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May 10, 2021 • Issue 21:05:01

Street SmartsSM

The payfacs are coming - Part 1

By John Tucker

According to research compiled by payments platform provider Infinicept, the number of payment facilitators (payfacs) globally is an estimated 1,000 companies that handle approximately $1 trillion in total processing volume annually. The analysis also shows the annual growth rate of payfacs is around 30 percent, which means by 2025, we could see over 4,000 global payfacs and around $4 trillion in processing volume flowing through them yearly. The COVID-19 pandemic has accelerated this growth.

Of the current 1,000 payfacs, the biggest are PayPal, Stripe and Square. Those three have paved the way for prospective payfacs to better understand the model, envision how to manage risks, and configure how they, too, can jump into the game to reap rewards.

In understanding the rise of the payfac, we have to begin with how we got to this place, which means identifying the major nuisances associated with traditional merchant accounts. First, I'll examine the Wild West aspect of payments.

Our own Wild West

Over the years, and in a variety of ways today, recurring nuisances associated with traditional merchant accounts have annoyed merchants and a range of technology companies and value-added resellers (VARs) that partner with ISOs and processors.

A number of these nuisances derive from the fact that many ISOs use a 1099 merchant level salesperson (MLS)/agent model, which many entrepreneurial salespeople prefer because they appreciate the freedom and opportunity the model offers. However, some companies using this model recruit with negligible screening. This opens the door to many who have no prior industry experience or have questionable backgrounds that should exclude them from the MLS fold.

This creates an array of problems, particularly merchants being lied to about rates and scammed by high fees. This causes reputational harm to the industry overall, not just to the agents and companies responsible. Often, rogue agents are in and out of the industry within a couple of months, leaving behind a bad taste in the mouths of merchants and technology partners to the point where both are brainstorming ways to better control the payments experience.

Onboarding issues

Many inadequately trained MLSs don't understand that, technically, a merchant account is a line of credit. When a merchant's customer runs an order on their credit card for $300, the ISO/MSP deposits that transaction amount into said merchant's bank account within two business days, even though the customer has not yet paid for the transaction.

If said customer initiates a chargeback of that $300 with the merchant unable to prove the legitimacy of purchase (thus losing the case), the ISO/MSP will go to the merchant to recoup the $300. However, if the merchant doesn't have the money in their account, the ISO/MSP is likely on the hook.

As a result, most payment processors do a real, in-depth underwriting review on every merchant before granting them the ability to process payments. If approved, each merchant receives a unique merchant identification number. The issue here is that the underwriting process can move slowly and require significant documentation—on site reviews, financials, references and more—before approval occurs (if said approval takes place at all).

Slow and burdensome onboarding annoys merchants, software companies and VARs, all of which would prefer that accounts go live in a much simpler, faster and smoother fashion.

Wacky billing

Our industry has a confounding assortment of pricing options. We have, for example, 2 Tier, 3 Tier, enhanced bill-back, interchange-plus and other types of pricing that a merchant account could have—depending largely on how the agent/MLS wants to write the account.

This leaves many merchants confused over what exactly they are paying, how they are paying it, and whether any real savings are being realized when they switch over to a new processing company. Furthermore, when the card brands increase interchange twice a year, this creates even more confusion. Unless merchants are on interchange plus pricing, they might receive uncomfortable communications from their ISO or processor requesting that they sign an amendment to their agreement to adjust their rates higher, based on new interchange rates.

Need for an alternative

All of these issues (not to mention others such as a lack of integration options), have created a market in need of alternative approaches to managing payments. As technology companies are investing more in their platforms, they are trying to determine how to:

  • Better control the total experience merchants have with their platform(s);
  • Increase merchant convenience and satisfaction to enhance stickiness;
  • Generate new revenues from subscribed merchants by adding payments, lending and other solutions that they can better control in order to better control the merchant experience;
  • Increase the valuation of their business by adding in more revenues, capabilities, and integrations, which helps when looking to merge or sell the business to a larger player with heavier capital resources.

Many of said technology companies are discovering the payfac model could assist them in achieving these goals. Todd Ablowitz, co-CEO and co-founder of Infinicept, projected at one point that at least 10,000 software companies could be good candidates for the payfac model.

That said, it's important to note that there are different options available to technology companies seeking to integrate more payfac capabilities, all of which bring different levels of risks and rewards. In my next article, I will break down the different types of payfac models. end of article

John Tucker is U.S. enterprise sales director for TreviPay (www.trevipay.com) and has over 14 years of B2B sales experience in commercial finance. Tucker is an MBA graduate and holder of three bachelor's degrees in accounting, business management and journalism. To connect with him, feel free to send him a connection invite via LinkedIn at www.linkedin.com/in/johntucker99/.

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