In this second article of a mini-series, Volker Schloenvoigt (Principal, London), Shanta Paratian (Manager, London) and Camille Cochrane (Business Analyst, Paris) introduce the role and responsibilities of the Payment Facilitator enabler (the acquirer), identifying some of the benefits of becoming one and discussing the need for acquirers to develop a well thought-through strategic plan to embark on this initiative. Becoming an enabler of PayFacs is very similar to entering a traditional merchant/acquirer relationship, since from an acquirer’s perspective, the PayFac is considered a merchant. However, as pointed out in our introductory article, the acquirer and PayFac have very distinct roles and responsibilities, differentiating them from the standard 4-party model.
What is a PayFac enabler and what does it do?
As PayFac enablers or sponsors, acquirers can adopt a new approach to merchant payment acceptance. A PayFac enabler provides PayFacs with a merchant account to hold their funds, a mechanism to accept electronic payments, and a platform to process the transactions. The enabler is essentially an acquirer in the traditional term. It enters a contractual agreement with its customer, the PayFac, which is the master merchant. As part of the agreement, the PayFac obtains the right to onboard sub-merchants. The acquirer receives funds from the issuer and pays them into the master merchant account of the PayFac. The acquirer is liable for transactions processed through the PayFac’s account; and because it is the member of the card scheme networks, it must follow their rules and requirements, also bearing full responsibility for underwriting, performing on-going due diligence on the master merchants, and onboarding them.
Why focus on enabling PayFacs?
PayFac enablement gives an acquirer the opportunity to competitively position itself in a market, differentiate its offering, and widen its proposition. Enabling PayFacs allows acquirers to benefit from alternative distribution channels, by supporting (indirectly) a broader range of customers whilst benefitting from lower operational costs (as PayFacs are in charge of the onboarding of sub-merchants). This is particularly true for small and micro-merchants that acquirers might not target otherwise. Further diversification can also be achieved through targeting sub-merchants in often unsupported niche verticals (e.g. education, healthcare, cannabidiol (CBD) business, fitness and wellness, event management, etc.). The enablement also generates new and higher volumes of transactions and consequently additional revenue.
Within PayFac enablement, there are typically two business models generating profit for the acquirer:
- i. a ‘light’ model where the acquirer that is enabling PayFacs, acts as the BIN sponsor
- ii. a ‘full’ model where the acquirer that is enabling PayFacs, acts as a BIN sponsor and manages activities such as authorisation, clearing, and settlements, etc.
Source: Edgar, Dunn & Company (2020)
What are the responsibilities of a PayFac enabler vs. a ‘traditional’ acquirer?
As stated earlier, by enabling a PayFac, the acquirer ceases to provide a number of acquiring functionalities such as conducting a due diligence of sub-merchants, setting up an appropriate onboarding process, monitoring sub-merchants’ activities, etc., but other functions also need to be supported:
- Sponsor PayFacs
- Conduct due diligence of PayFacs to ensure proper checks occur during signing/on-boarding of master merchants
- Register PayFacs with payment schemes
- Provide a master merchant account for deposits
- Monitor compliance of PayFacs in accordance with schemes operating regulations
- Enable transactional management (authorisation, clearing, settlement, processing including chargeback)
- Possibly shadow PayFacs with sub-merchant on-boarding and setup
EDC’s views on PayFac enablement space
In order to realise the competitive potential that PayFac enablement can offer, an acquirer needs to take into consideration the risks as well as the potential revenue opportunities that such a model could generate.
An acquirer willing to act as an enabler must adopt a prudent approach to managing risks. Developing a robust and strategic business plan is also crucial for the acquirer to set its overall business goals and to outline a plan on how to achieve them.
Acquirers are expected to provide a gap analysis of their enablement program to the card network in accordance with the schemes’ standards and best practices related to PayFacs. In addition, it is also recommended for an acquirer to have an existing and robust risk management system in place prior to being involved in PayFacs enablement. This should include internal team monitoring risks and clear risk management policies. Allocating resources to develop a strategy specific to the PayFac business, conducting the underwriting, monitoring transactions, and controlling activities, etc. are also a must. As mentioned above, acquirers can service PayFacs and indirectly sub-merchants in different industries; it is essential to define, in collaboration with the PayFacs, risk policies to support and target appropriate merchant segments whilst excluding those in high-risk industries, depending on the risk appetite of both parties. Acquirers are advised to work closely with their PayFacs to decide which segments to target, in which country, and the number of sub-merchants to enrol, etc.
Developing a business case to determine potential revenue and costs (capex and opex) is required for an acquirer willing to enable PayFacs. Revenues will be dependent on the exact role of the acquirer, the number of PayFacs it will on-board but also on the number of sub-merchants that each PayFac will service, and the annual transaction volume processed per sub-merchant. Costs could possibly include implementation support to launch the initiative, IT development (e.g. will the PayFac use 1 MID per sub-merchant or the same MID for sub-merchants?), risk and financial review for each PayFac, initial scheme registration/renewal fees.
There are specialised companies such as law and consulting firms globally that are dedicated to assisting potential acquirers willing to play a role in this PayFac space. They can offer support in defining key plans, assessing the regulatory aspects of acquirer enablement in specific countries, and setting up the capabilities required to mitigate risks and manage PayFacs in a structured manner (e.g. by accessing software designed specifically for PayFac activities). Working closely with experts in this field may enhance the acquirer’s efficiency and effectiveness in a growing PayFac enabler market that requires a sound strategy prior to entry.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).