By Dale Laszig and Patti Murphy
Payments acquiring has evolved from its original value proposition of simply accepting credit cards; the game has changed, bringing new competition to ISOs and merchant level salespeople (MLSs). The name change from payment acceptance to payment facilitation reflects a strategic shift from passive POS transactions to always-on, always-connected commerce.
When payment facilitators first appeared in 2012, they challenged the traditional business model of one-merchant, one-contract – a challenge facilitated by the card brands. From the earliest days of card acceptance, Mastercard and Visa had prohibited the aggregation of card transactions from multiple merchants for processing through a single merchant account. But that changed in 2011 when the card companies created a new category of "master merchants" that could provide processing services to smaller "sub-merchants." Originally Visa and Mastercard rules stipulated a transaction volume cutoff of $100,000 per brand per year to qualify as a sub-merchant; in 2016, that limit was raised to $1,000,000. American Express Co. and Discover Financial Services followed suit, stated Holli Targan, Partner at the law firm Jaffe, Raitt, Heuer & Weiss P.C. Each brand has its own nomenclature, but the term used by Mastercard, payment facilitator (or payfac) is the commonly accepted industry moniker.
Targan, an expert in financial technology law, likened payfacs to acquirers. "It's not that they replace acquirers," she said. "They still have to be sponsored." Payfac relationships also require "a lot of oversight," she added. "We're not seeing a lot of banks willing to do that." Card brand rules require sponsors to underwrite payfacs as master merchants that handle application processing, boarding, risk monitoring, billing and reporting for sub-merchants. There also are specific clauses that must be included in the contracts between master and sub-merchants that address issues such as liability and fraud, Targan noted.
Experts point to several advantages to merchants using payfacs, including streamlined applications, faster approvals and automated boarding. Payfacs can tailor card acceptance for select vertical industries, such as charitable and crowdfunding organizations, that have their own unique billing models. "This won't blow up the traditional acquirer model," said Rick Oglesby, President of AZ Payments Group LLC. "It will drive up growth in acquiring."
Several large acquirers are now actively pursuing payfacs as clients, Targan noted, adding that in some instances traditional ISOs are becoming payfacs. In October 2017, leading acquirer Elavon Inc. launched Scoop, a turnkey solution for payfacs. Also in October, JPMorgan Chase & Co. revealed plans to acquire WePay, a technology firm that developed a payfac application programming interface (API) used by the crowdfunding website GoFundMe, online marketer Constant Contact and others. JPMorgan plans to offer the API through Chase Merchant Services and to set up WePay as the banking giant's payments innovation incubator.
The benefits to acquirers working with payfacs are obvious: increased processing volume. Payfacs, for their part, get either a revenue share, or a wholesale buy-rate that they mark up and pass on to sub-merchants.
"The traditional ISO model may become extinct in five to 10 years, as more and more software vendors solve merchants' needs and monetize payments by integrating and offering their own solutions," said Benny Silberstein, co-founder of Payrix, a payfac platform for merchant aggregators.
Todd Ablowitz, President of Double Diamond Group LLC, said ISOs and acquirers need to accept that payfacs are here to stay. "Any ISO that chooses to bury their head in the sand on this is going to find themselves playing catch up," he said.
In the 2016 report Why Software Vendors Should be Payment Facilitators, Double Diamond estimated 10,500 U.S. companies are providing integrated software services to businesses that are positioned to benefit from the payfac model, including 4,200 in card-not-present markets and 6,300 in card-present markets. These companies, combined, represent potential processing volumes in excess of $1.6 trillion, the report calculated.
The report further predicted the payfac market – excluding the three early aggregators, PayPal, Square and Stripe – will double annually for at least another two years, before "moderating" to 80 percent a year. "Those payment facilitators will generate more than US$4 billion in payment processing revenue net of interchange and network fees in the same timeframe," the report stated.
Unlike traditional ISO models built on old technology rails, payfacs use advanced technologies, automated fraud analysis and APIs to board merchants quickly; they're designed to aggregate data and interface with other systems. "You realize how much more you can do and the control that comes with that, based on these data points," Silberstein said. Payrix co-founder Boruch Greenberg concurred. "Fifteen years ago, we were reps, going door to door like everyone else," he said. "As a full liability ISO, payfacs were never on our radar until we realized we needed control of the whole cycle, from A to Z. It was only by becoming a payfac that we could control transactions, underwriting, risk management, KYC [know your customer] and AML [anti-money laundering rule compliance]. This degree of control is unparalleled in the industry."
When Payrix was launched in 2015, Greenberg and Silberstein focused on simplification and scale. "As an ISO, we wanted to fix holes in the system, improve efficiencies and be able to monitor and manage risk in real time." The traditional ISO model can sometimes amplify problems with transactions, Greenberg noted. For example, ISOs often aren't alerted to errors until problem transactions have been settled and merchants funded, and it can take up to a week to recoup funds.
With real-time transaction monitoring, ISOs and acquirers can react immediately to problems, instead of waiting for third-party providers that pass on information that is often incomplete. "With Payrix, using our SDKs, we're capturing all the information, including customer data and device fingerprint, and we're leveraging that data," Greenberg said.
Merchants today need to integrate with multiple platforms, as well as change and adapt those platforms continually to keep pace with consumer shopping and payment preferences. Payfacs are positioned to help merchants manage multiple integrations while maintaining a cohesive customer experience.
"There are so many links in payments and everyone has a piece of them," said Nadav Naaman, Vice President of Product at Zooz. "Costs are affected by the way you route your transactions. At PayPal, for example, every basis point of improvement in a risk or fraud element or cross-border payment translates into millions of dollars." Zooz is a payment technology company that helps banks, third-party service providers and large retailers integrate disparate technologies across payments channels.
Providing a flexible integration process is only part of the value proposition, however. Merchants must be able to effectively manage multiple technology relationships that simplify connectivity and interaction, Naaman noted. Automated technologies are increasingly replacing dedicated human resources, connecting payfacs with payment acquirers, and end-user clients with APIs and portals to facilitate customized billing and payment acceptance that track market requirements.
Payfacs optimize the process by adding layers of integration from a centralized place, while maintaining a consistent user experience. They also can help merchants expand domestically and globally. Using payfacs that support issuing and processing across geographic markets provides consistent experiences to customers at home and abroad, Naaman said. Merchants need to connect to the right rails and make sure the rails are working, and they want the flexibility to reach more markets and sell more, Naaman added. "Ultimately, there are three main goals in payments: make sure the deal is done, make sure the transaction happens and optimize the revenue," he said.
Key competencies payfacs bring to the market are technology and integration expertise. But their expertise isn't all-inclusive. "There are pieces of what payfacs do that aren't their core competencies," Targan noted. Routines like underwriting, fraud management and chargebacks: these are areas of expertise they gain working with acquirers and ISOs. Some also need upstream technology partners. "A lot of people recognize that payfacs are the next big thing, but without the technology to manage and automate the process, it can become a bigger headache," Greenberg said. "Building your own platform can be time-consuming and expensive, and there's also a certain degree of trial and error when you're building a technology platform."
Silberstein said, "When you register as a payfac, you can build your platform from scratch or brand and customize a white-label payfac platform. Most of our clients view payments as a small but critical part of their business. Some are more verticalized than others." The Payrix platform enables clients to stay focused on their core businesses without worrying about the mechanics of payments, he added.
Case in point: Lawrence Pross, Managing Member of Taxi Charge LLC, a registered payfac, said he chose to work with Payrix rather than build his payfac platform from scratch. "It reduced costs and time-to-market, and improved efficiencies by facilitating payments from taxi fleets instead of individual drivers," he said, adding that it provided other added value, including estimated PCI compliance cost savings totaling more than $100,000 a year. Time and cost savings related to POS equipment and software certifications were also significant, Pross said. He estimated it would have taken six months to a year and hundreds of thousands of dollars to build a payfac platform from scratch; using Payrix it took just a few months to get up and running. "The Payrix platform invoices the fleet and sends the funds directly to me," Pross stated. "We're not paying interchange and chasing customers to get paid."
So what does all this mean for the feet on the street? MLSs can leverage payfac relationships to pursue specific vertical markets with greater efficiency and success, said Allan Lacoste, Vice President at Pivotal Payments. "They can run an opportunity and online offer for a quick and easy way to get a merchant account," he said. "They don't have to solve the technical issues; tech support teams can manage integration requirements."
Ablowitz added, "The payfac model isn't really all that different from that of an ISO. They go in and they solve problems with software and services. There's money to be made, but the problems that need to be solved are bigger than just payments."
Lacoste said MLSs are using payfac models to create different kinds of sales channels with dynamic onboarding that is faster and more efficient than traditional underwriting. Using payfac platforms eliminates the need for full-blown merchant applications, he noted. Multiple options include hybrid payfac models for merchants who may not initially need a full payfac platform but want the option to migrate to a payfac at some future date.
"An agent brought us a car dealership that wanted an integrated platform to process multiple dealers through a single MID," Lacoste said. "We created a hybrid model that automated account onboarding and lead generation to ensure that incoming leads were democratically distributed to salespeople at each dealer, even if they happened to be away from their desks."
Even agents with a mixed bag of merchants can streamline the onboarding process, Lacoste pointed out. GoDaddy.com, the Internet domain registrar and web hosting company, adopted a payfac model for its hosting service, he noted, providing a frictionless way for customers to add ecommerce to their websites. Lacoste offered another example of a CPA with 400 clients who offered free merchant statement analysis in an online newsletter. An embedded link within the analysis redirected clients who opted in to a short-form application.
Oglesby stated that working with payfacs also will help MLSs identify and pursue new vertical markets such as online fundraising. "I see a lot of growth opportunities in new verticals, also in international markets," he said.
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