Square, Stripe, and PayPal have become the poster children for the new era of payment facilitation. Less than ten years ago, these technology-focused disruptors entered the market with a fiercely underestimated growth potential. After all, how could offering product solutions built for micro-merchants make a significant dent in the mammoth portfolios of traditional acquiring banks?
A decade later Square made almost $50 billion in gross payment volume. If it were an acquirer, this would make it the 9th largest in the United States after top players Chase, Bank of America, and Vantiv/WorldPay (Gross payment volume (GPV) of Square Inc. from 2012 to 2016 in US$bn – Statista, January 2018). As the payment facilitation model is sweeping the globe, traditional merchant acquirers are worried about their own future and scrambling to come up with new technology and new distribution packages. Research by the Double Diamond Group suggests that even when removing the “big three” – Square, Stripe, and PayPal – the payfac market could grow to over $500bn in gross processing volume within the next five years (The World’s Top Card Issuers and Merchant Acquirers: 8th edition.” The Nilson Report, May 2016).
As for the traditional ISO, their future is dead. An increasing number of traditional independent sales organizations (ISOs) are looking to find ways to become a payment facilitator, or at least become more payfac-like. The ISO we know today will soon be no more, as they start to transform into ISVs, payfacs, or a new kind of hybrid. One study estimated that there are about 10,500 B2B SaaS companies in the United States alone that could operate as payment facilitators, given the right tools (Oglesby, Rick. “Why Software Vendors Should be Payment Facilitators: Don’t miss out on this revenue opportunity.” Double Diamond Payments Research, LLC. 20 October 2016). ISOs should be striving to get ahead of these tech companies and employ these tools before they do. So what are the right tools?
The components of a payfac that matter
There are six key components that make up the payment facilitator model of acquiring, but they are not all equally important. To be a payfac, a company must have the digital tools to board and underwrite merchants, process payments, complete network settlement, disbursement, reporting, and post processing.
While some ISOs may have some of these tools in place, they must be digital and fully integrated to their other systems and acquirer to get fast approvals, share necessary information, and compete with payfacs.
Think about Square and PayPal. Why have their models become popular and what is it about them, exactly, that is reinventing the payments space? A huge reason for their success and why they have been able to expand past micro-merchants and into mid-sized merchants, the bread and butter of many ISOs, is their fast, convenient digital merchant experience.
The ability to offer a smooth onboarding process and a quick underwriting decision has become a key value proposition for many ISOs and acquiring banks. It’s keeping their business from abandoning during the application stage to go elsewhere out of frustration, and offering these customers a gold standard first impression.
How to remain competitive against payfacs
The traditional ISO will soon be dead. But that doesn’t mean an ISO must become a payfac to survive. To compete against payfacs, an ISO has a choice. It can either become a payfac, or it can become more like a payfac or ISV in key ways. Regardless of what the future brings, both ISOs and banks will have to consider two things: a digital customer experience and smart risk models.
The first step is getting the merchant application online. Allowing for a paperless application and digital signature process makes it much more convenient and delightful to do business with you. Square’s entire business model is built around fast, convenient merchant onboarding. Believe it or not, they added the POS system later, out of necessity.
In a world with increasing demand for same-day payments, comes demand for same-day approvals. The only way to supply that demand is with streamlined and partially automated risk assessment models. Whether you do upfront KYC due diligence or complete underwriting, being able to do so in under 10 minutes, as most payfacs do, is nearly impossible without the help of automated technology. There are many third-party data sources such as KYC SiteScan, Experian, GIACT, and Au10tix, to name a few, that can instantly pull the reports you need to accelerate the process without increasing risk.
“We can sign documents on a PDF, so we’re digital”. You’re not alone, and this won’t keep you ahead of the competition. The best way to offer a convenient, digital customer experience, the speed of which is facilitated by a smart risk model, is to package the entire offering into one, cohesive platform. The merchant will experience end-to-end service within minutes, all on a single system. This is the payfac advantage. This is what will help you remain competitive.
Payfacs are a growing force to be reckoned with, and are pushing technology use into the acquiring market faster than anticipated. To remain competitive, ISOs and other traditional players should focus on smart risk models and a cohesive, convenient, digital customer onboarding experience. The traditional ISO will soon die, but only to make way for a newly digital ISO, employing key components of a payfac to their advantage.
To learn more about how your organization can remain competitive, read The ISO’s Guide to PayFac-like Customer Experience. This eBook covers how to improve merchant experience, how to decide whether to build your own or buy a solution, and a vendor checklist to arm you in your search, should you choose to seek a partner in your strategic efforts.