Many software companies offer payments to their merchant customers through referral agreements with third-party payment providers. Bringing those payments in-house has the potential to open up a new revenue stream and better control of the experience they provide for their merchant customers.
But what does it take – how does a software company become a payment facilitator?
The first step is making sure the decision makes financial sense, given the software’s specific business. While launching a payments product brings a software company more revenue, it also requires resources and investment.
There are a few factors that affect when a software company should consider becoming a PF. Transaction volume is an important gauge: For companies over $50 million in transaction volume, the move would likely make sense.
But size isn’t the only consideration. For example, software companies will need to compare the share of payments revenue they’re already getting from referral fees to the margins they’re likely to see if they’re handling transactions themselves. This will depend in large part on the types of transactions they handle: transactions in higher-risk industries carry higher margins than those in low-risk verticals.
Develop policies and procedures
Payment processing is closely regulated. Requirements for handling payment transactions come from governments, card networks and acquiring banks. Payment facilitators must develop a policy framework for complying with those requirements and for handling situations that arise with payment processing.
Part of that framework will be criteria for underwriting and transaction monitoring:
- How will the company conduct due diligence on potential customers and comply with know-your-customer (KYC) requirements?
- How will it monitor transactions for fraud or suspicious behavior to ensure that its submerchants are acting in a compliant manner?
- When can it use automatic underwriting and monitoring tools, and what will trigger a manual review of applications and transactions?
- What steps will it take when investigating a transaction?
- What procedures will it use for handling chargebacks?
These are just a few of the situations a PF needs to address with a robust set of procedures.
Develop technical infrastructure
To enable payments acceptance, a software company must be able to connect to a payment processor, underwrite and board its merchants, and monitor transactions. It must have mechanisms for servicing its merchants, including calculating fees, funding, processing chargebacks and reporting transaction data.
Much of a payment facilitator’s infrastructure is built to use technology to improve the merchant’s experience. For example, PFs often use automated systems to review merchant applications and flag only those that need closer examination by a human underwriter. This helps reduce friction during underwriting. They also can develop flexible systems that can tailor everyday functions like reporting to the needs of their merchants.
Develop a relationship with a sponsor
Once the payments infrastructure is in place, the prospective PF needs to be connected into the payments system, with both an acquiring bank to accept its deposits and a processor to handle its transactions. These functions are often bundled together and are known collectively as a sponsor. Once a new PF has applied for and received a payment facilitator ID from a sponsor, it is ready to begin handling payments for its merchant customers.
Fortunately, companies exist to help software companies with all of these needs, providing consulting services and even off-the-shelf software to get new payment facilitators on their way.