COMMENTARY: Are You Asking the Right Questions to Decide on a Payment Operating Model?

Companies offering payment solutions generally face an important decision in their early days: settling on the right operating model. Should we function as a payment facilitator (payfac) and do everything ourselves? Should we register as an acquirer, ISO, or third-party processor? Should we handle risk and underwriting? How should we connect our technology? What is the correct customer enrollment model? How should we present or quote rates and fees? 

These are just a few of the critical questions that must be answered before diving into the complex payments ecosystem and acquiring customers.

Yet, too many software companies make their operating and business-model decisions hastily, getting to their answer before they have even asked the right questions. Too often, developers and software businesses contract with technology providers that only offer one way to solve what is a multifaceted and evolving set of needs.    

There are plenty of misconceptions when it comes to operating as a payfac, a “processor,” or some form of hybrid. The questions around risk, engagement, enrollment, transactional technology, and data are numerous. Every company should arrive at their decision after deliberating on which model(s) and business processes will best serve their needs. 

All payment providers want streamlined enrollment for their services, easy access to critical data, simple and flexible pricing, fewer fees, and an experience they can control. Straight out of the gate, many assume that operating as an end-to-end payfac is the only way to accomplish all this. After all, cutting-edge technology disruptors like PayPal operate as payfacs and internally handle almost all functions, which means that companies aiming to be on the cutting edge should do the same. 

That’s the way the thinking often goes. Unfortunately, drawing this distinction may not serve your business well.

Today, easy enrollment, flexible pricing, data access, reasonable fees, and a simplified experience overall can be derived in numerous ways. Solutions across the ecosystem have been enhanced, hybrid models have come to market, and engagement strategies shift over time. Given a business’s specific end-markets, risk tolerances, and capabilities, it is not a one-size-fits-all approach, regardless of what a technology partner might be selling. Large-volume, complex merchants are different from small businesses. Payment risk and compliance is a no-joke function to undertake. Go-to-market strategies are often multi-dimensional. 

Flexibility is the key.   

The fact is, the model you chose to operate under may not (probably should not) be constant. Simplicity, cutting-edge, data-driven, and flexibility are the qualities the market deserves. Being an end-to-end payfac is one way to accomplish this, but not the only way—don’t kid yourself. 

There may be complimentary paths or even multiple models along the journey. The answer to the question of how a payments business should operate is, “it depends.” It depends on how companies wish to go to market, how many functions it would like to outsource, the size of its clientele and the pricing models the business wishes to deliver. 

With this in mind, companies should methodically approach the important matter of how to operate their payments business inside of their software organization. Every company should ask a series of questions designed to gauge the actual needs, risk tolerances, return on investment, and overall desires of the business, and then decide accordingly.

Some of these questions include:

• What kind of experience am I aiming to deliver for the end-user? 
• How will my company go to market? 
• What’s the pricing structure I want to deliver to my customer?
• What’s the connectivity, tenders, channels, and markets I need to support?
• What services should I perform myself versus leverage a partner for?

These are the kinds of questions a company should answer before settling on an operating model. Making a well-informed decision—one that helps decisionmakers choose the right technology partner and service provider—is what will serve every business well in the end.

There are different operating models that may work well for a business, so it’s important to think about other considerations. Like, which services a business wants to outsource to other companies and which should be handled in-house.

Payments-technology partners should be able to serve software companies leveraging multiple models simultaneously, and even offer flexibility on services to foster growth over time. 

There is a range of options on the table as a company joins the payments ecosystem. The mistake too many have made is committing to an operating model and not evaluating end-to-end services before taking the time to determine if this model or partner will serve the specific needs of the business from onset to scale.

An innovative organization with a great team and exciting roadmap entering the payments space ought to enter into partnerships in a prescriptive manner: do their due diligence by asking the right questions and then partner up for the long term. 

Too many companies rush into relationships with commerce and technology partners who later prove to be incompatible. With the right questions, business leaders may find a complementary operating model, solution set, and partner that builds connections for immediate and future success.

Greg Cohen is chief executive of Fortis, Novi, Mich.