According to analysis from GlobalData, the worldwide market for digital payments will reach nearly $2,500 trillion in value in 2023, expanding at a compound annual growth rate (CAGR) of 14.3% leading up to 2030. Expedited by the rise of mobile and the decline of physical money, a cashless revolution is sweeping the world.
Merchants need increasingly sophisticated solutions to stay abreast of this payment deluge. It is against this backdrop that payment facilitation (the service) and PayFacs (the product) have gained momentum – automating previously manual payment processes, surmounting regulatory hurdles and ramping up cashflows in one smooth platform. “They allow platforms to offer a payment component to their software that gives a cohesive experience to all merchants and sub-merchants, which can be set up to take payments very quickly,” explains Jeff Mason, a a PayFac expert from Pay360.
But payment facilitation is a continuously evolving solution. A merchant’s size, customer base and goals will all play into the services they choose to deploy and the partners they end up working with. Understanding how PayFacs gained a foothold in the payment world and their underpinning architecture can help merchants navigate this tricky terrain.
The PayFac revolution
Dating back to the 1990s, PayFacs have developed from their ad hoc origins in specific industries to entities that can control the entire payment process. Today, as businesses embrace digital channels, the advantages of PayFacs have become more pronounced.
The primary problem PayFacs address is acceptance of electronic payments and establishment of merchant identification (MID) accounts. It all started in the medical industry; aggregators stepped in to underwrite medical professionals and handle their billing, sparing them the burden of setting up merchant accounts. Over time, these aggregators expanded into other sectors, offering a convenient solution for both businesses and acquirers.
In the wake of the COVID-19 pandemic, the shift towards digital transactions has ramped up. Many businesses have moved their operations online. Others now operate exclusively in the digital realm. Consequently, the role of PayFacs has also evolved beyond enabling card transactions. They now focus on enhancing the consumer-facing experience for merchants, adapting to the changing needs and preferences of customers.
PayFacs are expanding into new industries all the time. “PayFacs are ideal for any software business whose platform, app or marketplace requires payment from its users,” says Mason. “Sectors that benefit from using platforms to reach target audiences are particularly well placed to gain. A few key verticals like education, booking platforms, hospitality and automotive stand out.”
But onboarding a PayFac solution – and associated risk mitigation and compliance costs – can be prohibitive for smaller businesses. One recent development – PayFac-as-a-service – is helping to combat this problem. It is an approach offering businesses, particularly small- and medium-sized enterprises, a convenient and cost-effective payment processing solution. Through outsourcing payment management to a PayFac-as-a-service provider, experts take control of the payment process while business decision makers can focus on day-to-day operations
There are numerous PayFac-as-a-service benefits. One is that it allows businesses to monetise payments effectively. By bringing payments in-house, platforms can create new revenue streams from transaction fees, significantly boosting revenue per customer. Additionally, PayFac-as-a-service providers offer increased security measures to protect against fraud and data breaches. They can implement advanced security technologies and automate payment processing tasks, leading to faster transaction processing times, reduced errors, and more insightful reporting. With other advantages including faster onboarding for users, customisable platforms and reduced complexity for managers, PayFac-as-a-service provides smaller firms with all the advantages of PayFacs minus the eye-watering up front expense.
What you need to know
The benefits of PayFac and PayFac-as-a-service are clear; what firm wouldn’t want to save time and make money in the process? But there are a few tips and tricks firms should bear in mind when working out what kind of PayFac solution would best suit them and how to ensure they are choosing the right partner.
To begin, it is worth noting a fundamental distinction between the traditional PayFac model and PayFac-as-a-Service. In the traditional PayFac model, businesses own and directly control their payment processing systems. In contrast, the PayFac-as-a-Service model involves a third-party provider managing payment processing systems on a business’s behalf. The latter offers less control, but is far cheaper – something smaller and medium sized businesses need to weigh up.
Whatever route they decide to go down, online merchants and software providers are not payment experts; their expertise lies in the services or products they offer. But they can guarantee a successful PayFac implementation, freeing up time to focus on their core offering, by focussing on five key factors.
First, businesses should seek modern, developer-friendly APIs that simplify integration with online marketplaces. Doing so create a seamless customer experience, eliminating the need for multiple costly integrations. Additionally, automated onboarding processes ensure that customers can start processing transactions within minutes rather than weeks.
A well-designed PayFac solution should also enable businesses to monetise their core customer base. This enables businesses to earn revenue from each card transaction processed through the payment gateway – effectively transforming a traditional cost into an additional income stream.
Insightful data analytics and reporting tools are also crucial for growing a payment facilitation platform. Utilising a solution with a comprehensive dashboard provides valuable insights, empowering businesses to make informed decisions and drive future growth.
Security is paramount when it comes to payment solutions. Businesses should choose a PayFac provider that meets the highest data security standards, freeing them to focus on other priorities with peace of mind.
Finally, in the always-on world of digital payments, PayFac solutions should offer diverse payment options. This means ensuring 24/7 accessibility, guaranteeing that businesses can accept payments at any time to accommodate the needs of all customers. When looking for a market-leading PayFac partner, Mason summarises with the following advice: “Look for good API’s and clear documentation. Ensure support is available both during the integration and ongoing account management to ensure the partnership reaches its full potential. Develop a slick and fast onboarding process for sub-merchants. Also look for competitive rates and fees, a variety of different payment methods, concise reporting and an intuitive dashboard for both sub-merchants and independent software providers.” In Pay360’s Evolve platform, they have all this and more. Download the whitepaper on this page to find out how Evolve’s PayFac solution could help you start monetising your payments today.