Ecommerce businesses today require a secure and efficient system for streamlining online payments. Innovative financial solutions in the payment processing industry allow merchants to manage payments from their customers safely and efficiently.
PayFacs or payment facilitators are one such solution. They allow merchants to quickly start accepting online payments, without having to open a merchant account with an acquirer (or acquiring bank).
In this article, learn all about PayFac, its functions, and its advantages for merchants.
What Is a PayFac or Payment Facilitator?
A payment facilitator, or PayFac, is a payment service provider (PSP) that enables merchants to accept and process electronic payments via sub merchant accounts. They open merchant accounts with a merchant acquirer and onboard businesses as sub merchants to facilitate online and POS transactions. Usually, payment facilitators support a wide range of payment options, and it is up to the merchant to decide which payment methods they would like to offer to their consumers.
PayFac services are particularly useful to small and medium businesses who have low transaction volumes. SMBs benefit from not having to make hefty upfront investments into opening a merchant account. Businesses operating in a high chargeback rate industry also see great benefits from working with a PayFac because merchant acquirers usually avoid working with such businesses directly.
ISO vs. PayFac
An Independent Sales Organization or ISO is a third-party company that partners with an acquiring bank to provide payment processing services to merchants by opening and managing merchant accounts for them for a fee.
The differences between ISOs and PayFacs include the following:
- Account types. The main difference between an ISO and a PayFac is that an ISO provides merchants with their own individual merchant accounts. On the other hand, PayFacs keep all merchant accounts in an aggregate under a master merchant account.
- Merchant contract. When partnering with an ISO, the merchant contract needs to list the payment processor who will provide the service. In this case, an ISO can be listed as a third-party, although it is not necessary. On the other hand, a PayFac enters into an agreement directly with the merchant, while listing the payment processor as a third party is optional. This allows a PayFac to manage the merchant account directly.
- Application, onboarding, and monitoring. Since merchants connect directly with a PayFac in a two-party agreement, the payment facilitator handles the entire application, underwriting and onboarding process. With an ISO, on the other hand, the merchant information is passed to the payment processing partner, who handles the onboarding and monitoring.
- Risks and responsibilities. As PayFacs are responsible for underwriting and onboarding a merchant, they are solely liable for any risks that affect the merchant’s account and portfolio. An ISO shares that responsibility with the payment processor or can be completely hands-off depending on the merchant agreement.
- Handling of funds. Payment facilitators accept and handle the funds for the merchant through aggregated processing. This means the funds are paid to the payment facilitator, who redirects them to the merchant account. ISOs do not come in contact with the merchant funds. Instead, the payer’s (consumer’s) bank sends the money to the payment processor, after which the funds appear on the merchant account.
- Technology. Payment facilitators develop their own technology solutions to handle parts of the process. This includes managing applications and onboarding, which a PayFac handles on its own, while in the case of ISOs, this is passed on to the payment processor.
How Do PayFacs Work?
Payment facilitators set up a master merchant account that includes individual sub-merchant accounts. All sub-merchants’ transactions are bundled and processed in aggregate.
There are several functions of the PayFac, including:
- Application Processing. The sub-merchants need to apply for the account in order to acquire the payment facilitator services. The payment facilitators speed up the enrollment and approval process to 24-48 hours instead of weeks through their sub-merchant platforms.
- Underwriting. After the application is submitted, it goes through the process of underwriting. The purpose of underwriting is to check the legitimacy of the sub-merchant’s business to confirm that it is not a threat to the payment facilitator and fulfills the necessary requirements of the payment facilitator process.
Note: For more information on merchant account underwriting, refer to our article What is Merchant Account Underwriting and How Does It Work?.
- Onboarding. If the application is approved after the underwriting process is completed, the payment facilitator proceeds to onboard the sub-merchant by adding them to the aggregate merchant account.
- Monitoring. Payment facilitators take on the risks that come with providing services to sub-merchants. This is why they perform regular fraud and chargeback monitoring of all transactions.
- Funding. PayFacs directly manage the funds sent to the sub-merchant by the consumer. They have access to the consumer funds in their bank and the authorization to transfer them to the sub-merchant account. This saves time and contributes to the efficiency of payment processing.
- Chargeback Management. The payment facilitator is also an active participant in the chargeback process. The PayFac works alongside the bank to perform the chargeback and may require additional documentation from the sub-merchant to resolve the issue.
Note: High chargeback rates can negatively impact a business. Learn how to keep yours in check in our article Chargeback Rate and How to Calculate It.
Payment Facilitator Participants
There are five payment facilitating participants:
- Payment facilitator. The payment facilitator is a service provider company that allows the sub-merchants to accept electronic payments from their consumers.
- Sub-merchant. The sub-merchant is the customer of the payment facilitator. They use PayFac services to accept payments from buyers, both in physical stores or online.
- Acquirer (acquiring bank). The acquirer provides the structure for the transaction. It also checks if the payment facilitator is following the necessary requirements in terms of technology, procedures and policies.
- Payment processor. The payment processor handles the processing of all payments that go through the payment facilitator. Often times, the PayFac assumes the role of a payment processor, while in other cases it serves as a third-party. After receiving authorization, the transaction is approved by the bank and funds are sent to the sub-merchant’s account.
- Sponsors. When an entity wishes to enter the payment processing system, they need a sponsor who will provide the underwriting and approval of their request. Sponsors are usually acquiring banks or payment processors.
Advantages and Disadvantages of PayFacs
There are many advantages for merchants with small and medium businesses who use payment facilitator services.
- Efficiency. Merchants can start accepting payments quickly. As opposed to opening a merchant account, getting approved for a sub-merchant account is several times faster.
- Less paperwork and less upfront investments. Working with an acquiring bank directly and opening a merchant account usually involves a lot of paperwork and upfront investments. PayFacs simplify the process and, besides a standard onboarding procedure, there is not much paperwork or investments involved.
- Less risk. After passing the underwriting process, the payment facilitator takes on managing risks for the sub-merchant through the master merchant account.
- Risk monitoring. A PayFac monitors all transactions for fraud and implements complex fraud prevention systems to minimize the chances of fraud and chargebacks.
- “High-risk” merchants are welcome. Banks are reluctant to work with high-risk merchants. These may include cam sites, CBD merchants, subscription boxes, and any other type of subscription processing. PayFacs take on the risk of working with high-risk merchants and provide payment processing services in industries which would otherwise remain unsupported.
- Access to a global market. PayFacs provide access to global markets through cross border payment processing. Often, PayFacs support local payment methods and currencies and make it easier to reach a global audience.
On the other hand, merchants also experience some downsides when using PayFacs.
- Transaction limits. As a part of the underwriting process, a payment facilitator may determine that a business poses a higher risk to them. Based on that information, PayFacs put transaction limitations on sub-merchant accounts to protect themselves from potential losses due to chargeback and fraud.
- Higher fees. Payment facilitators charge higher fees to their sub-merchants because their costs include partnering with credit card companies (registration costs that go up to $10.000), being up to date with payment compliance standards, providing consumer support services, as well as development and maintenance of their systems.
Note: Learn everything you need to know about merchant credit card processing fees.
Conclusion
Payment facilitators allow merchants to efficiently accept electronic payments from their consumers. A PayFac handles most of the payment process and serves as the middleman between the merchant and the payment processor or assumes the role of the payment processor.
Payment facilitators are especially beneficial to high-risk merchants, who otherwise wouldn’t be able to receive electronic payments.