One of the questions we’re asked most frequently by SaaS platforms is: When should we become a PayFac? This usually comes up because:

• They want to improve the speed of their merchant onboarding
• They are interested in increasing their margins
• They’ve seen some high-profile success stories (like Shopify) and are keen to capitalize on the opportunity

But, in most cases – especially for small to mid-sized SaaS platforms – the complexity of setting up a PayFac, managing reporting, and staying on top of regulatory requirements, far exceeds the value that it brings.

In this article we’ll explore:

• Why so many SaaS platforms want to become PayFac
• Three myths about PayFacs
• PayFac vs ISO: What’s right for your SaaS platform?
• The cost of becoming a PayFac
• Why you need a trusted payment partner

Prefer to talk to an embedded payments expert? Book a no-obligation call now.

Why do so many SaaS platforms want to become PayFacs?

One of the most common reasons SaaS platforms we speak to are interested in becoming a PayFac is that they’ve seen the success of Shopify and Stripe. It’s tempting to get swept along by their compelling growth trajectory. But it’s their scale that makes it feasible. For example, Shopify processed more than $45 billion in Q4 of 2023 and Stripe crossed the $1 trillion mark in the same year.

Another reason SaaS platforms consider becoming a PayFac is because it seems to be the logical next step in their growth journey. You’ve integrated payments and you’ve got them working well – surely the next thing to do is become a PayFac?

My response to this is always: Are you sure you can’t do anything else to optimize your payments?

There are so many ways you can improve your payment performance before going down the PayFac route. And it’s not the only way to achieve growth. Many SaaS businesses have experienced huge success from their payments without ever becoming a PayFac.

Three myths about PayFacs

There are three common misconceptions about becoming a PayFac, which lead SaaS businesses to rush in without truly understanding the implications. These are:

1. You’ll onboard more merchants faster

As a PayFac, you’re the merchant of record and provide sub-merchant accounts to your merchants. Since you are fully responsible for the onboarding flow and no longer need to route merchants via a third-party payment provider, the assumption is that you can onboard merchants instantaneously. But, it’s not as simple as that.

Onboard first, ask questions later?

As a PayFac, you have a grace period to complete the Know Your Customer (KYC) and Know Your Business (KYB) checks by collecting details such as ID, tax ID, and so on. This is what makes onboarding with large players like Stripe and Square so quick and easy. Merchants just need to fill out a short form to start processing within 10 minutes. However, regulations around PayFacs have tightened. And many leading PayFacs are now having to go back to merchants and gather the information they should have collected in the first place.

It’s also important to consider whether you actually want someone who’s sitting in a basement in the middle of the night, to set up a merchant account and start processing within 10 minutes. We’d argue that there’s something inherently wrong with that. For example, It’s rare that a brick-and-mortar merchant, would set up an account and open a store right away. They’d have to integrate POS, merchandise, and inventory.

So, yes, there is an advantage to faster onboarding, especially in terms of customer experience and perceived value. But the reality is that you still have to collect the information at some stage (and in many cases upfront). In that context, the speed of onboarding becomes a moot point.

And finally, it’s worth bearing in mind that most merchants don’t mind providing a bit more information upfront, especially if it means that no one is going to bother them for additional information at a later date (potentially freezing their account at the same time.)

2. You choose how and when to distribute funds

As a PayFac, funds go into your bank account and it’s up to you how you disperse them. Some software platforms, for example, will deduct their monthly platform fee from the payout. So, if they’re charging $100 a month for the SaaS platform, they can deduct that directly from the payments and not have to charge the customers separately. This provides a seamless customer experience and is one of the key advantages of being a PayFac.

The downside of that is that it comes with a heavy set of requirements. Because you’re handling other people’s funds, you have to manage them in a compliant way. You need to set up an FBO account and your bank has to be comfortable with the fact that money will be constantly flowing in and out of your account. As a merchant of record, compliance becomes critical and the associated costs are huge – as we explain below.

3. You’ll generate more revenue

The common assumption is that becoming a PayFac will bring in more revenue for your business. But, in reality, these gains only start to show if your volumes are high enough. Before you consider what you’ll earn, you need to understand how much it’s going to cost you in terms of registration, monthly fees, portfolio management, and compliance.

The question to ask yourself is: Is my gross processing volume (GPV) large enough to justify the investment?

In most cases, the answer will be ‘no’ or at least ‘not yet’.

PayFac vs ISO: What’s right for your SaaS platform?

In addition to PayFacs, there’s also the ISO (Independent Sales Organization) model, which might be a better fit for your organization.

An ISO serves as a bridge between businesses and payment processors. Unlike a PayFac, it isn’t a merchant of record. Instead, it operates as a reseller for a third-party payment provider.

ISOs generally fall into three categories:

1. Referral partner: The ISO acts purely as a referral agent, promoting a third-party payment solution (or solutions) to its merchants.
2. Registered ISO: The ISO registers with the Card Association and can market payment services under its own brand.
3. ISO with liability: The ISO takes on the underwriting of merchant accounts and financial risk.

We recommend SaaS platforms become a Registered ISO first. It’s an affordable and straightforward way to gain hands-on experience of payments without having to make a significant upfront investment.

Read more about the difference between a PayFac and an ISO here and the implications of becoming an ISO with liability here.

The costs of becoming a PayFac

As a SaaS platform, it’s important to understand the financial and resource investment needed to set up and maintain a PayFac. These can be broken down into the following:

Set-up costs

First of all, you have upfront costs such as the registration fees with Visa and Mastercard.

Then, you have the underwriting process to manage. This can take between six to 12 months and will involve a business plan and a compliance plan – for which you’ll have to appoint a compliance officer.

On top of that, because you’re now the merchant of record, your sponsor bank has to assess your financials to ensure you have the processes, procedures, and tools in place to manage the funds.

Altogether, you’re looking at about $150,000, plus at least one new full-time equivalent (FTE) just to get out of the gate.

Ongoing compliance

Of course, the story doesn’t end once you’re set up. As a PayFac, you’ll have ongoing compliance requirements to manage. For example, every month, you’ll have to provide a report covering:

• Every merchant on your platform
• How much volume they process
• Their refunds and chargebacks
• Proof of KYC and KYB due diligence

Delivering all of this is a massive cost in itself, and you’ll probably need a couple of FTEs just to manage your portfolio.

In comparison, if you’re not the merchant of record, you don’t need to register with Visa and Mastercard so you can get going almost immediately. And you don’t have to manage funds or provide monthly reporting.

Read more about the costs of becoming a PayFac: How to become a PayFac

Why you need a trusted payment partner

There are plenty of providers out there who will be willing to help you become a PayFac, regardless of whether it’s the right thing for your business or not. That’s why it’s so important to work with a partner who genuinely has your best interests at heart.

At Fiska, we have helped many SaaS businesses integrate the payment solution that meets their specific needs. Here’s why they chose to work with us:

We worry about payments so you don’t have to

As a SaaS, you’re probably obsessed with delivering the best possible solution to your customers. You don’t have the time, energy, or resources to become a payment expert. You want to know you’ve got a team of experienced experts monitoring your payments and identifying areas for improvement.

That’s why, at Fiska, we go through an extensive discovery process. We strive to know your business as well as you do so we can be sure to implement things in the best possible way.

We also keep a close eye on your performance to identify areas that could be doing better. For example, we recently looked at a customer portfolio and discovered that some accounts were losing money, even though the portfolio as a whole was profitable. We noted that some weren’t priced correctly and we worked with that client to optimize the pricing to fix the issue.

We also understand that things change. What’s wrong today, might be right for you tomorrow. And, as your business evolves, we grow with you. So, while we often advise against registering as a PayFac from day one, it might be the right thing for you in two years. If that’s the case, we will be able to implement a PayFac for you. But it will be part of a strategic, long-term plan with clear goals.

Ultimately, we aim to remove the burden of worrying about payments off our customers’ shoulders – freeing them up to focus on what they know best.

Your success is our success

We don’t charge monthly fees. Instead, we share a percentage of the payment revenue generated. This revenue is the difference between the platform’s price (paid by merchants for processing) and the base cost (interchange).

We empower you to set your own pricing, retain more revenue, and offer a customized payment experience that represents your brand values. This is because we’ve found it’s the best way to ensure your success. And, since our growth is tied to that of our clients, we don’t want to stand in your way.

Read more about our revenue share model

We really understand SaaS

Unlike the large payment giants, like Stripe and Square, we only serve one business type: SaaS platforms.

Our founders used to operate a SaaS platform and we know first-hand how frustrating it can be to grapple with technology that’s not fit for purpose or navigate a labyrinthine support system.

We know what SaaS platforms need and are focused on ensuring our technology and support can meet – if not exceed – their requirements.

Read more about why Fiska is a good fit for SaaS platforms >

Focus on building your business before becoming a PayFac

Becoming a PayFac will take a lot of focus away from your core business. And, in the vast majority of cases, you’re better off investing in your capital, your customer experience, and your features instead of managing a PayFac. However, as your business expands and your transaction volume increases, you may want to explore becoming a PayFac to enhance the merchant experience. Either way, we’re here to help.

Whether you’re aiming to refine your payment approach as an ISO or transition into a PayFac, we’d love to support you. Book a call with our CEO.