Payment facilitation and risk management: What do vertical software companies need to know?

Updated on April 3, 2024

Congratulations, you’ve discovered that adding payments to your vertical software can help improve customer experiences and support your growth goals.  

Before moving forward with payments, you’re probably curious to learn everything you can about payment facilitation and more specifically about the risks associated with adding payments to your software.   

Well, you’ve come to the right place.   

This blog post will shed light on the risks associated with adding payments to your software, and ultimately, help you determine what payment model makes the most sense for your unique vertical and business strategy. 

Before we dive into the risks associated with payments, let’s review why embedding payments is good for SaaS businesses and the three payment processing solutions available to software companies today.  

What are the benefits of adding payments to vertical software?

We know it and you do too – Embedded Payments are growing in popularity among software companies. When done correctly, they can create a seamless user experience, improve customer satisfaction and loyalty, and add an exciting monetization opportunity. If you’re still on the fence about how Embedded Payments can advance your organization, delight customers, and make your software offering more competitive, check out this blog post that explains what Embedded Payments are and how they benefit software companies 

What payment models are available to SaaS companies?

For SaaS companies looking to offer their merchant customers a payment experience built into their day-to-day management platform, they have three choices:  

  • Integrated payments (also known as a referral partnership or referral payments) 
  • Payment facilitation (or PayFac®) 
  • Payment facilitation-as-a-Service (PayFac-as-a-Service or PFaaS) 
  • What is a referral partnership?

    At a very high level, a referral partnership is an integrated payments model. You as the software company make an agreement with a payment processor to become one of their referral partners. From there, once your merchants are ready to set up payments for their business, you refer them directly to the payment processor and receive a referral fee. In this model, your organization assumes none of the payments risk and subsequently, has little control over the customer experience. 

  • What is a PayFac® developer?

    As a PayFac developer, software companies become their own payment facilitator, and therefore, can offer payment processing services directly to their merchants. This payments model, while the most lucrative, requires a considerable amount of time, capital, payments expertise, and a full assumption of risk. We will explore the risks in more detail in the next section.  

  • What is PayFac-as-a-Service?

    In between referral partnership and PayFac is PayFac-as-a-Service. With this hybrid model your company works with a payment facilitation provider, like Payrix. Through that partnership you gain access to a secure, compliant, and white-labelled payment solution that can be embedded into your software platform. This approach creates a seamless experience for your customers and allows you to offload the risk, compliance, and operational costs to your payment facilitation partner, while still reaping the many advantages of Embedded Payments. Plus, a team of dedicated payments experts will be at your disposal to ensure success. 

The Complete guide to Embedded Payments

Discover the 3 payment models available to software companies

What are the risks associated with adding payments and how to manage them?

As we mentioned earlier, the amount of risk exposure a software company must take on is directly related to the payments model they choose to operate within.   

  • In a referral partnership, software businesses offload all the risk to their payment processor 
  • If a software company opts to become a PayFac developer, they must be prepared to assume all the risk and manage that exposure effectively. 
  • Leveraging PayFac-as-a-Service and working with a payment facilitator provider, like Payrix, to add payments to your software, offers generous revenue opportunity, without any of the headache-inducing risks.

But when we say, “payment risks,” what do we mean? 

We’re so glad that you asked.  

Getting clarity on the risks associated with payments is critical for any software company, but particularly so for any software company considering becoming a PayFac developer. If referral partnership or PayFac-as-a-Service is more in line with your business strategy and tolerance for risk, these are some of the exposures that your payment processor or payment facilitator provider will shield your company from. 

Underwriting risk

Underwriting is about assessing the risk associated with a merchant or a payment transaction and determining whether you should approve or decline. It’s also both the source and solution of the risks we’ll cover in the next few sections.  

Unsound underwriting can expose your company to credit issues, fraud, and regulatory penalties. On the flip side, you can quickly create a burdensome underwriting process for colleagues and customers if you’re overdoing your due diligence. Striking a balance will be instrumental to success. As will the automation, technology, and underwriting systems you introduce into your payments experience.  

 As a PayFac developer, you’ll be responsible for all the sub-merchants that you board on your portfolio. This means you’ll need to: 

  • Know if your merchants and their customers are who they claim to be.  
  • Understand if they have a bona fide business with real customers.  
  • Identify if they are financially viable to support their chosen business model. 

Fraud risk

Payment fraud can run the gamut, but includes events like identity theft, dormant accounts, and friendly fraud, just to name a few. Sound underwriting and risk management can weed out these exposures effectively and should be top of mind for payment facilitators.  


  • Identity theft

    This tends to rear its head early in the merchant onboarding process. When false merchants onboard onto your platform, they can hit you pretty hard and fast, and the financial damage can add up quickly. 

  • Dormant accounts

    These merchants may spend a less suspicious period with you. They may even transact a little. Just to act like a good merchant. And then they suddenly bust out by processing large amounts of dubious transactions.

  • Friendly fraud

    Here, you may have a legitimate merchant on your books. But they themselves are victims of fraud. Unfortunately, they may be unable to handle that fraud alone. If you’re a PayFac developer, you’re responsible for the fallout and the costs.

Transactional and chargebacks risk

We’ve all heard the saying, “the devil is in the details” and this is particularly true when it comes to appropriately monitoring for suspicious transactions. However, details can be hard to pinpoint in a sea of transactions.  

Every transaction your platform processes comes with the expectation that you’re reviewing it for things like credit fraud and anti-money laundering rules. Common indicators of risky transactions include sudden deviations, such as increased or decreased processing volume, or a spike in chargebacks. A chargeback occurs when a customer disputes a transaction, and the funds are returned to the customer. 

Chargebacks can be particularly costly for merchants, and they can also damage their reputations. As a PayFac developer, you’re responsible for managing chargebacks and ensuring that merchants are not abusing that process. 

Additionally, when you’re settling a transaction, you’re doing so with the anticipation that goods and services will be provided later. And that is essentially a line of credit. So, the further out your future services and goods are delivered, the greater that risk becomes. When a merchant goes out of business and can’t deliver those goods or services, the payment facilitator is responsible for those transactions. So, understanding your merchants’ business models, and whether they’re taking advanced payments, is an integral piece of the underwriting process. 

Payment regulation and compliance risk

Moving money is a serious business, which means it comes with a serious (and ever changing) set of federal and state regulations to abide by. Should you choose to become a PayFac developer, your bank sponsors and acquirers will immediately pass many of these requirements onto you, including conducting Know Your Customer (KYC) checks, following foreign asset rules and sanctions, and meeting anti-money laundering (AML) needs.  

Therefore, you’ll need to make sure that you understand how to identify unusual activity. For example, you may need to delve all the way down into the nature of the AML training you supply to your entire organization.  

Reputational risk

Proper underwriting and risk management is a highly involved component of payment facilitation. In addition to monitoring for risky transactions and fraud, as a PayFac developer, you’ll need to consider the reputational exposure that comes with payments too. For example, if your customers experience issues with your payment services, it can damage your brand’s reputation.  

Payrix is here to help with all your payment facilitation and risk management needs

When it comes to payment facilitation and risk management, you don’t need to go at it alone. A premier payment facilitation provider, like Payrix, can help you absorb risks and navigate the complexity that comes with managing payments in-house. Our PayFac-as-a-Service solution allows you to accept, manage, and secure payments unencumbered by the pesky risks we discussed throughout this blog. When we say that we’ll handle the risk so you can hone the rewards, we mean every word of it.  

Ask for a demo to see how we can help your software business grow with payments and introduce a frictionless experience to your merchants.  


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