By Ken Musante
Napa Payments and Consulting
Payfacs work best when serving a specific vertical. Done right, a payfac can employ expedited and automated underwriting, stripping away many questions that would need to be parsed on a normal application. Type of business, product type, method of card acceptance and average ticket could all be assumed if the payfac were supporting a specific vertical such as dental offices.
Underwriters could deck out their acceptance criteria against dental offices and have distinct credit scores or validation requirements that are specific to dentists. They could cross reference through social media, dental schools and/or dental supplier records in addition to running the merchant through an automated KYC and underwriting process.
With a vertical focus, the risk is uniformly calibrated; anomalies are easily identified and grouped. Gum surgeons and root canal specialists typically have higher tickets and greater volume, but the underwriting and review process would be similar to that of a general dentistry practice.
Payfacs serving across verticals and payment methods have a much more difficult job. They need more information at the point of acceptance, or they need to hold and validate a greater number of transactions. Both scenarios create friction, and unless done correctly and appropriately communicated, the result is a poor merchant experience.
I recently applied for and was accepted as a merchant with two payfacs. Both payfacs served across verticals and as such, both failed to properly understand my merchant type until after they had boarded my account and held my funds. To provide context, I am a consultant. In general, I do not accept electronic payments. My tickets are large, infrequent and keyed. I am not the optimal merchant client.
The first payfac was with a large bank that has a great mobile banking app. I love it and use it daily. Applying for card acceptance was slick. I simply checked a box on the app, and I was accepted. Pricing was high, but I was instantly ready to accept cards. The day I was approved, I keyed in my first order. After a week without payment, I called. They reviewed my account and released the funds.
If I had not called, my money might still be sitting on hold. Either they had so many "held" transactions that they were terribly behind or the queue was not being worked. In my instance, there was no need to hold the funds. My average daily balance was tenfold the size of the transaction, and I had a history with the bank. Though it was my first transaction, I was good for the amount.
This payfac either needed to do a better job underwriting so it could lessen the number of held deposits, or it should have had better automation to cross reference my additional banking relationship to lessen the number of holds. In either case, there should have been regular (or at least some) communication regarding the status of my funds. I was exceptionally pleased at the ease of the account sign-up, but all that good will was lost when I had to call in and request my funds. Grade: D+
The second payfac was associated with my accounting package. I specifically signed up to accept ACH transactions. Again, the pricing was high. The sign-up was uneventful, but I did have to provide additional information associated with my LLC and validate my type of business.
My first transaction was great. My customer entered their ACH information directly into the payment gateway from their invoice, which then auto updated my accounting ledger.
Unfortunately, I did not receive the money and instead received an email notifying me that my payments were temporarily disabled. To receive my funds, I needed to provide additional information:
The first five questions could have been sourced without my assistance. And, if they wanted that information, they should have asked for it at the time of my application adjudication. Also, they suggested they would refund my customer if I did not comply with their request to turn over specific information or contracts I had with my client.
As a last opportunity to appease them, I reminded them that they had access to my accounting records and could see all prior invoices to the customer in question. I provided my website with over 30 published articles and encouraged them to share the URL with an executive at the company as they desperately needed my services.
Even though they did not accept my consulting offer, they did get me in touch with a risk analyst who immediately released my funds and apologized. They need to do a better job adjudicating merchants on the front end or have better automation or more staff reviewing transactions. There was sufficient information available within my accounting transactions that they could have used to validate the transaction. Grade: D-
In both cases, there were flashes of brilliance. With the bank payfac, the acceptance process was first rate. With regards to the accounting payfac, having my records auto update was slick. Unfortunately, both failed to think through the unhappy path they put me on and failed to either automate or properly staff for the workflow. Both payfacs attempted to serve diverse verticals without the tools or staffing to accommodate. The results were disappointing. 
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, www.napapaymentsandconsulting.com. Contact him at kenm@napapaymentsandconsulting.com, 707-601-7656 or www.linkedin.com/in/ken-musante-us.
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