As tech-forward software platforms grow, owning as much of the customer experience as possible is important for generating lasting product stickiness and brand loyalty. But for many businesses, payments are often supported by third-party providers.

Owning and customizing embedded payments and financial services within your product can help differentiate your business and be a tool for growth, giving you the power to drive revenue, turn payments into a profit center, and expand the value and functionality you deliver to customers.

A growing number of enterprises are adopting embedded payments technology. According to a 2020 survey, 59% of businesses reported using embedded payments. In a 2022 survey Stripe conducted with Edgar, Dunn & Company, 67% of SMBs said they subscribe to at least one cloud-based software solution; 73% of those SMBs reported integrating payments with one or more of their software tools; and 65% said they’re likely to consider financial services offered by their software vendors in the future.

We’ll cover what payment facilitation (payfac) and payfac as a service are, how they work, and how they can benefit your business.

What’s in this article?

• What is a payment facilitator (payfac)?
  
• What is payfac-as-a-service?
  
• How do payfacs work?
  
• How to become a payfac
  
• Payfac-as-a-service vs. becoming a payfac
  
• Benefits of payfac-as-a-service
  
• What to look for in a payfac-as-a-service provider
  
• Stripe payfac solution
  

What is a payment facilitator (payfac)?

A payment facilitator (payfac) is a type of service provider that enables businesses to accept different forms of electronic payments, such as credit and debit cards, ACH, and echecks. Payment facilitation refers to the process of making transactions or payments easier, faster, and more convenient for all parties. It encompasses a range of activities, including setting up and managing payment methods, processing payments, reconciling transactions, and protecting against fraud. The goal of payment facilitation is to simplify the payment process for individuals and businesses and ensure that payments are secure, efficient, and accessible.

What is payfac-as-a-service?

Payfac-as-a-service is a turn-key payment facilitation model in which an external company provides businesses with the necessary tools and infrastructure to accept electronic payments, such as credit and debit cards, ACH, and echecks. Enabling businesses to outsource their payment processing, rather than constructing and maintaining their own infrastructure, requires a fraction of the resources necessary to build and manage a traditional payfac.

How do payfacs work?

Traditional payfacs enable businesses to accept various forms of electronic payments by providing them with a payment gateway and merchant account required to accept and process electronic payments. Increasingly, additional features and services are offered, such as underwriting, compliance, fraud detection and prevention, chargeback management, and reporting and analytics.

Here’s a rundown of the basic functionality and support that most payfacs provide:

• Payment gateway
  Payfacs provide a payment gateway, a software that acts as an intermediary between a business’s website and the payment processor. The payment gateway facilitates the secure transmission of customer payment information, such as credit card numbers, from the business’s website to the payment processor for validation and processing.

• Merchant account
  Payfacs also provide a merchant account, a type of bank account that allows businesses to accept and process electronic payments. The merchant account is linked to the payment gateway and is used to deposit funds from successful transactions into the business’s bank account.

• Underwriting
  Payfacs perform underwriting, which is the process of evaluating a business’s ability to process payments, typically by checking the business’s credit, financials, and ownership. This process ensures that businesses are financially stable and able to manage the funds they receive.

• Compliance
  Payfacs also handle compliance with regulatory requirements, such as PCI-DSS, AML, and KYC. These security standards ensure the safe handling of sensitive customer information, combat money laundering, and verify customers’ identities.

• Risk management
  Payfacs also handle risk management, which is the process of identifying, assessing, and prioritizing potential risks to the business and its customers. This can include fraud detection and prevention and chargebacks, among other potential risks.

• Reporting
  Payfacs offer reporting features that allow businesses to track their transactions, view account balances, and monitor payments.

How to become a payfac

Instead of using a third-party payfac provider, some businesses choose to bring their payments in-house by becoming a payfac themselves. For platforms and marketplaces whose users are sub-merchants, becoming a payfac eliminates much of the complexity of a sub-merchant setting up their own online payments. Operating on a platform that acts as a payfac means there’s no need to work with an acquiring bank, payment gateway, and other service providers.

However, becoming a payfac requires a significant amount of up-front and ongoing work, like opening a merchant account, obtaining a merchant ID (MID), and getting your PCI DSS certification. The platform must meet security and compliance requirements, register with card networks, and build and maintain the operational infrastructure necessary to facilitate all of the functions provided to sub-merchants. There’s also substantial risk exposure involved when platforms take on traditional payment facilitation in-house, since they become responsible for writing and implementing compliance policies.

For a deep dive into what it takes for a platform to become a payfac, see our guide on payfacs, which covers everything from implementation to time and cost investments to compliance and maintenance considerations.

Payfac-as-a-service vs. becoming a payfac

Payfac and payfac-as-a-service are related but distinct concepts. Both offer ways for businesses to bring payments in-house, but the similarities end there. For businesses, the difference between using payfac-as-a-service compared to becoming a payfac comes down to time, cost, and risk—in short, payfac-as-a-service requires considerably less of all three.

A payfac is a company that provides payment processing services to other businesses, acting as an intermediary between the business and the acquiring bank and handling the payment processing on behalf of the business. Payfac-as-a-service, on the other hand, refers to a business model where a company provides payfac services to other businesses on a fee-for-service basis. This means that the business outsources its payment processing to a third-party provider, who is responsible for managing the payment processing on its behalf. The payfac-as-a-service provider charges a fee for its services, which often includes a percentage of each transaction processed or a flat fee per transaction.

The main difference between payfac and payfac-as-a-service is the ownership of the payment processing systems and level of control the business has over the payment processing. In a payfac model, the business owns the payment processing systems and has direct control, while in a payfac-as-a-service model, the third-party provider owns and manages the payment processing systems on behalf of the business.

Historically, bringing embedded payments in-house by becoming a payfac has been a heavy-lift way for platforms to retain control over their customer experience and financial services they offer, while maximizing their revenue from embedded financial services. However, increasingly, payfac-as-a-service features, like those offered by Stripe, provide white-label solutions that mitigate the downsides of outsourcing payment facilitation for platforms.

Benefits of payfac-as-a-service

Payfac-as-a-service offers a convenient and cost-effective payment processing solution for businesses—especially small and medium-sized enterprises—that allows them to focus on their primary business operations instead of managing payments in-house. The benefits of this approach, listed below, carry an even greater impact for platforms whose core expertise lies outside the scope of financial services.

Ability to monetize payments

Embedding financial services can grow revenue per customer two to five times more than the traditional model. Using a payfac can also boost customer satisfaction, expand market reach, and improve data insights, all of which can help to monetize payments and drive growth for the platform. In terms of monetizing payments, bringing payments in-house by using a payfac provider gives platforms the ability to create a new revenue stream from transaction fees.

The revenue gains associated with embedded finance expand as platforms offer a wider range of services to their sub-merchants. The Stripe payfac solution, for example, helps platforms drive revenue from other financial services such as loans, issuing card programs, point-of-sale payments, and faster payouts. Traditional payfac solutions are limited to online card payments only.

Security and efficiency

By using a payfac-as-a-service provider, businesses can benefit from increased security measures that protect against fraud and data breaches. Typically, providers implement advanced security measures, such as encryption, tokenization, and multifactor authentication, to ensure the security of customer data. Payfac-as-a-service can also improve the efficiency of payment processing for businesses by automating many of the manual tasks associated with payment processing, resulting in faster transaction processing times, reduced errors, and more nuanced, actionable reporting.

Other key benefits to using a payfac-as-a-service provider:

• Monetize payments
  
• Enable users to accept payments in minutes
  
• Customizable solutions
  
• Less complexity
  
• Reduced time and resource investment
  
• Less risk
  
• Minimal maintenance
  
• Access to expert tech and support around payments
  

Many tech-forward platforms decline to bring their payments in-house because it’s simply not their area of expertise. Payfac-as-a-service gives platforms all the benefits of being a payfac—like access to external, best-in-class payments technology and fraud protection, plus concierge-level support from financial services experts who are perpetually iterating, refining, and evolving the payfac solution—without needing additional expertise.

What to look for in a payfac-as-a-service provider

Finding the ideal payfac-as-a-service provider best suited to the needs of your business and the sub-merchants you support requires evaluating numerous points of functionality and support:

• Compliance and security
  Ensure that the payfac is compliant with regulatory requirements, such as PCI-DSS, and is able to provide a secure environment for processing electronic payments. It’s important to look for a payfac that has a strong track record of security and compliance and has implemented measures such as tokenization, encryption, and fraud detection and prevention.

• Payment processing capabilities
  Look for a payfac that offers a wide range of payment processing options, including credit and debit cards, ACH, and echecks. Consider the types of payments that your business currently accepts, as well as those you plan to accept in the future.

• Customizable integrations
  Some payfacs offer customizable integrations that allow businesses to easily merge the payfac’s services with their existing systems. This can save time and reduce the complexity of the integration process.

• Fees and pricing
  Compare the fees and pricing of different payfacs to ensure that you’re getting the best value for your money. Look for payfacs that offer transparent pricing and a clear understanding of the fees associated with their services.

• Customer support
  The financial functions that a payfac handles are critical to a business’s operations, so it’s important to find one that offers exemplary customer support. This can include 24/7 phone and email support, as well as online resources like FAQs and guides.

• Scalability
  Ensure that the payfac can scale to meet the changing needs of your business. This can include support for increasing numbers of transactions, new payment methods, and integration with new systems.

• Reporting and analytics
  Some payfacs offer reporting and analytics features that allow businesses to track their transactions, view their account balances, and monitor their payments. Having embedded payments and other financial services will yield a tremendous amount of data about your customers. Ideally, you want to find a payfac that has built-in mechanisms for synthesizing and applying data.

Stripe payfac solution

The Stripe payfac-as-a-service solution is designed to help platforms drive revenue by fully embedding payments, among other financial services, into their software so they can quickly and easily enter the market while keeping setup costs low and maximizing their monetization potential. The Stripe payfac solution also offers the ability to white-label other financial services, such as issuing cards and loans.

Stripe’s comprehensive payment processing service enables platforms to accept a wide range of electronic payments with easy integration. It’s secure, compliant, and offers additional features such as fraud detection and prevention, chargeback management, a transparent and flexible pricing structure, and reporting and analytics.

Stripe’s API-first solution lets platforms design every aspect of their ideal customer experience, including the ability to:

• Fully customize the user experience or leverage prebuilt UI components
  
• Set payout timing
  
• Set pricing and fees
  
• Manage complex money movement
  
• Integrate and unify financial reporting
  
• Scale the business globally without having to establish local bank accounts and company entities in each market
  
• Expand beyond payments by offering new services to customers like point-of-sale payments, invoicing, issuing payment cards, subscriptions, and lending
  
• Own the customer experience
  
• Maximize revenue
  
• Gain differentiation in competitive markets
  

The Stripe payfac solution was engineered specifically to solve for the drawbacks and shortcomings that have made platforms hesitant to use a third-party payfac. Many of the world’s fastest-growing platforms use our payfac solution to drive SaaS revenue, turn payments into a profit center, and offer new financial services.

Learn more about the Stripe payfac solution here. If you’d like to discuss how Stripe can help your business drive growth, get in touch with our team.