Why Payment Facilitators Are Thriving

As small businesses increasingly look for help in adopting digital payments, PFs are generating more and more payment volume—and more revenue.

When payment-facilitator megaplayers, like Square Inc. and Stripe Inc., first entered the scene more than a decade ago, many within the payments industry viewed the model as too risky. Despite early skepticism, the payment-facilitator (PF) market is experiencing strong growth because it benefits the entire payments ecosystem, including banks, card brands, merchants, consumers, and economies worldwide.

According to recent research conducted by AZ Payments Group in partnership with Infinicept, we can expect to see significant market growth for payment facilitators worldwide over the next six years. If the current baseline growth rate continues the number of global payment facilitators is expected to expand from 1,075 in 2019 to nearly 2,400 by 2025. This represents a compound annual growth rate of 14.3%.

However, with payment networks heavily investing in the growth of PFs worldwide, it is foreseeable that the market will grow at a more accelerated pace. Under an accelerated growth rate of 25.6%, we could easily see the number of PFs reach more than 4,000 by 2025—which would be four times the number of PFs we have today.

In either the baseline or accelerated growth rate scenario, the market expansion of PFs is expected to have a significant impact on the payments industry.

What’s Driving Growth?

The PF model was conceived by Square and Stripe, then embraced by Visa Inc. and MasterCard Inc., to help drive the ubiquity of electronic payments worldwide. Before it was introduced, small merchants faced significant challenges in offering their customers the same digital payment choices that larger companies were able to provide, mainly because the payments ecosystem was not built with small merchants in mind.

Today, payment facilitators provide small merchants with a smoother onboarding process and a better payment experience. By removing digital-payment acceptance barriers for small merchants, Visa and MasterCard are earning more revenue by converting more non-card volume onto their networks.

This provides a strong financial incentive for the card networks to push the rest of the payments ecosystem into accepting this new model of merchant processing.

Payment facilitators like PayPal Holdings Inc., Square, Stripe, and Shopify Inc. have proven that offering a seamless path to electronic payment acceptance, especially for small and micro-merchants, helps grow digital payments. Their success has set the stage for other companies to follow suit. Innovative companies worldwide are becoming PFs to provide a better payment experience for their customers, increase their revenues, and improve their business valuations.

The strategy is paying off for companies of all sizes. Patientco Holdings Inc. became a PF to simplify payment processing for their health-care system clients. As a result, they are able to offer clients greater flexibility to respond to patients’ financial needs and implement new, intuitive payment tools that today’s patients expect.

After becoming a payment facilitator, Five Stars Loyalty Inc. expects to generate $1 billion in annualized gross payment volume in its first year of operation and $6 billion in cumulative gross payment volume in three years.

For acquirers, PFs provide a strategic opportunity to expand transaction volumes, cut the cost of doing business, and offset risks. PF business lines are typically higher-margin while requiring less work to maintain than is the case with maintaining all submerchants individually.

PFs also assume a portion of the risk and can bring net-new transaction volume to acquirers through emerging electronic payments categories such as business-to-business and government payments.

Looking ahead, acquirers have an opportunity to increase profits by 5% to 8% with no incremental interchange or assessments by offering value-added services designed to meet the unique needs of vertically focused PFs. In response, many of large financial institutions, including Wells Fargo & Co., JPMorgan Chase & Co., and Fifth Third Bancorp are enabling PFs. They are looking to capitalize on the 208,000 or so software companies worldwide that could benefit from becoming PFs, according AZ Payments Group research.

As PFs form in developing countries, they bring new opportunities for economic expansion. This makes the digitization of payments a key priority for many large payment players and governments across the globe. Countries like India, Nigeria, and Vietnam are using PFs to fuel economic growth and support emerging markets in fintech.

Card usage makes the economy more efficient, yielding a meaningful boost to economic growth year after year through a multitude of factors. These include transaction efficiencies, consumer access to credit, and increased consumer confidence in the payment system overall.

A recent study conducted for Visa by Moody’s Analytics concluded that growth in the use of electronic payment products, such as credit and debit cards, added $983 billion to the gross domestic product of the 56 countries examined between 2008 and 2012. Since PFs help fuel electronic payment acceptance, especially among small merchants, the rise in PFs globally is directly tied to increased GDP for countries that have adopted the model. It’s safe to conclude, then, that the roster of countries embracing PFs will only increase in the coming years.

Market Barriers Fall

In the early days, becoming a payment facilitator was a difficult, complex, and a time-consuming task. Today, the market barriers are crumbling, in large part because PF-as-a-service (PFaaS) companies are offering turnkey solutions that help banks and their customers dramatically decrease the time, cost, and headaches involved in moving to the PF model.

These new software platforms and API stacks take all the heavy lifting out of the equation. PFaaS customers gain access to all the underwriting, risk, and compliance capabilities and expertise they need to quickly onboard and manage submerchants. This allows their sponsors to earn more revenue with less effort and risk.

In 2019, payment facilitators processed $929 billion in gross payment volume globally, which represented 6% of all transactions worldwide. Under the baseline growth-rate scenario, global gross payment volume (GPV) flowing through payment facilitators (not including PF megaplayers PayPal, Square, Stripe, and Shopify) is expected to more than triple from $436 billion to $1.58 trillion by 2025.

Under the accelerated growth rate scenario, PF GPV (again, not including PayPal, Square, Stripe, and Shopify) could reach almost $2 trillion by 2025.

As gross payment volumes increase, the revenue PFs generate from payment processing will significantly increase as well. In 2019, PFs generated $3 billion in revenue. Depending on the market growth rate, PFs could be generating $13 billion to $15 billion in revenue by 2025.

The global retail transaction processing industry moves nearly $16 trillion annually and generates $371 billion in revenue. The growth of the PF model, fueled by supporting products and services, represents a significant opportunity for thriving software-as-a-service companies across every industry to own a piece of the payments pie.

As the payment-facilitator model matures, we’re seeing companies spanning every imaginable software vertical take control of their payments offerings. These software companies serve verticals like wellness (ClubReady LLC), restaurants (Toast Inc.) and health care (Phreesia Inc.), and countless others.

Today, it’s not surprising many software businesses are realizing they can provide a better experience for customers, while increasing revenues and business valuation, by becoming a payment facilitator.

—Deana Rich is co-founder and co-chief executive of Infinicept, Denver.