Why a SAAS platform can become a Payment Facilitator but WILL NOT be the next Stripe
We talk with SAAS platforms on a regular basis. Likely about 1 out of every 5 says:
“We want to be like Stripe”
If you have seen Jim Carrey in Pet Detective you know the scene below. It had me rolling on the floor the first time I saw the movie.
DO NOT GO IN THERE
That’s kind of how actually becoming a Stripe like player in the payments space is. Sounds like a good idea but the reality is that it’s an incredibly difficult and risky proposition.
So why can’t you be like Stripe? In one word: RISK
Payment Facilitation allows a platform to instantly onboard new users and enables payment acceptance 15 minutes from application.
In many cases it works VERY well for the platform offering both a client acquisition tool and a way of generating a new revenue stream. The platform onboards new clients with little to no application friction and generates revenue on every transaction. There is a lot to like.
In the past the platforms only option was to become a True Payment Facilitator. That meant registering with card brands, assuming all risk and compliance burdens and in essence becoming a payments company in addition to their SAAS offering.
Today a Managed Payment Facilitation model is available that shortcuts time to market as well as significantly reducing compliance demands and risk exposure. This means many platforms that previously were not ready to act as a true facilitator now have an avenue to reap the benefits of Payment Facilitation.
So back to the RISK thing. In both the True and Managed Payment Facilitation options you partner with an acquiring bank to actually process and settle credit, debit and ACH transactions [via ACH Payment Processing API]. In payments there is massive risk of fraud, non-payment of fees and in cases reputational risk. If you don’t mitigate these risks you go out of business.
The primary way that acquirers like Vantiv, Wells Fargo and TSYS mitigate their risk in allowing Payment Facilitation is by working with platforms that have a vertical focus.
One example would be property management. As part of the ABC property management software solution they enable rent collection. Sign up with ABC and start collecting rent via ACH and credit card. Because ABC focuses on one particular vertical all of their platform users fall into the same business type. This mitigates risk. Of course it would still be feasible to have fraud or financial loss but the risk has been much reduced.
Another example is a restaurant point of sale solution with embedded payments. Again significant risk mitigation because of the software targets.
In contrast Stripe, Square and PayPal offer their services to a very broad spectrum of businesses. All of them have sophisticated risk control measures and fraud prevention TEAMS. All budget financial loss into their business model and pricing.
The barrier to entry in this space is massive. Essentially you have to have major money AND the cooperation of one of the acquiring banks. That means you need contacts that can make phone calls to the powers that be.
So unless you have both the big money, contacts AND an absolute game changing product stay out of the bathroom.