Should You PF? Choosing the Model That is Right for You
Every software provider that is considering accepting payments has a fundamental choice to make: Should you handle the payments yourself? Or should you outsource the payments piece to someone else?
The answer to these questions is not one-size-fits-all. There are many considerations, from financial to logistical. Over the coming weeks, we plan to explore the choice with a series of deep dives.
This week, we’ll begin exploring the key considerations when deciding how to handle payments.
Traditionally, companies that wanted to accept card payments had to set up their own merchant accounts through an acquirer. The process was often cumbersome – not to mention cost-prohibitive – for many small businesses.
As the payment facilitator model gains traction, small companies now have access to another option for accepting and processing payments – essentially bringing all or part of the processing functions previously handled by acquirers in-house.
A paper published by Infinicept, Why Software Vendors Should Be Payment Facilitators, explains how the model sets up a basic choice for ISVs – whether to operate as what it calls a retail or wholesale PF. This choice is one of the first considerations for a company that has made the big decision to become a PF, and we’ve included an overview of the features of each below:
Retail payment facilitators own the client relationship and offer payment services to their clients, according to the paper. However, they outsource the associated payments processing and liability to a third party. The third party handles the underwriting and fraud monitoring as well as providing the master merchant account.
Wholesale payment facilitators, on the other hand, own the entire relationship with their clients, including all of the payment processing functions. For a company that started out as a software vendor, this requires a shift in business model that will enable the proper risk management and payment processing support infrastructure.
The card brands support the payment facilitator model as a way to broaden the types of merchants who are eligible to accept payments. Although the PF model has increased the types of merchants who are eligible to accept payments, there are still rigorous requirements to protect the payments system from fraud. These include complying with data security standards and performing due diligence on submerchants.
According to the Infinicept paper, wholesale PFs take on responsibility for these requirements – and thus more risk. But they also have the potential to reap more rewards through additional revenue and the control the wholesale PF model affords.
The good news is, no matter which model you choose, support for this burgeoning business model has expanded greatly in just the past few years. Many ISVs who wish to outsource the payments functions to someone else turn to existing PFs such as Stripe or WePay.
And for those who wish to take on the payments piece themselves, acquirers such as First Data; Vantiv, now Worldpay; and Elavon have developed specialized programs catering to the specific needs of payment facilitators. And new companies such as Infinicept and Payrix have sprung up to offer platforms and tools that keep aspiring PFs from having to spend months building out their payments infrastructure.
As we continue this occasional series, we take a look at the factors that help every ISV decide whether to make the leap into retail payment facilitation. We’ll talk about compliance and staffing, revenue and risk.
In the meantime, what are your questions about payment facilitation? Let us know by leaving a comment.
Of course, payment facilitators need to consult with their acquirers and attorneys or other compliance advisers for detailed advice particular to their situations.