From SaaS to PayFac: Passing Sponsor Bank Due Diligence
A vertical SaaS platform wanted to embed payments. We built their compliance program from scratch and got them through sponsor bank diligence in under 90 days.
The Opportunity
Our client was a vertical SaaS platform serving the home services industry — think HVAC contractors, plumbers, electricians. They had 2,000+ businesses on their platform managing scheduling, invoicing, and customer communications.
The natural next step: embed payments. Instead of sending invoices that customers pay elsewhere, let them pay directly in the platform. The economics were compelling — interchange plus a platform fee on every transaction.
They'd chosen a PayFac-as-a-Service provider and needed to pass their sponsor bank's due diligence. The bank sent over a 47-page questionnaire and requested documentation they didn't have.
What We Built
1. Sub-Merchant Risk Framework
The sponsor bank needed to understand how the client would manage sub-merchant risk. We built:
- Risk-tiered onboarding — Different diligence requirements based on projected volume and business type
- Prohibited business list — Clear documentation of what businesses they wouldn't onboard
- Ongoing monitoring triggers — When to re-review a sub-merchant (volume spikes, chargeback increases, etc.)
- Termination procedures — How and when to offboard risky sub-merchants
2. AML/BSA Program
As a PayFac, they'd have BSA obligations. We built a proportionate program:
- Written AML policy and procedures
- Sub-merchant KYB requirements (beneficial ownership, business verification)
- Transaction monitoring rules tuned to their vertical
- SAR filing procedures and escalation paths
- Training program for operations staff
3. Operational Procedures
Banks want to see that you can actually execute. We documented:
- Sub-merchant application workflow
- Document collection and verification steps
- Approval/decline decision matrix
- Chargeback and dispute handling
- Reserve and funding policies
- Customer support procedures
4. Questionnaire Response
We worked through the 47-page questionnaire line by line, providing:
- Direct answers with supporting documentation
- Cross-references to relevant policies
- Data on their existing customer base (risk profile, industries, geographies)
- Projected volumes with assumptions clearly stated
Pro tip:
Don't just answer what they ask. Anticipate follow-up questions and address them proactively. It signals sophistication and reduces back-and-forth cycles.
The Process
Timeline from engagement to approval:
Weeks 1-2: Discovery & Gap Analysis
Reviewed existing materials, identified gaps, created project plan
Weeks 3-6: Program Build
Drafted policies, procedures, and operational workflows
Weeks 7-8: Questionnaire Response
Completed due diligence package with supporting documentation
Weeks 9-12: Bank Review & Q&A
Responded to follow-up questions, made minor revisions
The Outcome
- ✓ Sponsor bank approval in 87 days
- ✓ Launched payments to first cohort of sub-merchants within 30 days of approval
- ✓ $2.4M processed in first quarter
- ✓ Zero compliance findings in first annual review
- ✓ Program scaled to 800+ active sub-merchants within 18 months
What We Learned
The biggest mistake companies make with sponsor bank diligence is treating it like a checkbox exercise. Banks aren't looking for perfect policies — they're looking for evidence that you understand the risks and have thought through how to manage them.
The client's advantage was their vertical focus. Because they only served home services businesses, their risk profile was well-defined and their controls could be precisely tuned. Generalist PayFacs face much harder diligence because they can't predict what's coming through the door.
Building a PayFac program?
We've helped platforms across verticals pass sponsor bank diligence. Let's talk about your situation.
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