By John Tucker
TreviPay
A character nicknamed Socrates in Dan Millman's semi-autobiographical Way of the Peaceful Warrior said, "The secret of change is to focus all of your energy ... not on fighting the old, but on building the new." A number of traditional merchant processing companies understand this. They are bringing to market integrated payments packages, along with programs that help technology companies become payment facilitators (payfacs) instead of fighting the old race-to-the-bottom battles of rate savings and cash discounts
In The payfacs are coming – Part 1," published in The Green Sheet on May 10, 2021, issue 21:05:01, I proclaimed that the payfacs are coming and discussed major nuisances associated with traditional accounts that set the stage for disruption.
A revolution is taking place with the rise of the payfac, creating a huge market shift for payments, especially since the COVID-19 pandemic is driving increased investment in new technologies to address unmet challenges found in various industry verticals. New technology companies, often developers of innovative software, are attracted to the payfac model because they want to create a superior merchant experience.
If the annual 30 percent growth rate of payfacs continues, not only is there a strong chance we will get to 4,000 global payfacs by 2025, but we could far exceed that number. By the end of the decade, we could see 10,000 to 15,000 global payfacs, and the payments industry, as we know it in 2021, will be forever changed.
When technology companies consider payfac capabilities, they soon realize not all payfacs are created equal. There are three main payfac models, and within each, a variety of configurations exist to maximize revenues and reduce risks. The three main payfac models are the:
Simply put, Payfac technology helps facilitate, or expedite, payments between one entity (or person) and another entity (or person). So, for example, a technology company is already participating in payment facilitation if it has integrated a payment gateway into its platform.
With this setup, there's no risks to the technology partner from a payments standpoint; the company isn't dealing with underwriting, compliance, staffing, customer support, billing, upgrades, infrastructure, etc. All of that is handled by the technology company's merchant processing partner, which also manages the payment gateway relationship.
But while there are no risks here, the rewards are often low in terms of residual revenue share, depending upon the partnership's terms. Some partnered technology companies have negotiated exclusive agreements with merchant level salespeople (MLSs) who send them new merchant account leads, and the MLSs and the company share the processing residuals. Due to the highly competitive market, many MLSs agree to this arrangement, which creates a win for the technology company. It gains an additional revenue stream without risks or support responsibilities in the payments side of the business.
However, said technology companies are turned off by confusing billing processes, inadequate customer support and rogue MLSs, all of which create a bad experience for merchants that reflects negatively on the technology company. Thus, these companies look deeper into other payfac capabilities.
In the full model, the software/technology company becomes a full-fledged payfac, registered with the card brands. This brings an array of benefits, including:
The full model offers numerous benefits but comes with significant costs and internal processes to manage. For example, to get set up, the technology company might incur $500,000 to $1 million for the requisite licenses, card brand registrations, compliance assessments, staffing, underwriting procedures, and more. Then, ongoing costs, including compliance, can range from $50,000 to $200,000 per year.
Experts usually don't recommend that a technology company adopt the full model unless it has a huge quantity of merchants that can make the investments profitable within a relatively short time. Also, the card brands prefer that all sub-merchants process under $1 million a year; once a sub-merchant goes over this threshold, it would likely have to get a traditional merchant account. So much depends on types of merchants using the platform.
The hybrid model combines the best of both worlds, bringing the best of the referral model, including lower risks, and the best of the full model, including higher revenue splits, quicker onboarding and a better merchant experience. This is achieved by what's known as payfac-as-a-service, or to think of it another way, a payfac on top of a payfac.
In this model, a company that has already gone through the process to become a full payfac offers other technology companies the opportunity to join its platform using such a payfac-as-a-service or payfac-out-of-the-box type of setup. Thus, the technology company sits on top of the main payfac and boards clients in a sub-merchant fashion.
The hybrid approach brings more sophisticated payfac capabilities to technology companies that might not have the time, energy, nor resources to manage the full model. It also allows the company offering payfac-as-a-service capabilities to quickly become profitable through adding other software companies and their respective sub-merchants. There are significant costs to this setup as well, but it's not as expensive as the full model.
While increasing numbers of payfacs will choose full and hybrid models, I don't believe it's going to be a completely smooth ride. Technology companies must still remember that the card brands will frown on sub-merchants processing over $1 million a year. In addition, while flat, easy-to understand-pricing of, say, 2.9% and 30 cents (Stripe pricing) for every transaction might be attractive to smaller merchants, those processing $100,000 to $900,000 a year might find that those rates are too high and opt to go through the longer setup process with a traditional merchant processor.
So we'll have to keep monitoring this situation. It will be interesting to see how the rise of payfacs contributes to significant changes in the payments industry. This is obviously no longer your grandfather's or father's payments Industry. It has become a millennial- and Gen Z-driven industry powered by digital, integrated, embedded solutions. 
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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