What is a PayFac (Payment Facilitator)?

The across-the-board advent of e-commerce and online marketplaces has ushered in new challenges, especially in the financial realm. Businesses that sell their products online need a reliable channel powered by robust software to accept payments during transactions. And this is where payment facilitators come in handy.

This article aims to answer the question “What is a payments facilitator?”, describe the principles of its operation, showcase the benefits of leveraging PayFac platforms, highlight the challenges related to the PayFac usage, and explain the differences between a payments facilitator and classical merchantaccounts.

The PayFac definition covers two entities. On the one hand, it is a third-party service that enables organizations (typically called sub-merchants) across various verticals to process payments coming from credit or debit cards, bank transfers, and other sources. On the other hand, a payment facilitator is a provider of such systems to internet-driven businesses that, in addition to their core payment processing feature, offer a scope of other services, such as fraud protection, data storage, tokenization, and more.

Properly speaking, PayFacs aren’t direct acquirers. Stripe, PayPal, Square, Stax, and other juggernauts in this niche are essentially intermediaries between the acquirer (a bank) and a business (sub-merchant). They partner with an acquiring bank and set up a payment processing platform integrating multiple gateways, where the funds of each sub-merchant are pooled into one master account managed through a unified payment solution. 

By harnessing this model, enterprises can radically streamline and simplify their payment processing pipeline, since it grants access to a large customer base and allows companies that acquire PayFac services to avoid getting embroiled in lengthy, cumbersome traditional merchant account applications and processing.

Now that we know the answer to the question “What is a payment facilitator?”, let’s find out how it works.

What does the cooperation between a PayFac, a bank, and a business look like?

Registration and onboarding

Organizations (sub-merchants) apply for a merchant account with the provider that owns the master MID (merchant identification account). The PayFac reviews the application form that contains 7-8 major data points, swiftly performs underwriting, generates a pricing agreement (usually, sub-merchants pay a commission called residual on each transaction), and enables accepting payments by opening a gateway. The entire routine is accomplished within hours. 

Transaction processing

Each time a customer pays for the product, the PayFac receives and processes transaction information on the sub-merchant’s behalf. 

Fund settlement and disbursement

The PayFac interacts with the acquiring bank to settle the funds, which are routed to the sub-merchant’s special account. 

As you see, it is all a cakewalk. The system runs like clockwork, providing numerous perks to organizations utilizing it.

As a vendor specializing in innovative payment solutions, we at Tranzzo see the following upsides of employing a payment facilitator.

Fast onboarding

The entire application submission and approval procedure takes several hours (sometimes even minutes), so you can start accepting payments on the same business day, unlike what happens when applying for an individual account. 

Simplified compliance and risk management

Conventionally, e-commerce businesses have neither the expertise nor the qualified personnel to tackle these aspects. PayFac handles the whole complex of such operations, allowing companies to focus on their core activities.

Transparent pricing

The simple pricing plans relying on the flat-rate per-transaction fee system enable entrepreneurs to enhance the predictability of their expenditures.

Additional services

As a rule, a service suite offered by a PayFac platform includes chargeback and fraud management, multiple payment method support, and access to analytics and reporting features. 

Cost efficiency

Since PayFacs distribute compliance and infrastructure burden across all sub-merchants, each of them is entitled to lower expenditures than they would defray as individual merchant account holders. Naturally, this cost reduction has a positive impact on their revenues.

That said, you should also be aware of potential roadblocks and bottlenecks when opting for the payment facilitator scheme.

What should you look out for when harnessing a PayFac model?

Regulatory requirements

Typically, compliance is the provider’s responsibility. Nevertheless, before entering into a contract with the PayFac, you should make sure it is registered with card networks, adheres to all current financial standards (KYC, AML, PCI DSS, and more), and has completed the necessary licensing procedures.

Fraud prevention and risk management

These are also usually handled by payment facilitators, but you should inquire about fraud prevention tools and chargeback loss coverage mechanisms the provider has in place. 

Operational considerations

Like it happens with any software, an organization that onboards a PayFac, should check how it integrates into its existing digital ecosystem (some PayFacs have limited options regarding payment software, hardware, and gateway flexibility), whether it can handle omnichannel customer support across multiple languages, how stable the system is, and if it has a scalability potential both to deal with a growing number of customers and expand into new markets with their versatile legal frameworks. 

Given the seriousness of these challenges, can we say that payment facilitators are inferior to classical merchant accounts? 

Let’s compare these two systems according to their key parameters. 

Structure and functionality

When setting up a merchant account with an acquiring bank, you enter into a direct relationship with it and receive a dedicated account upon approval. A payment facilitator “hires” a master account from a bank and “rents out” its functionality to sub-merchants. 

Application and onboarding

To get approval for a traditional merchant account, you will have to wait several weeks, during which your application undergoes a thorough, lengthy underwriting process. With a PayFac, it takes hours or at worst days.

Fees

PayFacs usually charge a percentage per transaction. The owners of merchant accounts are subject to more complex fee structures with monthly or annual fees, setup fees, statement fees, and whatnot.

Risk handling

Businesses with an individual merchant account assume direct liability for fraud and chargebacks, and must resolve disputes and implement preventive measures themselves. PayFacs deal with compliance, risk management, and fraud detection, however other liabilities still rest with sub-merchants.

So, which model is better? It depends on the size of your enterprise and its transaction volume. For startups and small businesses with no expertise in the payment processing field but an aspiration to kick off accepting payments as soon as possible, a payment facilitator is just what the doctor ordered. Large organizations with high sales volumes that want greater control over their finances and can benefit from potentially lower fees down the line will find a traditional merchant account more suitable.

What is a PayFac? A payment facilitator is a third-party provider of fintech services to online entrepreneurs. The provider obtains a master merchant identification account from an acquiring bank and rents out access to it to individuals and organizations (called sub-merchants) for payment processing.

By opting for the PayFac model, businesses can quickly undergo the application procedure and start accepting payments within days or even hours. Other services that the PayFac suite extends are fraud prevention, risk management, analytics and reporting, regulatory compliance, and chargebacks.

The payment facilitator scheme suits small businesses and startups best. Such enterprises benefit from fast onboarding, transparent flat per-transaction fees, and a set of additional fintech services that enable them to delegate such specialized operations to niche experts and focus on their core shop-floor processes.