Becoming a Payment Facilitator, Payment Service Provider [PSP] or Payment Aggregator
[Update: A more thorough examination of the payment aggregation model can be accessed in our white paper section.
Payment Aggregation: What you should know.
A Payment Aggregator or Facilitator [Payfac] can be thought of as being a Master Merchant, facilitating credit and debit card transactions for sub-merchants within your payment ecosystem. Becoming a PSP [Payment Service Provider] lends itself well to some businesses that fall into the software provider classification. Some well know aggregators or Payment Service Providers [PSP’s] are PayPal, Stripe and Square. How are they different from a merchant account provider? Paypal/ Stripe/Square underwrite and provision the merchant accounts themselves and fund their sub-merchant’s payments. MOST importantly, PP, Stripe and Square assume the risks involved in payment processing including fraud loss, chargebacks and non payment. A traditional merchant account provider will obtain information from the business owner that makes them comfortable enough to assume payment risks. One of the big advantages that PSP’s have is their ability to set up a new customer almost on the fly as opposed to the merchant account provider that may take days to approve an account. There is then additional time ensuring the payment gateway or application using the payment processing has all the appropriate merchant account credentials provisioned. The PayFac model eliminates these issues as well.
Here are some pros and cons of the Payment Aggregation:
The disadvantages to the Payment Facilitator model
- Potential risk of financial loss
- Customer support burdens
- Integration demands
- Approval process to become a PSP can be somewhat burdensome
- Compliance with KYC/PCI and potential tax reporting
The advantages to the Payment Facilitator model
- Speed of boarding process: Being a Payment Facilitator allows you the ability to setup sub-merchants very quickly, removing a choke point to new client acquisition.
Customers love that it is so easy to get the account going with no paperwork or documentation burdens. This dramatically improves the client boarding process. Buy a Square reader at Walgreens, go online and create your account and within 30 minutes you can be swiping payments. That’s a very attractive acquisition tool.
- Merchant Control: Sub-merchants are under contract with you, the Master Merchant.
- Flat fee structure: Easy to understand flat fees for your merchant customers. No needs to understand interchange tables.
- Earnings: Master merchants are able to earn money from network and transactional fees, and potentially float.
Revenue is derived simply from the difference in buy rate from the processing networks and the sell rate charged to the end customer. For illustration, if a Payment Facilitator knows their true overall cost amounts to 2.4% of processed volume and they sell at 2.9% their margin is .5% of dollars processed. If they process $10,000,000 per day that works out to $50,000 in revenue per day. Very attractive business model and you might say sign me up. Not so fast.
There is still the risk exposure that must be examined. Any business that chooses the PSP model will likely face loss from fraud, going out of business, non-fee payment, etc. In addition, small dollar average ticket merchants that do very few transactions per month are typically not profitable. A merchant that does three $40 transactions per month might generate $4 in revenue. If acquisition, boarding and support cost an average of $40 per merchant, the ROI is almost a year to break even.
In addition as the PSP you will be front line for payment related support and when money is on the line you know people want service ASAP. There must be thought given to the support burden when pursuing the PSP model. The more you “know” your client base and the potential for dollar loss the more informed your decision could be.
So it for you? Definitely a decision your business needs to give a lot of thought to. If fast/easy client boarding is a must the PSP model is very tough to beat. There is of course the risk mitigation that MUST be addressed. There are certainly cases where payment processors have gone down because they did not properly mitigate exposure. Customer service burdens are also a part of your decisioning. Typically you will also have an integration timetable to ensure the account provisioning, application process and KYC [know your customer] obligations are programmatically correct.
There is an alternative to becoming a PSP while still being able to offer fast account set up. You may find a TPP with slick API’s for merchant account onboarding that offers a hybrid blend between traditional reselling merchant accounts for a TPP and acting as a Payment Facilitator. Advantages are no risk, no support and much lower implementation costs. You still gain revenue benefits without admin burdens. It is unlikely you would be able to provision accounts as quickly as if acting as the PSP, but a middle ground may be the best fit for you.
In summary payment aggregation isn’t for everyone, but that’s not what is important. The question is “Is it right for you”?
You can get more detailed information from our Whitepaper: Payment Aggregation: Is it right for my business?