The PayFac Playbook

Playbook The Payment Facilitator

INTRODUCTION

The global payments landscape in 2022 is unrecognizable – compared to ten and even three years ago. Powered by a few key trends, including changing customer expectations, the rise of innovative technology and the impact Covid-19; payments today are prolific and increasingly more digital.

Customer expectations have changed, and businesses have had to adapt. According to a report by Insider Intelligence, worldwide eCommerce sales will exceed $5 trillion this year and will account for more than a fifth of overall retail sales. Now more so than ever, customers are showing increased comfort levels when navigating the world through a digital lens and this extends to payments.

To keep pace with the digital demand, businesses all over the world have had to re-think their commerce strategies. In 2022, businesses will need to invest in refining their digital experiences to meet their customers' expectations at every point in their journey, beginning with payments.

Payment facilitators enable businesses to accept online payments more easily by outsourcing the complexity to companies that specialize in payments. This works well for both merchants and payment facilitation companies.

Furthermore, there is the rise of financial technology and companies colloquially known as Fintechs. 2021 was a transformative year for fintech. What felt like a corner of the technology industry a decade ago, is now the largest funded category globally: fintech received over $130 billion in capital representing 20% of all capital invested in 2021.

Even across the fintech space, we’re witnessing rapid evolution. While the first generation of fintech products were reasonably generic, we’re now witnessing the rise of more and more specialized tools. We expect to see vertical specific

software & payments solutions for everything from trucking to barbers .

The rise of the fintech industry is in direct correlation with the increased digitalization of our lives; and of course, payments are no exception. None of the startup unicorns we know today would have been possible without the opportunity to accept payments online. Fintech is here to stay and live among us, continuing to innovate, drive the trends and set the standards for what good looks like in our industry.

To a certain extent, the payments facilitation model is an example of the fintech industry’s move toward specialized products and tools. Payment facilitators enable businesses to accept online payments more easily by outsourcing the complexity to companies that specialize in payments. This works well for both merchants and payment facilitation companies – colloquially referred to as PayFacs – as it allows each business to focus on their own core competencies.

In this playbook, we aim to demystify the modern payment facilitator model. Whether you are already a mature PayFac or just starting up, read on to find out how this innovative model can drive value to merchants worldwide by simplifying complexity and increasing adoption of digital payments.

What is a

What is a Payment Facilitator?

So, let’s start by drilling a bit deeper into Payment Facilitators (PayFacs). A PayFac is a third party merchant service provider that enables merchants to accept electronic payments. Payment facilitators control the onboarding process for their customers – referred to as sub merchants in the payment facilitator model – and are responsible for handling certain aspects of the overall transaction flow.

A PayFac will often handle various complexities for a business. These can include:

• Getting a merchant account

• Setting up a payment gateway

• Providing credit and debit card acceptance

• Handling security requirements such as Payment Card Industry compliance, tokenization and fraud prevention

• Dealing with payment routing, declines, chargebacks, subscriptions and transfers

Herein lies the value PayFacs bring to the table. Most businesses will have little to no knowledge of the complexities associated with accepting and processing payments digitally, yet digital payments are most certainly on the rise. PayFacs bridge the knowledge gap for merchants and o er a streamlined, cost e ective solution, enabling businesses to optimize their payment strategies.

A PayFac is a third party merchant service provider that enables merchants to accept electronic payments.

The history of

PAYMENT FACILITATORS

Payment Facilitators

It all goes back to the evolution of our modern, digital economy.

The turn of the century marked an important shift in the way commerce happened; namely it started to digitize. As digital commerce began to take root, software companies realized how di cult it was for some of their clients to process and ultimately accept digital payments.

In the late 1990s the merchant account application process was not only complex but also incredibly time consuming. However cumbersome, this presented less of a challenge for large, well established businesses with intricate operations and adequate resources. But as more small and medium businesses (SMBs) sought to accept credit cards, banks were suddenly challenged with keeping up with growing interest from SMBs.

The history of •

But SMBs weren’t privy to the infrastructure and resources available to large corporates. As a result, ISOs stepped in as an outsourced sales function for the Acquirer — they are a reseller, serving as an extension of the Acquirer . ISOs increasingly acquired new merchants and became the primary point of contact for ongoing service and other needs.

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Next came the internet.

Between the late 1990s and 2010 payment gateways, such as Authorize.net, CyberSource, DataCash, and Bibit, emerged enabling businesses to sell goods and services online. Payment gateways were una liated with with ISOs or Acquiring banks and merchants could either sign one up directly or find one supported by their Acquiring Bank.

This development did provide a slight challenge to merchants, however. As gateways were independent providers, this meant merchants suddenly had to manage multiple commercial relationships to satisfy all their needs.

It’s clear to see why PayFacs today hold such a coveted position within the payment ecosystem. Not only do they provide significant benefits to the merchants they serve but their substantial recent growth is also mutually beneficial to legacy players. Frictionless digital payments are conducive to greater payment volumes and these in turn feed more revenue to the Acquirers , the Acquirer Processors, and the Card Networks.

The modern PayFac model as we know it, emerged in 2010 and its focus was to streamline services and provide merchants with a single commercial relationship for all their payment needs. The two most notable PayFacs, Stripe and Square, were founded in 2009 – only two years before Visa and Mastercard launched their own o cial PayFac programs.

ADVANTAGES

What are the of the Payment Facilitator model?

What are the advantages of the Payment Facilitator model?

By using sub-accounts of the PayFac merchant account, businesses don’t need to go through rigorous onboarding and operational processes. The PayFac handles complexities such as:

• Getting a merchant account faster

• Setting up a payment gateway with fixed transaction cost

• Global credit and debit card acceptance

• Handling security requirements such as Payment Card Industry compliance, tokenization and fraud prevention

• Dealing with payment routing, declines, chargebacks, subscriptions and transfers

• Descoping from new regulatory mandates and legislation changes such as PSD2, SCA and 3DS 2.0

Key di erences between PayFacs and ISOs

The Payfac is licensed financial institution, which is not mandatory condition for ISOs.

License Underwriting Technology

The Payfac has its own in-house made gateway or uses white-label solution from Gateway providers, while ISOs are usually not limited to one gateway.

Utilizing sub-merchant aggregation

The Payfac acts like the so called “merchant of record” or “master merchant” and its customers are called “sub-merchants.” ISOs submit each merchant directly to the acquirer and follow the traditional steps of onboarding.

Because the PayFac has the merchant relationship with the Acquiring Bank, the PayFac is responsible for underwriting its sub-merchants (as well as Know Your Customer, Anti-Money Laundering, and other compliance checks).

The sub-merchants therefore avoid the traditional bank underwriting process and are instead able to become an approved sub-merchant in a matter of hours/days, not weeks/months.

As the master merchant, the PayFac receives funds from the Acquiring Bank during the settlement process. The PayFac then redistributes funds to its sub-merchants, and handles any future refunds or chargebacks.

Liability

Following the funds flow, credit risk, card scheme rules and risk management standards, the liability of the PayFac is higher than the ISO’s have.

Profit and scale

With greater responsibility comes greater opportunity to gain profits. The risk is rewarded by the ability to control the merchant pricing, ger higher margins and custom billing conditions to sub-merchants.

PayFacs bridge the knowledge gap for merchants and o er a streamlined, cost e ective solution, enabling businesses to optimize their payment strategies.

What should PayFacs

LOOK FOR IN A PARTNER?

What should PayFacs

look for in a partner?

Integrated payments give platforms more control over their payment experience and the ability to streamline the customer UX. Merchants taking this approach no longer need to establish direct relationships with acquiring banks or payment gateways.

PayFacs should, however, consider their payment partners’:

• Acquiring coverage

• Technology and Integration types

• Automation

• Fees

• Commercial setup – credit risk, settlement cycle, contract length, flexibility

• Compliance and regulatory knowledge

• Added value services

• Reporting

As the PayFac model gains momentum and appeal, more and more platforms are exploring the possibility of becoming a PayFac. It is an attractive proposition: fast, easy onboarding and additional revenue generation.

PayFacs typically work with two main players to facilitate the payments ecosystem: acquiring banks and payment partners.

1. Acquirers

PayFacs use merchant accounts to hold deposits. An acquirer supplies those merchant accounts. It also takes on the liability for any transactions processed through its payment facilitator customers. Since it carries that liability, the acquirer establishes some stringent requirements that the payment facilitator must follow.

2. Payment Partners

Payment processors authorize transactions and send these to the appropriate card networks. They also settle funds from the bank that issued the credit card used in the transaction. To work e ciently, a payment facilitator and a payment processor must integrate. Otherwise, transactions will not be routed correctly.

If your platform needs to operate internationally and support sub-merchants in other regions, partnerships with local acquirers, gateways, and other service providers may be necessary. In general, platforms will build local systems from scratch in order to adapt to local requirements or support multiple regions.

To simplify the process and lower the administrative burden, consider working with a single partner, like us at Nuvei, who operates as both an acquiring bank and a payment partner.

What

What do we do

FOR PAYFACS?

What do we do for PayFacs?

We are a global, multi-currency acquirer providing EU domestic and cross-border processing. We operate as both an acquirer and a genuine payments partner with local expertise around the world, facilitate a vast suite of local and global APMs, and fast pay-ins and payouts to your clients via Visa Direct and Mastercard Send.

Our single solution o ers a seamless end-to-end experience to customers, and a best-in-class support service to PayFacs, including server-to-server integration, sub-merchant onboarding, and much more:

1. Simple integration

At Nuvei, our technology is flexible, and we are third-party agnostic. PayFacs can rely on their own gateway integration or a white-label, third party solution. We also simplify complex server-to-server integrations.

2. Easy sub-merchant onboarding

Registering as a merchant with multiple issuing institutions requires a considerable investment in time with financial and performance requirements. We create a simplified sub-merchant enrollment process, and soon we’ll be o ering an MCC automated configuration API.

Our single solution o ers a seamless end-to-end experience to customers, and a best-in-class support service to PayFacs.

3. Multi-currency pricing (MCP)

Our multi-currency pricing (MCP) allows merchants to automatically display prices in customers’ home currency and allows them to pay in that currency as well.

Our dynamic currency conversion (DCC) allows platforms and can o er payment in almost all corners of the world. It allows you to o er your customer to convert their final checkout amount into their home currency, and to make their payment in that currency. We also o er post-Brexit support to Payfacs as our license is passported to serve the whole EEA zone and UK. read more about DCC and MPC here with link to https://docs.nuvei.com/documentation/features/financial-operations/currency-conversion-dcc-and-mcp/

4. IC++ buy rates

Our pricing combines the Interchange fee, the Scheme fee and an additional percentage of the transaction amount value to one fixed price per transaction.

5. Dynamic 3DS, chargeback handling and dispute management

The Dynamic 3D feature allows us to dynamically manage a 3D-Se cure flow for suspicious orders based on multiple criteria in the rule engine in real-time. This minimizes the risk of chargebacks and fraud, while converting high-risk tra c into payments instead of automatically rejecting them during the fraud screening flow.

Our chargeback management and dispute management solutions, meanwhile, remove any risk or burden from PayFacs by allowing merchants to respond directly to unrecognized card transactions and other potential disputes. Detailed reports are available via our back-o ce or API, giving users a clear overview of fraud and chargeback information.

6. Built-in security, risk and anti-fraud services

Our eKYC and document verification checks help PayFacs and your customers comply with Anti Money Laundering (AML) regulations while meeting identity management requirements. The rule engine runs during the pre-authorization phase of a transaction and its decision can impact the flow of the authorization in the acquirer bank.

Nuvei’s fraud screening rules, meanwhile, can block or flag transactions for review for a particular user that matches the logical conditions of the rules. Rules can be configured to automatically blacklist transactions according to elements such as credit card, email address, user I D, IP address and more.

The risk level is calculated by intelligent transaction data, such as device information, time zone, and other parameters. Frictionless customer authentication is achieved when the authentication can be done only using the data collected in the background, allowing the transaction to be processed without requesting any additional information from the customer.

7. Direct access to reporting and data

Our Control Panel helps PayFacs manage their payment workflow from developing payment pages to managing transactions and account balance, 24/7.

8. A personalised, superior service

We take a human-first, agnostic approach to our partnerships. As our partner, you’ll never be stuck talking to chat bots, we’re real humans on the end of a phone to consult with. We collaborate with leading companies and brands to extend our services and abilities, to grow our customers’ and partners’ global reach. That’s why our platform can integrate with almost any other system, including our competitors’, because we believe in collaboration, transparency and growing the world of payments together, across the globe.

BECOME A PAYFAC? Should you

Should you

become a PayFac?

PayFacs are well-positioned for substantial growth. Payment volumes are projected to increase over 100% globally from 2022 to 2025 to over $4 trillion.

With the global movement towards digital payments, PayFacs are well-positioned for substantial growth. Payment volumes are projected to increase over 100% globally from 2022 to 2025 to over $4 trillion, according to eMarketer.

Many software platforms find the PayFac model appealing because it provides more control and flexibility over onboarding flow and user experience. But by becoming a PayFac, be aware that you are also becoming a processing company that is responsible for the compliance and risk associated with global payments.

If PayFacs gather, analyze and interpret data they can, in turn, improve their operations and profitability, delivering more added-value services to sub-merchants. Embedded finance, for example, allows non-financial organizations to seamlessly integrate financial service features into their products and services.

PayFacs are responsible for the management of payment processing so it’s necessary to have infrastructure and support in place. If you are wary of taking on the risk, then working with a payment partner like us is fast solution, which will cover maximum target markets with a single integration.

What do you need in place

BEFORE BECOMING A PAYFAC?

The quicker a business can start transacting on a PayFac, the quicker online revenue starts flowing.

What do you need in place

before becoming a PayFac?

The quicker a business can start transacting on a PayFac, the quicker online revenue starts flowing. While getting a full merchant account can take months, the better PayFacs can often get an account going in minutes.

For businesses like ISOs, SaaS companies, franchisors, ISVs and online marketplace owners that already have some customer background verification logic at hand, it’s straight forward to become a PayFac.

Before becoming a PayFac, the following need to be addressed:

• Licenses for your target markets

• Technology, your own in-house built gateway or a ready to use white-label solution

• A certified hosted payment page, according to PCI standards

• A merchant onboarding and management system

• Access to a back-o ce platform for reporting and reconciliation

• An acquiring bank registration

• Additional risk and fraud protection. Both Visa and Mastercard have their CHB programs for merchant guidelines on managing fraud

• Rigorous and well-documented underwriting, compliance and credit risk policies. Best, hiring an AMLRO to create and oversee your activity and policies as a licensed financial institution.

CONCLUSION

The Payment Facilitator model has certainly been around for a while and is proving to be profitable for both the PayFacs themselves and the merchants they serve.

The basic principle relies on the belief that companies should indeed focus on their own core competencies and work in partnership with one another to ensure the further development of our ecosystem. PayFacs should look to work with a holistic payment provider who can not only support them 24/7/365 but also help them scale their own business by enabling their merchant customers to optimize their payment strategies.

Because the days when payment departments were considered a cost center are long gone. We’re now on the dawn of a new era, where strategic payment optimization is key to a business’ revenue growth – and PayFacs have a key role to play.

If you are a software provider and are considering the possibility of becoming a Payment Facilitator, we would be more than happy to help. Contact Yanita today, for an initial conversation.

CONTACT:

Yanita Karailieva yanitak@nuvei.com

ABOUT NUVEI