what is a payfac - person holding credit card terminal with emv card inserted

What is a Payfac?

Monday, December 22, 2014

When it comes to your business, there are a lot of critical decisions you’re responsible for. From the day-to-day operations to the higher level decision-making, small business owners like you have a lot to deal with. One of the biggest decisions you’ll make for your business is the way in which you’ll accept different methods of payments. In today’s environment, customers expect that you take a variety of payment methods at your business, and there are many ways to do so.

One of the payment models that has become popular is payment facilitators (PayFacs). So, in this article, we’ll take a look at payment facilitators – what they are, who they’re for, and how they compare against some of the other common payment processing solutions in the marketplace. That way, you’ll be able to make the best decision for your business. To start, let’s define a PayFac.

What’s a PayFac and how does it work?

PayFacs are merchant service providers that help small businesses accept credit card and debit card payments online and in person. They do this by offering merchant services under their own master merchant account. Through the master merchant identification (MID), a master merchant can give others access to payment processing or a payment gateway. These other submerchants receive access to payment solutions much faster than if they had to apply for their own unique merchant account. Instead, in the PayFac model, a small business gets a submerchant account under the master merchant.

PayFacs are based on the merchant aggregator model created by Visa and MasterCard to provide support for payment card acceptance in marketplaces. These marketplace environments connect businesses directly to customers, like PayPal, eBay, and Amazon. Other examples of these marketplaces include Xero accounting software for invoicing, Uber and Lyft, Etsy, DoorDash, and Airbnb, where customers get connected to business owners and pay them directly through the app. As you can see from these examples, a PayFac can help individual sellers or service providers take payments without having to endure the lengthy process of applying for their own unique merchant account.

So how do PayFacs work? The process starts with the merchant who owns the merchant account. They offer their ability to process payments to other companies. In turn, prospective merchants apply – usually via an online application – and fill in the necessary data points. These data points include a variety of figures and calculations that tell the MID holder if they should take on the risk of the new merchant. Once the prospective merchant inputs that data, an underwriting process takes place. Again, much of this process involves an underwriting tool that analyzes the risk that a new submerchant imposes on the merchant who owns the merchant account. The end goal is to make getting a merchant account more accessible for small businesses and others who may not process as many, or as large of, transactions. 

During the underwriting process, some of the normal checks can be handled by automation, thereby helping to check prospective companies for the following red flags:

  • Know Your Customer (KYC) requirements
  • Anti-Money Laundering (AML) checks
  • Mastercard’s Member Alert to Control High-Risk Merchants (MATCH) list comparison
  • Office of Foreign Asset Control (OFAC) terrorism prevention list scan

The application process for PayFacs is much more streamlined than that of another type of merchant service provider – an Independent Sales Organization (ISO). While ISOs can take weeks to return a decision to you, many PayFacs offer decisions within minutes. This quick decision-making is helpful for small businesses who are trying to get up and running. Once a new merchant is approved, they have access to the PayFac’s payment processing systems. In this way, a PayFac becomes a merchant account provider for smaller businesses. They typically take on a big role in facilitating the transactions but can also offer other services, including software, hardware, and analytics tracking.

One of the biggest benefits for smaller businesses is not having to get approved by a bank, which can be a stumbling block for many small businesses who simply don’t process the transaction volume needed for their own merchant account. Now that you know more about PayFacs, let’s talk about the partners they work with to ensure successful transactions for your business.

Who are the key partners in a PayFac transaction?

In a PayFac transaction, there are a few more key players than in a normal transaction. Each partner plays a critical role in making sure submerchants like you can quickly receive your payments. Here are the key players in the PayFac ecosystem:
  • Acquiring banks: This is the bank that issues the PayFac their merchant ID. Because PayFacs use these acquiring banks to process payments and hold deposits, they shoulder the liability for any transactions that occur through PayFacs. That means that acquirers usually post stringent requirements that the PayFacs must follow. They are the ones who make sure the submerchants also follow the rules and operating regulations.
  • Payment processors: This is who authorizes transactions and sends them to the card networks. They also help settle funds from the banks during transactions. The PayFac uses their connections to connect their submerchants to payment processors.
  • Sponsors: Sponsors are the combination of an acquiring bank and a payment processor.
  • Submerchants: This is the PayFac’s customer. They use the PayFac’s merchant account to process their transactions, and they pay a fee to the PayFac for this service.

Now that you know about a few of the key players in the PayFac world, let’s take a look at how PayFacs differ from a couple of different payment processing solutions. To start, we’ll compare PayFacs to traditional merchant accounts.

PayFac vs. traditional merchant account: What’s the difference?

When it comes to accepting payments, one of the most popular ways is for a business to set up a traditional merchant account. This lets a business accept credit card or debit card payments from customers while being able to receive the funds into their account. Traditional merchant accounts are a form of bank account and require you to report directly to the bank. But with a PayFac, you’re reporting directly to the merchant who is providing the merchant account.

In contrast to a more streamlined setup process with a PayFac, traditional merchant accounts have a rigorous application and review process that can take weeks to conclude. That can result in waiting a long time before being able to accept payments at your business, which equates to missed revenue. Also, if you choose to go with a traditional merchant account, you’re held liable for chargebacks and are responsible for preventing fraud and any outcomes as a result of the fraud. That can be tough for small business owners since the process of fighting chargebacks can be time consuming and costly.

Because banks typically work with larger businesses for traditional merchant accounts, they are more likely to charge monthly or annual processing fees. These fees can eat away at your financial bottom line as a small business, especially if you’re just getting off the ground and don’t process as many sales as bigger companies.

Next, let’s look at the difference between PayFacs and ISOs. 

PayFacs vs ISOs: What’s the difference?

Another popular way for businesses to accept credit card payments is through ISOs. ISOs offer merchant services to their customers, but in a slightly different way than PayFacs.

One of the biggest differences is the contractual agreement and who the merchant is linked to in the contracts. In the case of ISOs, the merchant is linked to the payment processor, and sometimes the ISO is mentioned as a third party. Typically, the ISO stays out of the contract between the two and instead focuses on the relationship with the payment processor.

In contrast, a PayFac is responsible for the submerchants. The submerchants and the PayFac enter into an agreement, and that agreement is not related to the PayFac’s agreement with the payment processing partner. That means PayFacs have more control over their agreements than ISOs do.

But with this increase in control, PayFacs also assume more responsibility than ISOs. PayFacs are responsible for the application and onboarding processes in addition to much of the underwriting process. PayFacs also shoulder more responsibility when it comes to risk. That’s because they are responsible for the actions of their submerchants, therefore putting themselves on the hook for any consequences of chargebacks and fraud. Sometimes, like in the case of wholesale ISOs, they may assume more risk. But typically, ISOs are responsible for less risk than PayFacs.

Now that you’ve seen the differences between PayFacs and ISOs, let’s look at the biggest benefits of utilizing a PayFac for your business.

The benefits of a payment facilitator

There are many benefits for small businesses like yours when it comes to using a PayFac. Here are some of the biggest benefits for your company:

Quick signup process 

When it comes to accepting payments, time is crucial for many small businesses. With a PayFac, submerchants can start accepting payments much quicker than if they were to use an ISO or work directly with an acquiring bank. Because the PayFac has fewer steps to complete during the merchant onboarding process, they have less costs and can pass the cost savings on to you as well. This quick signup process can help a merchant accept credit card, debit card, and sometimes ACH transactions in a matter of a few hours or days – not weeks.

Solutions to fit your needs

Another benefit of a PayFac is that they can more easily customize their offering to your business to fit your needs. That means your business gets a more holistic solution that the PayFac tailors to your business, including the right payment technology for you. This can sometimes even include a submerchant platform that makes it easy for you to receive payments and manage your account, therefore positioning your small business for an opportunity for increased cash flow.

Fraud and chargeback tools

Because they are the primary merchant, PayFacs are in charge of risk management for their submerchants in their payment ecosystem. That means they have to protect their business by protecting yours. From monitoring suspicious transactions to helping your business deal with chargebacks, they can help your business manage risk and, subsequently, your hard-earned money.

Flat-rate fees

Another benefit of working with a PayFac is a simple fee structure. Many have easy-to-decipher fee structures that are easy to understand and manage. A simple structure can make your life easier as a business owner and allow you to focus on running your business. As always, it’s important to discuss specifics with prospective PayFacs.

As you can see, there are many benefits to a PayFac that can help your business get up and running. You've also seen how the PayFac model can support your business in ways that you might not get from other types of payment models. Running a small business is tough, and a PayFac is one way to help streamline your business. After reading this article, hopefully you have a better sense of PayFacs so you can decide if they’re the right solution for your business.

Ready to get started with merchant services for your business?

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