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In recent years, payment facilitators, or PayFacs, have emerged as an innovation in the online payment industry. They have been enabling online merchants and eCommerce stores with a quick and easy way to receive online payments.
A payment facilitator, in a nutshell, is an organization that functions as a master merchant of a card publisher/network. They facilitate payments on behalf of other businesses, the sub-merchants.
With more businesses shifting their operations online and selling their products and services on eCommerce stores, payment facilitation is now a very lucrative business opportunity with a huge potential market and high profitability.
In this guide, we will discuss how to become a payment facilitator and start your own payment facilitation business.
Understanding the Payment Facilitator Model
As briefly discussed above, a payment facilitator approach allows an organization to become a master merchant or a merchant of record, which in turn can board other businesses as its sub-merchants.
PayPal or Stripe, for example, is a payment facilitator or a merchant of record. Businesses that accept payments via PayPal are PayPal’s sub-merchants. During its formation, however, Paypal has undergone the traditional setup of a merchant account in its name with credit card networks. Paypal is technically reselling this merchant account to its sub-merchants while also assuming liability for all financial risks for their sub-merchants.
As we know, however, we can quite easily register a PayPal account to be considered as its sub-merchant. We only need to provide a few data elements instead of having to go through the traditional underwriting process.
In this aggregation model, we can quite easily see the benefits of the payment facilitator approach: it’s traditionally difficult and time-consuming for an online business to start accepting online payments. However, with the help of PayPal and similar companies, it’s now much quicker and easier. This is the reason why payment facilitation is now a popular and lucrative business opportunity.
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Why You Should Offer PayFac Services
The most important benefit offered by a payment facilitator is a faster, easier, and highly efficient means of enabling new online merchants to accept and process online payments.
Obviously receiving payments is a very important aspect for any online business to accept payments. If not, it can’t generate revenue. On the other hand, the payment facilitator can gain a percentage, or fee, of each transaction. So, you can grow your revenue by getting more businesses as your sub-merchants.
How to Become a Payment Facilitator
In order to become a payment facilitator, the said company must be approved by a processing bank. A bank like Elavon, Chase, Bank of America, or Fiserv. Also, it must sign a direct agreement with this processing bank. The business must undergo an extensive underwriting process. There are two areas in which the business must stay in compliance with the processing bank’s regulations:
Policies and Procedures
An effective payment facilitator must develop at least two sets of policies:
1. Policies for Underwriting Sub-Merchants
The payment facilitator must define its set of policies for underwriting potential sub-merchants, which can be customized depending on the size of the sub-merchants, geographical locations, risk tolerance, and other factors, including:
- How to perform a due diligence check on a potential client’s website
- When and how to perform the manual review for potentially fraudulent applications
- Criteria for performing KYC (Know Your Customer) and KYB (Know Your Business)
2. Policies On Monitoring Existing Sub-Merchants
Another important set of policies should be implemented for monitoring ongoing transactions to protect the payment facilitator from fraud and other risks. These procedures include:
- Identifying thresholds and red flags for when anomalous transactions must be reviewed manually
- How to review high-risk transactions
- Investigation steps when investigating potentially fraudulent transactions
- Policies in handling chargebacks
To meet the compliance of the credit card network and issuing bank, the company must possess the required technical infrastructure to properly onboard the sub-merchants and process transactions. This can include:
- The ability to onboard prospective sub-merchants
- The ability to (automatically) handle the underwriting process
- Monitoring ongoing transactions to identify fraud, anomalies, and so on
- A system to calculate the fees for each transaction automatically and fund the sub-merchants
- Chargeback handling system
- A reporting system for the sub-merchants
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Getting Approved as a Payment Facilitator
As you can see, meeting the compliance requirements of customer ID, as well as local government regulations can be quite challenging, and they are often the biggest challenges in starting a payment facilitation business.
This is where working with a experienced payments consultant like RPY Innovations with close to 100% approval rate can help in:
1. Building Your Payment Facilitation Infrastructure
Not only technological infrastructures but recruiting a team capable of running your payment facilitator business can be challenging. You’ll also need to train them regularly in order for them to stay in compliance with the latest regulations and policies.
For payment facilitators, obligations can evolve rapidly, and RPY Innovations can help set up a training model to educate your current personnel and eliminate the need to recruit new employees for your payment facilitator business.
2. Setting Up Policies
Implementing all the required policies and procedures to meet the regulations, and audit each regulation annually to make sure these policies are in compliance with the ever-changing requirements. The assistance of a payment project consultant like RPY innovations can significantly help in this area, saving both your time and resources in meeting the required compliance.
3. Application Process
The application process for being a payment facilitator can be time-consuming with lengthy and detailed examinations. Even when you already have a healthy relationship with an acquiring bank, most of the time they can’t help with the approval process due to the potential conflict of interest
While becoming a payment facilitator can be quite challenging, it is a lucrative business opportunity to explore, especially if you are already in the software or SaaS industry. A payment consultant can help you save a significant amount of time in the approval process, so you can further optimize your business model and services to ensure that they will align with your payment facilitation model.
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