The Evolution of Integrated Payments: Payment Facilitation
The payment facilitation model emerged in response to the limiting capacity that ISOs (Independent Sales Organizations) offered merchants in the early 1990s. For businesses processing millions of dollars in transaction volume annually, the one-size-fits-all solutions provided by ISOs weren’t designed to meet the specific needs of any given business vertical.
An online babysitting platform may have needed a way to pay sitters after taking their cut. A restaurant may have required a POS (point of sale) system tied to a software product that made it easy for customers to tip the waitress who placed their to-go order. As software products became hyper-verticalized for all kinds of industries, payments remained stagnant.
Enter payment facilitation
Payment facilitation allows for the same kind of verticalization we’ve come to expect in software, for payments. A payment facilitator is a specialized merchant that has all the privileges of a payment processor: they can underwrite sub-merchants, process transactions, manage disputes, and make payouts on behalf of sub-merchants. Payment facilitators are essentially mini-payment processors. Some notable payment processors you may know include Paypal, Square, and Stripe.
A good example of a payment facilitator would be a fictional company named SaaSyboats, a Software-as-a-Service provider that targets small to medium-sized businesses in the maritime industry. A sub-merchant of the payment facilitator, in this case, would be the Old Harbor Yacht Club, which uses Sassyboats’ software to manage memberships, boat and accessory rentals, and the clubhouse restaurants.
Providing payment processing to a yacht club might seem like a straightforward process. There are, however, several features specific to the boating and maritime industry that make SaaSyboats an ideal choice for any yacht club. As Old Harbor Yacht Club grows and scales, it makes sense for them to have a software solution that integrates their club management needs with payments.
The solution provided by the payment facilitator simplifies the process of accepting payments for sub-merchants like Old Harbor Yacht Club. This payments solution:
streamlines the underwriting process
allows for customization of the payments experience
insulates the sub-merchant (Old Harbor Yacht Club) from the required compliance responsibilities of payment facilitators
simplifies the funds’ settlement process so that the effort required for reconciliation is significantly reduced
Why we need payment facilitators
Payment facilitators exist in the middle of a sophisticated stack of networks and organizations that interact to ensure data and funds are safely and securely transmitted from cardholder to the end merchant. Payment facilitators bridge the gap between sub-merchants and acquiring banks and processors while managing risk, ensuring compliance, and simplifying settlements.
Right now, for businesses who process large transaction volumes, there aren’t a lot of options that provide the kind of comprehensive payments infrastructure solution that payment facilitation does. Enterprise companies could choose a third party provider as a payments solution but end up giving away basis points, paying based on processing size, which ultimately means paying more the more you process, and facing limitations on customized functionality.
Without the payment facilitation model, organizations would need to independently build out costly, time-consuming integrations and relationships with each financial services network entity. And then there’s the cost. Building an in-house payments stack requires about 2-3 years on average, and can cost upwards of $5 million before deployment.
Powering your business with better payments
There are a variety of payment strategies that companies can leverage, depending on their size and the way they serve customers. Small companies that earn the bulk of their revenue from goods and services they sell directly might consider easy-to-use third party payment platforms. Vertical platforms who accept transactions on behalf of other merchants, will in many cases reach a transaction processing point where the fees associated with their large processing volume becomes prohibitive, prompting the search for a better, profit-focused solution. For these companies, integrating with or becoming a payment facilitator is a definite value add.
Not only will these companies be able to personalize and deliver a world-class product experience for their customers, but they will be able to reap large margins of revenue previously paid to third parties in the form of transaction processing fees. Beyond these primary benefits, astute organizations can process payments for all sorts of businesses in their vertical, positioning themselves at the top of the payments processing food chain.
Interested in turning your payments center into profits? Get in touch with a Finix payment specialist here.
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