How to Become a Payment Facilitator
Everything you need to know to build your own payments platform.
Table of Contents
Overview
Before you process one dollar here are the must haves...
1
Sponsor
Find a processor who will sponsor you as a PayFac with a Member Bank and the Card Associations.
Underwriting
Pass an extensive underwriting process.
2
3
Cash Reserves
In most cases, put up substantial cash reserves and personal guarantees with the bank or processor. Additionally, you must develop credit underwriting guidelines and AML policies.
4
Tech Resources
Ensure you have the internal capabilities and infrastructure required to manage settlement funds to your downstream clients and merchants.
Payment Experts
Hire staff who are experts in merchant acquiring to sell, implement, support, and manage the day-to-day activities of the payments business.
5
6
Compliance
Ensure that payments operations are in (and remain in) full compliance with PCI & other mandates, which can cost hundreds of thousands of dollars annually.
Risk 101
Becoming a PayFac requires building and investing in multiple systems. PayFacs have ongoing legal requirements to maintain their good standing and credit requirements with acquiring banks and card networks.
The Electronic Transactions Association (a professional advisory group from payment processors, banks and card networks) strongly recommends engaging these industry experts and legal counsel to ensure compliance and adherence to laws and guidelines.
41%
It’s estimated that payment fraud increases at a rate of 41% every two years.
To learn more about fraud detection and prevention, click here.
40%
Roughly 40% of consumers who commit fraud will do it again within 60 days$50 billion
Pymts.com estimates that $40-$50 billion will be reported as fraud by 2030.
Steps to Becoming A PayFac
STEP ONE
Banks & Sponsorship
Find an acquiring bank: as a PayFac, you must approach acquiring banks with a business plan to establish a partnership. Next, get sponsored to facilitate payments for sub-merchants.
STEP TWO
Integration
Integrate your payment platform and gateways to provide functionality for sub-merchants to process online payments.
STEP THREE
Certification – It’s the law
Obtain Level 1 PCI certification to ensure the security of data. You are required by the Payment Card Industry Data Security Standard to be certified, which may also include Mastercard and Visa (EMV or chip) certification if the PayFac supports in-person transactions.
STEP FOUR
Onboarding & Compliance
Create underwriting policies and systems to ensure only legal entities that comply with card network and acquirer rules are onboarded. Your system and employees must:
Estimate the nature of sub-merchant’s financial health and risk, including, compliance issues, fraud, credit, regulatory and reputational risk.
Verify identities of each sub-merchant, including KYC, owner structure and other business details.
Check OFAC and MATCH lists for sub-merchants before onboarding. Mastercard manages the Member Alert to Control High- Risk Merchants (MATCH) list.
STEP FIVE
Internal Systems
To mitigate risk, you will need to a build a system with internal policies to conduct due diligence. Your PayFac system and staff will need to:
Comply with each AML law by encoding rules and requirements from card networks and regulatory organizations.
Identify suspicious activities (including indicators of terrorist financing).
File Suspicious Activity Reports with the Financial Crimes Enforcement Network (FinCEN) or acquirer, as required.
STEP SIX
Registration & Licenses
Submit registrations and apply for any additional required licenses such as:
Register as a PayFac with each card network.
Apply for money transmitter licenses (MTLs) in each state the payfac operates in (if required to support certain fund flows).
STEP SEVEN
Merchant Systems
Build automated merchant dashboards, payout systems and dispute management processes to handle chargebacks.
Ongoing System Maintenance
Every sub-merchant: Verify the identity, business model and owner information for each sub-merchant. Set up payments processing for sub-merchants.
Update and Monitor risk systems: Perform due
diligence, monitor sub-merchant activity on an ongoing basis and mitigate risk as needed (e.g., apply processing caps, delayed funding, or reserves).
Prevent and block fraud: Proactively prevent fraud on the platform and block or review suspicious transactions. Best practices include using adaptive machine learning for fraud detection. Submit evidence to card networks when needed for chargebacks on behalf of sub-merchants.
Pay out funds to sub-merchants: Ensure sub-merchants are paid their earnings on time.
Reporting and reconciliation: Generate and distribute 1099s or other tax forms as needed annually.
Maintain PCI DSS compliance: Ensure the platform remains compliant even as data flows and the customer experience evolves. Some card networks require PayFac’s to submit quarterly or annual reports, or complete an annual on-site assessment to validate ongoing compliance. Renew PayFac registration and licenses: Re-register as a PayFac with card networks annually and update or renew MTLs on the required cadence.
Description | Time Required | ESTIMATED COST |
|---|---|---|
Acquirer Sponsorship:
business plan + attorney fees | 2 – 6 months | Varies |
Payment Gateways | 1 – 6 months | Varies |
PCI Compliance | 2 – 4 months | $50,500 – $800,000 |
Merchant Management Platform | 8 months – 1 year | $700,000 + |
Compliance System | 1 – 7 months | $400,000 |
Underwriting Program | 3 – 12 months | $600,000 |
License Fees | 6 months – 2 years | $1,000,000 |
Merchant Onboarding | ongoing | $5 per merchant |
Risk Monitoring and Mitigation | ongoing | $350,000 + (1 FTE at $250,000 per year and 1 risk analyst at $100,000 per year) |
Fraud Prevention | ongoing | $0.04 – $0.10 per transaction |
Chargeback Management | ongoing | $17 per dispute |
Funds Routing and Payout | ongoing | $0.25 per transaction |
Reconciliation/Reporting | ongoing | $5 – $225 per form +
$100,000 per year 1 Finance
FTE |
Annual PCI Validation | ongoing | $300,00 per year |
Renew PayFac Registration | ongoing | $10,000 + per year |
There's an Alternative Solution
To summarize, there is a significant amount of time and money needed to become a PayFac. With Usio, software companies, ISVs, and many others receive all the benefits and functionality of being a PayFac without taking on the responsibility, liability, time to scale, operation infrastructure, and more.
Reasons To Work With Usio
Whether your application demands a hosted Paypage or you require the flexibility of taking payments mobile, we have a solution for that! Usio is an innovator of cutting-edge payment applications and technologies. Our SDKs, with full code, are written for each API in the newest and most common coding languages.
What Makes Us Unique
Our automated enrollment tool eliminates the onerous process required to set up merchants. With our unique boarding API you can board one merchant at a time or 1,000s. We are the only payment company that offers this level of flexibility.
There’s More
Like every business out there, software companies are always trying to find ways to earn incremental new streams of recurring revenue. Even if you currently have a payments solutions in place, how many of your users are actively using it? To put that in perspective, let’s assume that you have 1,000 merchants using your software. Chances are you are not earning any residual income on even 10% of them. What if there is a simple way to move that 10% to 80% or more of your users. Would that be of value to you? Below is a realistic example of how Usio will dramatically impact your bottom line simply by partnering with us. We do all of the heavy lifting, directly increasing your net income. Take a look:
Your Annual Take Home Revenue
Let’s say you have 1,000 merchants currently using your software and 80% start processing payments (800 merchants.)
Those 800 merchants process $20,000 each per month for a total of $16mm in processing volume every month.
That $16mm turns into a net take- home income of $64,000 per month, or $768,000 per year for you. That is right, we said $786,000 per year in your pocket.
