By Patti Murphy
Payment facilitators, commonly referred to as payfacs, are changing the face of merchant acquiring. This is not necessarily bad news. Payfacs are "master merchants" that facilitate payment acceptance on behalf of smaller merchants. They are authorized by the card brands to aggregate transactions initiated through these "sub-merchants" for settlement through sponsor banks.
Any business with less than $1 million in transactions per card brand per year can be a sub-merchant under Visa, Mastercard, American Express and Discover rules. The master merchant handles all the heavy lifting (underwriting, boarding, fraud management, Payment Card Industry Data Security Standard compliance, etc.) and typically charges a flat per-transaction fee.
PayPal Inc. is the most obvious and perhaps earliest example of a payfac. But the market has grown to include thousands of firms, largely software companies that integrate payments acceptance with other business software applications.
To the casual observer payments may seem like just another business process primed for disruption by technology giants. But payment acceptance is a much harder nut to crack than most technology mavens realize. The emergence of payfacs illustrates that even companies with access to the latest and greatest technologies can't find easy workarounds for the systems and processes that support payments in this country.
These systems and processes, managed by banks and their acquiring partners, have evolved and matured for a century, or more, all the while demonstrating incredible resiliency. The emergence of software-enabled payments, rather than threatening the status quo, presents another opportunity for banks and merchant acquirers to drive greater efficiencies for business customers.
Think about it. From cash to checks, to credit cards, then debit and prepaid cards, and now online and mobile payments, the role of banks always has remained central to payments. Banks may outsource the mechanics of merchant acquiring, like signing up merchants and managing network technologies, but they remain firmly in control of the payments piece.
Deriving revenues by driving more transactions is important to banks and their acquiring partners, and payfacs help on that count. They already have extended card-acceptance to thousands of businesses that are too small or unique to appear on the radar of most ISOs and merchant level salespeople (MLSs).
And they stand to expand the market by orders of magnitude. Double Diamond Payments Research, a division of Double Diamond Group LLC, calculated the latest entrants to the field (this excludes the big three, PayPal, Square and Stripe) will be generating over $500 billion in gross processing volume by 2021.
In addition to driving more transactions, collaborating with payfacs also can help banks, acquirers, ISOs and MLSs up their customer service games and pursue new vertical markets, such as organizations that support crowdfunding and fundraising initiatives. "With all the hurricane and other relief efforts underway, there are a lot of charitable organizations online," Rick Oglesby, President of AZ Payments Group LLC, noted in a recent interview.
Double Diamond, in a recent white paper, provided the example of RunSignUp, which sells event management software to groups that organize benefits like charity races. Its software provides marketing and enrollment tools, website management and reporting, mobile apps and race-day features, and, by integrating with a payfac, payment processing too.
YouCaring.com is a slightly different twist on that theme. It provides a business platform for fundraising organizations like GoFundMe, Kickstarter, Donors Choose, and FundRazr. One of the payfacs it works with is WePay, a Silicon Valley firm that's being purchased by JPMorgan Chase & Co. WePay developed a software-as-a-service application programming interface that independent software vendors (like YouCaring.com) can use to integrate payment acceptance and processing with other business services.
"With WePay, Chase is taking the work out of payments for both our business clients and the software providers who serve them," Matt Kane, CEO of Chase Merchant Services, said in an October statement about the acquisition. "We are powering payments for growth, so businesses can accept payments instantly, get paid faster and never lose a sale." This is key, because no matter how simple or complex a business, its number one priority is generating revenues. Most don't care how they're paid for products or services as much as they care about accessing the proceeds from sales as quickly and efficiently as possible. WePay isn't just a merchant play for Chase, though. WePay's technology can also support payfac up-and-comers. "[W]e'll give ISVs [integrated software vendors] a payment facilitator-like experience without the overhead or increased fraud risk," Kane said. Meanwhile, Chase said it plans to convert WePay into its payments technology incubator. This should enable it to keep pace with evolving payment technologies and changing business models.
Chase isn't alone among banks seizing opportunities presented by payfacs. Leading acquirer Elavon Inc., a subsidiary of U.S. Bank, has a payfac service line it calls Scoop. "With Scoop, we give our [payfac] customers the confidence that their payment processing is handled by a trusted partner with global capability, both securely and efficiently," Ian Drysdale, Executive Vice President for Global Ecommerce at Elavon, said in a statement.
Merchant acquiring has come a long way from when simply signing merchants up for card acceptance was lucrative for banks and their acquiring partners. Today, more than ever, success is predicated on relationships and partnerships that drive transaction growth. The ascent of payfacs is the latest evidence of this trend.
Banks and merchant acquirers aren't the only businesses thinking this way. Jonathan Auerbach, Chief Strategy and Growth Officer at PayPal, spoke to this same trend at the 2017 World Economic Forum. He described PayPal's efforts to act as a "bridge" between technology firms and banks. "We are firmly shifting away from viewing other financial services entities through the traditional competitor lens," he stated. "Instead we are seeking opportunities where collaboration can help us and our partners expedite the pace and increase the scale of innovation, to the ultimate benefit of our customers."
"The ability and will to collaborate is emerging as a strategic imperative in the ongoing digital transformation of the financial services industry," Auerbach said. He suggested other industries would do well to pursue similar strategies. "When done right, strategic partnerships can provide a path to fully realize the growth potential inherent in the digital transformation" that faces all industries, Auerbach added.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her a email@example.com.
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