Payment options in the world of subscription commerce

Delivering a seamless purchasing experience is integral to a successful subscription commerce business. For organisations looking to build a next-generation subscription commerce platform, determining the right payments strategy and partnerships can be daunting, given the plethora of options.

To the uninitiated, the world of payments is full of confusing jargon. This is particularly true when considering payment facilitators (‘PayFac’) and the merchant of record (‘MOR’) models. Both of these models provide unique advantages that can help an organisation reach more customers faster, with less friction in the process. However, they fulfill different use cases, so understanding their optimal use is key to maximising their value and avoiding disappointment when deploying them.

Payment Facilitators – PayFacs

PayFacs operate as a master merchant that facilitates credit and debit card transactions for sub-merchants (the PayFac customers) within their payments ecosystem. A PayFac assumes all the risk involved in payment processing – including fraud loss, chargebacks, and non-payment. They underwrite and provision the merchant account themselves and fund their sub-merchant’s payments.

Unlike a traditional merchant account provider that puts each customer through a risk assessment process, the PayFac offers speed and simplicity. Customers and accounts can be added almost instantly with global coverage for pay-in and local/ domestic bank payouts in many countries. One of the major advantages of using a PayFac is agility. Customers experience a fast, nearly friction-free process, and rich, modern APIs make it easy to integrate a PayFac into your marketplace or commerce solution. Compliance is streamlined, making it easier to adhere to local regulations and rules.

Examples of PayFacs are companies like Adyen, Stripe, Square, BlueSnap, PayPal, and Checkout.com (this is by no means the definitive list). Amazon is also a PayFac and a merchant of record.

So what is a merchant of record?

Merchants of Record

In the MOR model, a consumer makes a purchase online, and the MOR serves as an intermediary between the buyer and the seller. The MOR handles processing of the payment, and, in fact, takes legal ownership of the good or service (albeit for a split-second). Thus, the MOR is responsible for fulfilment of the good or service and the risks and liabilities associated with the payment.

In the world of digital goods, providers like Avangate/2Checkout, Digital River, cleverbridge, FastSpring, and Nexway (among others, including Amazon) offer full service platforms that include commerce, marketing/promotional services, payments, local tax and compliance, and more. A retailer or business seller is able to plug into an MOR and start selling very quickly, via the MOR, into global markets. The MOR handles issues like translation, billing, local currency and payments processing, and assumes the risks of transacting with the buyers. The benefit to the seller is the ability to reach new geographic markets without having to stand up local infrastructure.

Small to midsize companies find this appealing because they can serve new customers very quickly. Some mid to very large software and digital goods companies consider the MOR model an attractive channel for product lines that are not necessarily their primary focus.

These product lines can be sold via the MOR, and the underlying monetisation – from marketing to contracting, provisioning, and collecting payments – is outsourced to the merchant of record without having to be integrated into an existing infrastructure. In addition to the overall benefit of speed, the MOR model benefits companies looking to expand into specific countries or regions without having to invest in the resources (people, technology, processes, partners) to operate legally in those places.

It’s important to keep in mind that merchants of record are full service providers. The customer is obligated to use the complete stack of capabilities – from the ecommerce system to billing, payments, etc. As for critical steps in the end customer’s journey – eg when a customer renews a subscription –, the business that is using an MOR is dependent on that MOR to deliver a seamless renewal process, since the customer relationship is actually in the hands of the MOR.

Organisations that have their own resources in any one of the sub-domains provided by the MOR – eg subscription billing or ecommerce – may find the MOR model too restrictive. In this case, there are PayFacs that provide API-driven services for payments handling and localisation issues that are easy to connect into an existing monetisation infrastructure.

Cost is also an important consideration. While MORs provide speed and the simplicity of outsourcing, it comes at a cost. Small to midsize companies will find the total cost of ownership of the MOR model attractive, particularly since it is relatively inexpensive to initiate the MOR services from a capital investment perspective. For larger enterprises that place a premium on their brand experience and also have existing resources in their country, the MOR model may not make economic sense.

In an era in which businesses are seeking speed and flexibility, PayFacs and MORs can be compelling. Getting the right fit requires clear business objectives and a detailed understanding of both the costs and the benefits of each. The massive market adoption of PayFacs, like Adyen and Stripe, is a testament to the appeal of the model and of those solutions.

This editorial was first published in our Payments and Commerce Market Guide 2018-2019 and in Monetisation of Digital Business Models 2019 – Insights into Billing and Recurring Payments Report.

About Andrew Dailey

Andrew Dailey is a Managing Director of MGI Research, an independent research and advisory company focused on disruptive business and technology trends. Mr Dailey leads the agile monetisation and quote to cash coverage for MGI. He has over 25 years of diversified technology and financial services experience as a software executive, industry analyst (Gartner), and advisor to Fortune 500 companies. He is a co-founder of Gartner’s Software Asset Management service, and served on the team that coined the term ERP in the early 1990s.

 About MGI Research

MGI Research is an independent research and advisory firm focused on disruptive business and technology trends. It serves business and finance executives, tech CEOs, and institutional investors.