and in fact take on all or most of the risk as well.

However, it is the area of passing on the contract to a payment processor that also gives the ISO one of its advantages — it can have relationships with many payment processors and give its customers a wide range of choices, options, and flexibility in terms of the actual processing. In contrast, since a PayFac is managing every step of the process, it typically has a single payment processing option. 

Funding is another area of difference. Since PayFacs are handling the whole operation, they can expedite funding and payout to their customers, making it happen very quickly. ISOs are dependent on the payment processor and cannot speed up the process. Similarly, reporting on settlement is much stronger with a PayFac since it can provide visibility all along the way and can give more detailed breakdowns whereas an ISO’s payment processor may only provide bulk reports of bundled transactions.

Finally, in order for a PayFac to be successful, it needs to build its own technology infrastructure. This means it can be more flexible and provide faster, more efficient, and more customizable solutions that can also adapt to market conditions far better as compared to the traditional model of an ISO, which is relying on a particular payment processor.

ISO Benefits:

• No upfront investment 
• Proven, well-established model
• Can leverage existing processor relationships

ISO Drawbacks:

• Limited to the ISO/processor’s capabilities/offerings
• Lower revenue share
• Less control over customer experience

PayFac Benefits:

• Own end-to-end payments relationship
• Access to full merchant data
• Higher revenue potential 
• Customized payment solutions

PayFac Drawbacks:

• High upfront investment (~$1-$2M+)
• Need teams for risk, compliance, tech buildout
• Full liability for losses and risk

For ISVs with existing processor ties looking for quick time-to-market, lower risk, and less capital outlay, becoming an ISO may be preferable.

For SaaS platforms focused on maximizing monetization and owning the payments experience, investing in becoming a PayFac can pay off despite larger costs and risks.

The choice depends on the business, risk appetite, capabilities, and willingness to make the larger platform investment required for a PayFac model. Each approach has merits suited for different scenarios. If you’d like to talk through the scenarios that you are considering, we’d love to meet with you. Get started by scheduling a consultation today.