Payment Facilitators Versus Payment Processors – What Are the Differences?

The trend of ISVs and software platforms enabling payment acceptance through their SaaS (software-as-a-service) and installed software systems is exploding. In fact, McKinsey has found that 50% of small businesses now run payment processing through their ISVs, and 15% are in the process of transitioning their payment processing to an ISV provider. 

Embedded payments is a multi-trillion dollar opportunity for ISVs but choosing the right payment processing partner can be a challenge. With traditional payment processing options, the signup process can be time-consuming and frustrating, the merchant approval process can take up to 7 business days, and pricing is confusing and fraught with hidden and recurring fees. The problem for enterprises is that traditional merchant service offerings lack the dynamic funding and flexible billing options needed to access new markets while supporting existing business processes.

Software companies are in an optimal position to embed payments into their offerings to unlock new revenue and improve customer experience. We review the two primary integrated payment options – traditional merchant acquiring offered by a payment processor and payment facilitation offered by a payment facilitator (payfac).

Traditional Payment Processors (Merchant Acquirers)

ISVs want to provide a user experience that is simple, convenient, and consistent – making the most difficult of back-office processes non-evident to the point of invisibility. Businesses sign up for practice management software to simplify and manage their business processes, thereby rewarding the ISV with subscription revenue and loyalty. 

However, merchant acquiring – which can be considered the traditional payment processing model – requires significant time and effort to open an account and can be expensive. Payment processors provide the systems and technology that actually processes the payment transactions, routing them to the card networks and the banks, receiving authorization and declines, and settling funds. 

Because of the way traditional processing was built, it takes time, effort, and money by the payment processor to enable and support merchants. Considerations include:

  • Onboarding (Underwriting and Account Setup): Full merchant onboarding can take 3-7 business days for enrollment, which includes an application form, supplemental paperwork (merchant financials, voided checks, driver license, etc.), and human underwriters.

  • Flexibility of Funding: Payment processors will offer a variety of digital and payment types, but typically only the largest merchant acquirers can offer split payments, convenience fees, service fees, multi-account, fast funds, and dynamic funding. 

  • Monthly recurring fees: There are many parties in the payment processing flow – the payment processor (which can also be the payment gateway), the card associations, the acquiring bank, and more. A payment processing statement can contain upwards of 10 different fees charged to the merchant on a monthly basis, which can be difficult to decipher.

All this being said, in the merchant acquiring model, the processor almost always shares merchant revenue with the ISV. There are a host of factors that go into determining revenue share, from payment volume to transaction size to who is selling the account and providing first-level support. 

Payment Facilitators (Payfac)

Payfacs offer payment processing to companies, known as sub-merchants, through their own links with payment processors. Payfacs serve as an intermediary, gathering sub-merchant transactions and passing them to a payment processor for completion. Payment facilitators provide three primary services to their customers:

  • Onboarding (including instant signup and underwriting) services

  • Payment processing services

  • Back-office functions (including settlement and reconciliation)

The Payfac model simplifies the merchant account enrollment process and provides increased levels of control to ISVs. Seamless and paperless underwriting is at the heart of this model, accelerating standup times for merchants.

Payfacs wrap all these services into APIs that software companies can integrate to, automating the entire provisioning process into a seamless merchant enrollment experience that can be completed online by a merchant in minutes. This API-centric integration and automation is very different from the traditional payment processing enrollment experience.

There are additional considerations when choosing a payment model, including transaction types, pricing, hardware, and compliance and security. Check out 6 Factors to Consider When Choosing a Payment Processing Model to learn more about features and functionality across models.

The Different Payfac Models

Payfacs create a more dynamic user experience for ISVs. But like any payment option, there are different payfac models to choose from. 

Software Platform as the Payfac

Some ISVs have opted to become their own payfac to gain complete control of the payment process and all payments revenue. However, this is the most aggressive payfac model typically only adopted by the largest ISVs since:

  • The time to become a Payfac can range from 12-18 months.

  • The cost can reach into the millions due to software buildout, integrations, bank sponsorships, PCI compliance, AML compliance, financial reserves, registration fees, and more.

  • The ISV assumes 100% of the risk and liability for their sub-merchants.

  • Payment industry experience is required to run underwriting, transaction risk monitoring, and daily financial settlement. 

  • All merchant account sales and customer support must be provided by the ISV.

Without these pieces already in place, an ISV could risk becoming distracted from their core software business.

Payfac Direct Providers

Some larger providers now provide payment facilitation as a direct service to sub-merchants. Here, the ISV can integrate to the payment platform and provide the platform’s payfac services to their merchants directly. However, this is considered more of a “pay to play” model where the ISV is leveraging their processing only. Considerations can include:

  • Margins: Many direct payfac providers will not offer revenue sharing and impose a high buy rate, which can lead to limited margins for the ISV and more costly processing for the sub-merchant (the ISVs’ clients).

  • Merchant Ownership: In the direct model, it can be extremely difficult to support the portability of sub-merchants or transaction data to another provider, if the ISV decides to go with a new payfac or payment processor.

  • Support: A complaint among merchants and ISVs with direct payfac providers is the lack of “human” support, with companies directing SMBs to chatbots or online forms for questions.

While ISV clients will enjoy the benefits of payfac with the direct model – fast onboarding, payment experience control, a variety of funding options – it could come at a higher price and lower margin for the ISV.

Payfac as a Service

Payfac as a Service is the newest entrant on the payfac scene. In this hybrid payment facilitation model, the payfac payment service provider becomes a payfac with Sponsor Banks; they act as a master merchant account and are able to set up sub-accounts for merchants same-day. Payfac as a Service providers differ from traditional payfacs in that they:

  • Offer aggressive revenue shares.

  • Allow portability of merchants and transactional data.

  • Assume all merchant risk and liability.

  • Provide flexible ISV and sub-merchant contracts to support specialized sub-merchant business models and state requirements.

  • Can provide human support to the ISVs and rapid merchant service support.

This model can be ideal for software providers that want to offer their clients same-day onboarding, provide fast funding, and control the sub-merchant experience, while making payments revenue and increasing margins.

Check out our Embedded Payfac FAQs to get frequently asked questions and answers on embedded payment facilitation, plus definitions of payment processing terms.

The Payfactory Solution for ISVs

Software companies increasingly view fully embedded payment functionalities as complementary to their platforms. A payment offering not only enables software companies to capture a larger portion of the economics of a given payments transaction, but also comes at nearly zero customer acquisition cost as it is a logical cross-sell to their existing customer base.

Payfactory specializes in embedded payfac services for ISVs and SaaS companies. Our gateway-friendly platform integrates with software systems to provide seamless payment facilitation with little to no development required, allowing our partners to minimize integration costs and quickly gain a new revenue stream. Founded by payment industry veterans, we believe that integrated
processing should be simple, frictionless and fast – while also maintaining the highest level of security, customer service and human
support.

Access our API documentation and sandbox to see why Payfactory is the easiest and fastest way to enable merchant payments and to start making revenue today. 

Integrated Payments and Embedded Payments: a Trillion-dollar Opportunity

Ten years ago, it was novel to have a SaaS, CRM or EHR platform that offered core business and operational functions while also allowing customers to pay for services within the platform itself. 

Shoot to 2023 when payments integrated or embedded within software systems are not only the new normal but are expected by consumers – regardless of industry. You prepay for an appointment with your doctor through their EHR system, you order an Uber or Lyft and pay within their mobile application, you visit your salon and tap to pay through their CRM. 

According to Bain & Company, Independent Software Vendors (ISVs) have the potential to address $35 trillion in payments, or 15% of the worldwide total, by integrating payments into their platforms. Not only do integrated payments meet consumer demand but they also offer ISVs and SaaS platforms a lucrative revenue stream while creating stickiness with clients.

But navigating the world of payments can be a challenge for software companies. Let’s look at exactly what integrated payments are, the benefits of integrated payment systems and considerations when choosing an integrated payments partner.

What are integrated payments?

Integrated payments – also called embedded payments – is payment acceptance built directly into the software systems that businesses use to conduct commerce. Virtually every company now uses one or more software platforms as part of their day-to-day operations. Many are consumer-facing, where individuals are directly interacting with the SaaS platform, whether in healthcare, higher education, retail or government. For consumers, paying within the platform is convenient, efficient and can enhance brand loyalty.

The terms “integrated payments” or “embedded payments” also encompass any kind of payment method – and there are many to choose from, including:

  1. Credit & debit cards

  2. Automated Clearing House (ACH) transfers

  3. Electronic checks

  4. Mobile wallets (Google Pay, Apple Pay, Samsung Pay)

  5. Buy Now, Pay Later (BNPL)

While accepting credit cards is standard for almost all ISVs, what additional payment methods are offered will depend on the size of your company, your vertical or industry, your customer profile and a host of other factors. A knowledgeable integrated payments partner will help you determine which options are best for your business. 

The benefits of integrated payments

While integrated payment and embedded payment solutions significantly benefit consumers, the benefits to ISVs and SaaS providers are numerous.

  • Additional source of revenue: The software platform will gain a portion of processing revenue with their integrated payments partner. Revenue share will vary by company size, payment processing model and transactional volume, but can reach millions of dollars per year for larger ISVs. 
  • Elimination of manual reconciliation: Integrated payments eliminates the process of manually entering and reconciling transaction data into the software system. Not only is manual accounting time consuming, but it is also prone to errors and is not scalable with your business.
  • Cost savings: Many small to medium-sized software platforms don’t have dedicated accounts receivable departments to review payment information. Integrated payments create operational efficiencies, leading to decreased overhead and cost savings.
  • Client stickiness: Let’s be honest – there is fierce competition in today’s ISV market. It can be difficult to win business but once won, keeping it is crucial. When clients enable integrated payments through your software, there is less likelihood of attri

Choosing an integrated payments partner

There are many factors to consider when choosing an integrated payments partner, which will vary by what you want out of the relationship. Questions to ask yourself can include:

  • What is my desired revenue share from a partnership?
  • What kind of payment methods do I want to accept?
  • What level of payment security compliance do I want from my partner?
  • What kind of customer relationship management and support will I, and my merchants, receive from my partner?
  • How involved do I want to be in the sales process?
  • How quickly do I want to board merchants for payment processing? 

Starting with these questions will help you determine the best integrated payments partner for your business – whether that is a traditional payment processor or a payment facilitator, also called a Payfac.

The Payfactory difference

Formed by payments industry veterans, Payfactory enables ISVs and SaaS vendors to effortlessly integrate or embed payment acceptance into their platform. A true Payfac-as-a-Service, Payfactory provides immediate onboarding, digital payment acceptance and is gateway-agnostic, meaning that you can quickly enable Payfactory on your current payment platform, or partner with Payfactory’s preferred payment gateway, Bluefin.

We believe that merchant processing for ISVs can be simplified without sacrificing support. Partnering with Payfactory means white-glove, human-centered service for our partners and their merchants. That’s the Payfactory difference. Learn more about our platform.