Ups, Downs, and “Frothiness” in Between: PF Day Wrap

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Bailey Reutzel

Interest in the business of payment facilitation is growing, not just among companies lured in to monetize transactions and the investors excited to fund fast-growing startups, but also regulators wanting to make sure a new third party isn’t taking advantage of consumers.

And all these eyes on the industry mean payment facilitators themselves, and companies thinking about switching to the model, are hungry for more information about how to run their business to take full advantage of all the opportunity in the space.

In the two previous years, promotion and marketing focused on making people aware that Payment Facilitator Day, which is part of ETA’s TRANSACT 17 conference, now existed.

“This year, payment facilitators were searching the event out,” said Todd Ablowitz, president of Double Diamond Group and co-publisher of PaymentFacilitator.com.

Plus, Ablowitz said, the fact that Square wanted to keynote speaks to the event’s success in its third year.

The opportunity in the industry is huge right now, as is witnessed by the success of Stripe, PayPal and Square. But it’s yet to be fully tapped. According to research from Double Diamond Group, the $33 billion U.S. business-to-business software-as-a-service industry comprises 22,000 companies, 10,500 of which could benefit from switching to a PF model.

Payments as a Plug-In

In all the sessions, one theme seemed to reverberate throughout: payments are not a product; they’re one of many features businesses expect when looking for a service provider.

“The way payments were treated in the past isn’t how they should be treated today,” said Deana Rich, president of Deana Rich Consulting and a co-publisher of PaymentFacilitator.com. “Payments as a plug-in is what’s becoming more the norm.”

According to Kevin Harris, chief finance and operations officer at RunSignUp, a payment facilitator for races and running clubs, during a panel discussion, there are huge opportunities for the industry to offer more than just payments. Merchants are hungry for new products, especially more ways to use ACH, plus APIs for simpler integration with all the features that surround commerce.

At the core, “merchants want easier onboarding and faster payments,” Harris said, during the “Through the Looking Glass” panel.

And according to Mike Phelan, president of PaymentSpring, a student loan servicer and PF, getting away from paper is a huge boost, saving the company time, money and bad experiences because of error. More than 90% of PaymentSpring’s business is automated.

Andy Meadows, cofounder and executive vice president of sales and strategy at Anovia Payments, said the PF is constantly working to automate more of the underwriting process.

“Automated onboarding is one of three main draws that drives [business] to value added resellers (VARs),” Meadows said. “It’s the first thing merchants mention.”

Slowing Down

But this speed of operations comes with its own set of hurdles that several panelists and attendees at the event spoke to. Christopher Rhode said memberplanet, a PF focused on streamlining business for nonprofits, churches, booster clubs and schools where he’s the chief operating officer, is stepping back on such hasty onboarding.

While memberplanet has intimate knowledge of its customers in its current vertical, “when we were looking at moving into new verticals, we thought maybe we had too seamless of an onboarding process,” Rhode said. “And we need to slow it down for AML, KYC and compliance to protect our merchants and submerchants.”

Especially with more sophisticated fraudsters on the prowl, Harris said, the push for real-time is not always safe or achievable. RunSignUp’s onboarding process is two-tiered because of this. Once a merchant is onboarded, the PF starts processing for the merchant, but doesn’t pay them out until they get more information.

And that’s exactly as it should be, according to Meadows, because underwriting and risk management are the bread and butter of PFs.

“These VARs aren’t payment experts and they’re definitely not underwriting and risk management experts,” he said. “That’s a full-time job that needs to be occupied by a payments veteran or expert.”

The compliance complexity in the industry was a hot topic at PF Day, where not only Meadows, but others commented on the serious job of PFs to manage risk appropriately. This risk management is a responsibility regulators are keeping a close watch on, to protect consumers.

Not only is the CFPB looking at the industry, but state regulators have also become more interested in the industry.

And the big issue is one-size-fits-all requirements. “While the PF model is still relatively new, many of the regulations are not suited for the model and may need to evolve to keep up with the model,” Harris said.

Treating PFs as any other payment business can lead to exaggerated costs, Harris continued, costs that might have to be passed down to customers. While memberplanet and Anovia Payments haven’t changed their pricing to accommodate increasing fees, this year, PaymentSpring had to.

Eyes and Money on the Model

The fees aren’t the only thing piling up for PFs.

Merchants of all kinds, plus the venture capital and institutional investor community, have begun taking note of the new industry. Merchants who increasingly need more specific software for their business and are attracted to a system that has payments capability built in. And investors seeing exponential revenue growth from software vendors that shift to monetizing transactions instead of their software.

“The ability to marry software and payments was a huge, meaningful use case for this model,” Ablowitz said. “And to offer frictionless underwriting, it’s essential for some verticals and many micromerchants.”

According to Roy Burns, managing director at TA Associates, valuations for PFs are as high as any he’s seen in the past 20 years.

“The market is frothy,” he said, during the “Opening the Aperture” panel. “The investor community has really gone to school on [the PF model], understand it now and think it’s going to continue. It’s frothy and that’s deserved.”

Although, Burns said, companies looking to make the switch to a PF model are looking to investors like himself for help apart from just capital. Companies are interested in building the right team to manage their payments business since handling payments developers and payments in general is vastly different than managing software and its developers, he said.

Ablowitz agreed, but said in such a nascent industry flush with opportunities, there’s one key thing to strive for: “Play the fundamentals.”

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