$11.53 trillion. That's the total projected transaction value of the digital payments market in 2024. Covid-19 has only exacerbated the adoption of digital payments, and the likelihood of cashless and digital payments across the world entering the mainstream remains high. 

To process these payments, payment facilitators are often required. Essentially, payment facilitators (or PayFacs) enable businesses to securely accept electronic/digital payments, whether in-person or online. 

PayFacs also provide a range of other services alongside payment processing, including transaction aggregation, merchant/client onboarding, ensuring PCI compliance (which includes Know Your Customer and anti-money laundering), providing merchant support, and much more.

PayFacs vs Payment Processors 

To be clear, PayFacs differ from payment processors: the former function as service providers to merchant accounts, bringing together a range of payment services including invoicing into one unified platform, thereby focusing on more than solely transaction execution. The entire breakdown of the difference between payment service providers, aggregators, and platforms can be found in our blog post here.

While the PayFac business model is well-known within the payment processing industry, there remains some confusion on the nuances of the terminology surrounding payment facilitators, particularly when it comes to the differences between registered PayFacs and PayFacs as a Service. 

Despite both sharing common PayFac functionalities (they both allow businesses a way to ensure payments are brought in-house), the two have many significant differences, which SaaS companies must take into consideration when choosing which one they will use to power their payments ecosystem. In this article, we'll take a closer look at the differences between a Registered PayFac and PayFac as a Service, and help you better understand which may be the right fit for you. 

What is a Registered PayFac?

A registered PayFac can be seen as a full payment facilitator, as it must be directly registered with a credit card network or acquiring bank. A PayFac will provide its payment processing services to other businesses, functioning as a middleman between the business and the acquiring bank or credit card network. As a registered PayFac, the business directly controls all payment processing systems (and also usually owns them). Some examples of registered PayFacs include PayPal/Braintree, Adyen, Stax Connect, and Checkout.com. But with great power comes great responsibility, as outlined in some of the below distinguishing factors of a registered PayFac. 

• Regulatory requirements and compliance: A registered PayFac must ensure compliance with all KYC regulations, and have the manpower to implement adequate and robust customer identification and AML procedures. These must meet both national and global standards to ensure full legal and regulatory compliance (such as PCI DSS Level 1 Compliance), as many registered PayFacs will have merchants from across the world using their services, which requires rigorous vetting to mitigate fraud and money laundering risks. 

• Operational responsibilities: Perhaps the most important service a registered PayFac offers is transaction aggregation. Essentially, this is a business model where the PayFac has the functionality that allows sub-merchants to sign up under their own merchant account and thereby process payments through one single master account. Simply put, a payment aggregator allows other merchants to seamlessly accept payments without creating their account with a credit card network or acquiring bank. 

They must also manage the entire underwriting process (a robust risk assessment process for all merchants), make onboarding for sub-merchants as streamlined as possible, provide regular risk and fraud detection services, and all settlement services. In short, all sub-merchants must be able to access all payment processing-adjacent services through a registered PayFac, all without needing their own individual account. 

• Costs and investments needed: Becoming a registered PayFac and integrating payments into a software platform has significant costs, requiring an average of up to $500,000 to launch, as well as an average of $100,000 a year in maintenance costs. Development and set-up of payment systems also can take as long as 2 years, as it requires building out merchant dashboards and payout systems, reaching Level 1 PCI Compliance, getting registered by card associations, and much more. Operational expenses such as specialized employees, insurance, and reserve accounts must also be factored in. As such, becoming a registered PayFac is not a feasible solution for SaaS businesses without significant cash flow. 

However, for those that have the finances and resources to become a registered PayFac, benefits include more control over the entire payment processing ecosystem, as well as the potential for higher revenue through various FinTech monetization strategies (including transaction fees, freemium models, and various partnerships and integrations).

What is PayFac as a Service? 

While a registered PayFac essentially takes on much more risk, utilizing a PayFac as a Service (or PFaaS) provider allows SaaS businesses to swiftly start accepting payments, minimizing the barrier of entry for companies who would like to access the benefits of a registered PayFac through a less capital-intensive approach. Essentially, PFaaS (such as Tilled or Finix) is a plug-and-play platform that eliminates the complex, resource-heavy approach of direct payment management, while still providing the majority of the benefits of a registered PayFac. Furthermore, SaaS organizations are not responsible for the setup or maintenance of the payments infrastructure, thereby requiring significantly less capital upfront.

• Regulatory registration: The PFaaS model means that the service provider is the registered PayFac, not the SaaS company accessing its payment ecosystem. 

• Operational responsibilities: The PFaaS provider will handle the majority of the responsibilities for its sub-merchants, including onboarding, underwriting, and compliance. While SaaS companies will still be able to access payment processing services (often through white-labeled solutions) they will not be responsible for most of these operations and can instead focus on running their business. 

• Costs and investments needed: For SaaS companies, costs are limited to the monthly/annual subscription costs the PFaaS requires. While this will vary from provider to provider, and is in part dependent on your SaaS business model, this will generally cost no more than a few thousand dollars a month. 

While new revenue streams are available for SaaS businesses partnering with a PFaaS provider via custom pricing models, the revenue is usually less than that which a registered PayFac receives, as it must be shared with the PFaaS provider. However, this is generally an acceptable trade-off for taking a hands-off approach to the complexities of directly managing payment processing and aggregation.

Comparing Registered PayFac and PayFac as a Service

Deciding Between Being a PayFac or Using PayFac as a Service

It can be difficult deciding what road to go down as a SaaS organization, but there are some factors to take into consideration to make the process easier. It’s also worth noting that a solution provider like Preczn can serve as a decision-maker for you. In this regard, we can factor in your needs and help you determine which route to take.

That being said, if you're a small SaaS start-up or scale-up, becoming a registered PayFac is unlikely to make sound financial sense, given the resources and deep expertise required for set-up, underwriting, and continual risk management. For those SaaS businesses with significant ARR and clients that collectively process up to $100 million, becoming a registered payment facilitator can offer lucrative benefits. 

However, for the vast majority of SaaS businesses, the economics of becoming a registered PayFac simply do not make sense. If your ARR is high enough, then you must determine if the added revenue from monetization strategies and value-added services will outweigh the upfront and maintenance costs of becoming a registered PayFac. If it does, then it may be an option for your businesses in order to have total oversight of the payment process. 

Final Words

For most SaaS businesses, the PFaaS model provides the best of both worlds: accessing the revenue potential registred PayFacs offer and streamlined integrated payments. And it's all without having to build your own payment platform in-house, manage PCI compliance, and handle underwriting, empowering your business to focus on what really matters and leaving the rest up to the pros. 

At Preczn, we take a holistic payment processing approach that unifies your payment provider, customers, services, and data into one single platform. Through what we call platform orchestration, vertical SaaS businesses can access a single source of truth through our FinTech operating system, unlocking new revenue streams that go beyond traditional payment processing. 

Discover our Fintech as a Service approach and learn more about our integrated financial services solutions today. Contact us for more information.