The internet has leveraged the playing field between a small business and a large enterprise in many ways. Every day, new tools are developed that challenge the infrastructures of big organizations. Disruptive technology allows fresh talent to be seen and compete in places they never might have. When it comes to the merchant services space, payment facilitators are challenging the balance of power.
What is a PayFac (Payment Facilitator)?
A payment facilitator (PayFac) is a merchant services business that sets up electronic payment and processing services for business owners, so they can accept electronic payments online or in-person. Offering similar services to popular payment processing tools like Stripe and PayPal, PayFac is a third-party merchant service provider.
During the application process, you need to provide basic information to get started. Once the account is approved, you can start processing payments within hours (as a sub-merchant under the PayFac account). This is quite an attractive timeline. Especially for an SMB where it can take days or even weeks to get an account approved via the traditional channel.
How do Payment Facilitators Work?
The payment facilitator owns the master merchant identification account (MID). In order to process transactions, the acquirer (merchant) must apply for a merchant account. This includes an application with 7-8 key data points, an underwriting process, working out a pricing agreement, and integrating the latest payment technology.
During the onboarding process, the data points are evaluated by an underwriting tool and approved or declined in real-time. If everything looks good, the payment gateway is opened and the merchant is boarded as a sub-merchant under the PayFac‘s master merchant ID.
What is a Payment Facilitator Model?
A Payment Facilitator (PayFac) cuts the need for an individual merchant to establish a traditional merchant account. An effective PayFac model involves smart technology.
A software provider registers with an acquirer to provide payment services to sub-merchants who us their platform. By doing this, the software brand is acting as the “master” merchant account provider. They can now board sub-merchants under their own account to streamline payments for them.
In the PayFac model, there are three main parties involved: the acquirer, the payment facilitator, and the sub-merchant. It is the acquirer‘s responsibility to provide the structure for the transaction. The PayFac acts as a go-between the acquirer and the sub-merchant (who always operates under the payment facilitator).
The acquirer works with the PayFac to initiate the sub-merchant platform. There are a few tasks an acquirer must oversee when developing this payment solution that includes:
• Application process
• Underwriting
• Payment technology integration
• Pricing agreement
• Monitoring PayFac’s compliance
It is the acquirer‘s job to make sure the payment facilitator is following the rules and in compliance with operating regulations. They are expected to perform due diligence when onboarding sub-merchants and shouldn’t be giving out accounts to just anyone. Risk management is part of the job.
The PayFac must undergo a comprehensive evaluation to register but it is not complex. It is simply a necessity to establish a safe and secure payment infrastructure that all parties can benefit from.
Why be a Payment Facilitator?
A payment facilitator has the distinct advantage of onboarding new clients with speed and ease. Online payments bring in a potentially large revenue stream from the fees charged to end-users.
If you have concerns about the risks and costs of processing transactions, a business may consider managed or hybrid payment facilitation. If you have a customer base more disposed towards strong subscription revenues or higher fees to offset the reduced margin, the hybrid PayFac may be your best bet.
There is also the option of aggregation. While the cost can be substantially higher, the upfront investment fees are considerably lower. The revenue generation potential here remains strong.
If the aggregation model does not fit your business, you may want to consider a payment processing partnership. This system transfers the inherent PayFac risks to a third party, while still offering an opportunity to generate revenue.
Traditional Acquiring vs. Payment Facilitation
Working with a payment facilitator eliminates the need to go through traditional payment companies. The PayFac model differs from traditional acquiring in many ways.
The traditional method was first established for brick-and-mortar businesses with a clearly defined relationship between merchants and the customer. This was still applicable when e-commerce was developed as long as that relationship was there. However, the traditional model proved to be a poor fit for emerging online economies, like marketplaces.
Online marketplaces are an environment where anyone can be a buyer or seller (or both). eBay and Amazon are prime examples of this business model. It’s just as easy to become a vendor as it is to purchase something.
PayFac was created to fit this niche. It’s based on the merchant aggregator system developed by Visa/MasterCard to provide support for credit card acceptance in a digital environment. Used in the marketplace space, it facilitates payments without requiring each seller and/or service provider to go through the lengthy process of opening a traditional merchant account.
| Traditional Acquiring | Payment Facilitation |
| A merchant contracts with an acquirer to accept and process payments. | A PayFac contracts with an acquirer to accept payments on behalf of their sub-merchants. |
| The merchant uses a merchant bank account to accept payment types like credit, debit, and other forms. | PayFac uses a master merchant account to accept all payments for the sub-merchant. |
| The acquirer issues each merchant their own account. | The acquirer issues the PayFac a master merchant account. |
| The acquirer directs funds from the buyer to the merchant account. | The PayFac directs the funds from the buyer to the sub-merchant account. |
Online business begs for fast and painless payments. You want to make it quick and easy for people to purchase. The payment facilitator model ensures a business can offer the same type of payment options to customers, regardless of size.
It evens out opportunities and gives consumers a broader range of purchasing options. If you are an SMB looking to climb the ranks, a payment facilitator is a good shortcut for finance. It also keeps customers happy, which is always the ultimate goal.
