WePay: ISOs, ISVs And The Future Of PayFacs

Being a payments facilitator – or a PayFac – has become surprisingly trendy of late. In a recent conversation with WePay co-founder Rich Aberman, Karen Webster observed that it has become a big enough buzzword recently that lots of brands are jumping on board with the label, whether or not it is quite the right descriptor, or even a comparison, for their business.

But, as nearly all payments peeps know, just because a concept is popular doesn’t necessarily mean it’s all that well understood. And, Aberman told Webster, when a firm starts thinking about becoming a payments facilitator, clarity on business cost and risk becomes particularly important. As he noted, among the firms that most commonly move down the PayFac path – ISOs, ISVs and platform businesses – the benefits stand out quite brightly: easier merchant onboarding, better control of the experience, a new payments revenue stream and greater internal control.

The costs, on the other hand – monetary expense, risk management, compliance, funding, infrastructure development, integrations – are often a bit fuzzier to firms, despite the fact that they are extremely important to understand and mitigate very early on in the process.

So, how does a firm looking to become a PayFac make the choice thoughtfully?

As Aberman noted, it first helps to take a look at the strategy and vision of the specific firms.

The Right Transformation for ISOs?

ISOs, with the merchant accounts they sell for acquirers, have something of a business problem these days.

“ISOs are basically in the business of selling merchant accounts to merchants,” Aberman pointed out. “And the problem is, merchants aren’t buying merchant accounts anymore – they are buying solutions.”

For ISOs, he noted that the comparison between their current flagging model and the PayFac model is pretty stark – and for some, the PayFac model is obviously the better choice for staying relevant.

“All [ISOs] aren’t created the same,” Aberman said. “So if they are one of the super-ISOs, which is a quasi-acquirer, they are probably contemplating building their own PayFac solution – or buying ISVs in order to become more of a solutions-based firm.”

Aberman adds that technology-focused ISOs have probably also built their own gateways and onboarding experience, which means they likely have some underlying technology that may already work with ISVs, but are limited by the “chunkiness” associated with the ISO model. In those cases, Aberman noted they might consider an upgrade to a PayFac.

But for what Aberman describes as “feet-on-the-street retail ISOs,” he noted that the move to PayFac doesn’t make as much sense – because they don’t have their own independent technology, but are rather using third-party solutions to sign up merchants.

In those cases, he said, trying to become a PayFac – building the tech stack, managing the risk and compliance and doing all of the integrations – may not make as much sense, especially since, in his opinion, they have a better option. The future of these firms, he said, isn’t becoming a PayFac, but is becoming more of a merchant solutions consultant. When you think of the SMBs these firms serve, he noted, providing technology assistance is much more valuable than offering technology integrations.

“These [SMBs] are business owners who hire people to set up their Wi-Fi routers; they are looking for a trusted advisor to help them choose better solutions,” Aberman said. “The ISOs in these cases shouldn’t be thinking about building PayFac infrastructures so much as they need to help their clients buy the right solutions sets. ISVs are already making it easier to piece together the right solutions – retail ISOs don’t need to be technical so much as they need to be skilled at offering the right road maps.”

These retail ISOs, Aberman noted, are well-suited to serve that role, because they already know quite a bit about their customers and the niches they serve. That is the skill set they should trade on, rather than trying to own the end-to-end payment process.

The situation for ISVs and platforms, he pointed out, is a bit more varied.

The Power of Preserving Options

For ISVs and platforms, Aberman told Webster, the move to becoming a PayFac is completing their offerings to their customers.

“If you are an ISV that’s selling software to salons, or a POS company or an eCommerce platform, payments is clearly a factor in what your clients are going to do,” Aberman said. “Not having payments as a piece of that solution can hurt the value proportion to the business. In fact, for a POS company, not being able to do payments possibly renders your software useless.”

Moreover, he noted, these firms have a vested interest in both controlling the end-to-end-payment experience – so they can improve it or tailor it to their user needs – and making money on it.

“The ISVs want to control the pricing, onboard, risk management, contract ownership – and the acquirers don’t have the right technology to do that,” Aberman said, adding that they are now letting them become master merchants, and the ISV or platform is now in the PayFac game.

For all of its advantages, however, that path becomes very, very expensive to build on their own, Aberman added – and it increases risk for the acquirer, who now has to trust the master merchant. That requires a great deal of inefficient, manual back-and-forth between the acquirer and the emerging PayFac in order to ensure that all of the due diligence ducks are in a row.

Aberman said that FinTech in general – and WePay in particular – have emerged to confront that problem by offering what he called “PayFac in a box,” which offers most of the benefits of the PayFac business model without all the messiness of the PayFac infrastructure construction project.

Some firms, he noted, will still choose to build their own infrastructure, and probably for good reason: Getting stronger margins by running payments in-house. Those players, he said, should work with a primary quiverer and insist on easy, modern APIs and the processing capacity from day one – all in an effort to assess whether that acquirer can offer the value needed in exchange for the cost and risk of the solution they are building.

“Being a PayFac,” Aberman emphasized, “isn’t just offering businesses a solution, but a robust solution.”

Aberman’s position now, as it was before the Chase acquisition, is that most ISVs and platforms would be best served by not being a PayFac process, but instead taking advantage of the PayFac-in-a-box solution.

But these days, he noted, WePay has become a bit more agnostic on that issue. Now, as part of Chase, WePay can sponsor PayFacs, using the WePay API to “form the connective tissue to Chase.” That slightly changes the offering they can make to the ISVs and software platforms.

“Being a PayFac used to mean having to be centrally involved in the flow of funds, [but] that really isn’t the case so much anymore,” Aberman pointed out.

WePay’s APIs take the three core functions of PayFac – onboarding, payment processing and payout processing – to give WePay a great deal more visibility into the operation of a PayFac and, therefore, the ability to do more for them.

“For us, that now means giving options to software platforms and ISVs,” Aberman said. “We can give ISVs all of the benefits of being a PayFac without the costs, so I still say that for most, being a PayFac doesn’t deliver the ROI that they might think. But as part of Chase, we are able to register an ISV or a software platform as a PayFac, and act purely as a dumb pipe if that’s what the client wants.”

And, Webster asked, is it what clients want?

Aberman said that what clients want most now is optionality.

When he and his team explain that WePay can help them become a PayFac or be that for them today, clients are receptive. They like to know the option is open should they want to pursue it someday.

“What we hear is that knowing we can serve as an on-ramp to becoming a PayFac is more important than becoming one today,” Aberman noted. “We hear a lot of ‘that’s great, but no need to rush into that right now.’”