Hidden costs of becoming a PayFac

March 7, 2024

Payments strategy

It’s easy to romanticize the profit potential of becoming a registered Payment Facilitator (PayFac). Especially when the alternative is referring merchants to an ISO, giving up control of the relationship, and ceding ownership of the data in exchange for a few additional basis points of revenue.

Who wouldn’t want to cut out the middleman in order to double or triple or even 10x their payments revenue?

It’s seductive on paper, but the reality for most software platforms is that the costs of operating as a PayFac will consume most of the payments revenue. And this is after the large up-front investment to become a PayFac in the first place.

We’ve seen many in our industry claim that the economics of registering as a PayFac can begin with as low as $50M in annual processing volume. The reality is that even with $1B+ in annual volume, in many cases the math still doesn’t point towards becoming a PayFac.

Where does the money go?

👮 Information security, PCI compliance, and audits

💳 Card Brand registration fees

⚖️ Regulatory compliance, AML audits, and risk management

📄 Invoicing, billing, and reconciliation

↩️ Chargeback handling

🧑‍💻 Engineering staff, IT, and data vault

After talking to dozens of software companies, we’ve noticed that most software companies overestimate the cost of implementing PayFac-as-a-Service and vastly underestimate the cost of becoming a PayFac.

Once we factor in the personnel required to support these requirements, operating as a PayFac can be 10x the cost of partnering with Rainforest.

The magic here is that Rainforest specializes in platform payments, so we can satisfy a lot of the PayFac requirements in an efficient and economical way.

For example, our Payments-as-a-Service was designed to keep the platform and merchant out of PCI scope as long as the platform uses our embeddable components, eliminating the need for a PCI compliance audit at the platform level.

We have the scale and expertise to handle risk management, compliance, and finance operations centrally, and can do so at a much lower cost than a software company standing up a new team to handle these functions.

And we built our core technology specifically for the purpose of platform payments. We keep the embeddable components up to date so our platform clients don’t have to allocate engineering resources to modifying a form every time a compliance requirement changes.

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