March 22, 2023 at 12:44pm

Trends come and go in the payments industry. Payment facilitation followed a predictable trajectory, from the gold rush fever of early implementations to mass disillusionment as major players grabbed market share. In their wake, merchant acquirers, ISOs and agents were left with micro and nano merchants, ever careful to stay under that million-dollar processing threshold to comply with card brand rules. The story might have ended there, but for the sheer determination and ingenuity of payments architects and designers who blazed a different trail.

This series, “Just the FACs,” follows the transformative journey from early-stage payment facilitation to modern PayFac offerings that are shaping the future of digital commerce. Along the way, we’ll share insights from leading merchant acquirers, ISOs, independent software vendors (ISVs) and service providers who are enhancing the customer experience and opening new revenue-sharing opportunities. We will also explore how principled design creates agile, secure and highly intuitive solutions.

PayFac Evolution
PayFac has evolved from passive plug-ins to flexible technologies that enterprises can bend and shape at will. Early off-the-shelf iterations might have worked for marketplace sellers but had little to offer ISVs that customize apps for specialized markets and prefer revenue sharing to sunk costs and relationship managers to FAQs and live chat.

Ruston Miles, Payfactory founder and CEO, and ETA Payment Facilitator Committee member, observed that modern approaches to payment facilitation represent a paradigm shift from earlier iterations, which he characterized as “fast onboarding for ISOs.”

“During the PayFac 1.0 land grab, ISOs were aggregating merchants they didn’t know too well, which led to sizable merchant fraud and losses,” he said. “Generic ‘PayFac for the masses’ had a lot of risks but new embedded models allow ISOs, agents, and ISVs to know their merchants and reduce overall risk of merchant fraud. Less loss results in more margin to share.”

True Embeddedness
Describing embedded payments as a hallmark of PayFac 2.0, Miles noted software developers appreciate the difference between integrated and truly embedded payments.

“I see PayFac 2.0 as embedded payments, and that means truly embedded, not just integrated,” he said. “Unlike integrated models that rely on merchant providers, software providers and payment gateways all working loosely together, PayFac 2.0 embeds payments directly inside software, from front-end signup to the merchant’s own reporting.”

PayFac 2.0 is an elegant experience, Miles noted, that allows service providers to know their merchants better and derive the following key benefits:

Know your merchant: By fully embedding payments within verticalized software, PayFac 2.0 optimizes the merchant experience for each business, whether salon, insurance agency or school district, while allowing service providers to identify and understand who their merchants are and how they process.

Increase agility, lower risk: By leveraging advanced AI and machine learning (ML) to manage risk, PayFac 2.0 accelerates enrollments with agile, intelligent credit decisioning and customer onboarding.

Expand choice, reduce cost: By offering a range of service options, from full-service to PayFac-as-a-Service, PayFac 2.0 enables software brands to customize and control the PayFac experience without having to invest in building PayFac infrastructure.

Gain control, capture revenue: By building PayFac 2.0 directly into their applications, software brands and their participating ISO, acquirer and agent partners can capture high revenue share while controlling the user experience, from front-end onboarding to embedded payment acceptance and reporting.

Choose your gateway, processor: By facilitating open, interoperable service models, PayFac 2.0 can be both processor and gateway agnostic. To ensure high security and performance levels, providers may make their own recommendations but can also honor existing gateway and processor relationships.

PayFac as a Force Multiplier
With the PayFac 1.0 gold rush behind us, the next big thing for ISOs, agents and ISVs may be hiding in plain sight. Like any mass migration, PayFac 1.0 produced winners and losers but the story doesn’t have to end with “winner takes all.”

There’s no doubt payments and retail industries have democratized technology and made a big brand experience accessible to small and midsize merchants, but big business will continue to have requirements that can’t be watered down. Growth remains top of mind among all enterprises, and PayFac 2.0 is designed to help them scale at the speed of software.

During ETA’s State of Payments, held virtually on January 25, 2023, the ETA’s Payment Facilitator Committee predicted more PayFac growth in 2023, advising ETA members that regional banks and credit unions are becoming more active in the space. The committee continuously updates ETA Payment Facilitator Guidelines and Payment Facilitators Common Usage Guide to stay current with ecommerce, privacy, compliance, marketing practices and graduation of submerchants, in the post-COVID era, committee members noted.

It’s time to celebrate the payments industry’s collective journey from PayFac 1.0 to PayFac 2.0, next-generation embedded solutions that facilitate payments, seamless customer experiences and profitable business relationships. Next up in this series, we’ll explore how to build security into the digital customer experience.

Dale S. Laszig is a payments industry journalist and guest columnist for Payfactory. Previous to her writing career, she managed business development for leading payments acquirers and POS manufacturers. Connect with her at [email protected]LinkedIn and Twitter.

The Electronic Transactions Association (ETA) is the global trade association representing more than 500 payments and technology companies. ETA members make commerce possible by processing more than $6 trillion in purchases in the US and deploying payments innovations to merchants and consumers. Learn more: