Did you know the first debit and credit cards in the US — comparable to the ones we have today — were issued in the 1960s?

Then the payment card industry picked up pace in the 90s with the proliferation of ATMs and the rising popularity of electronic banking. As the number of cashless transactions rose, so did the need for systems to facilitate such payments.

Enter the payment facilitator or PayFac. 

The PayFac business model originated in the 90s and has since become integral to the payment processing industry. Initially used by SMBs to facilitate cashless and online payments, “traditional” payment facilitators paved the way for modern payment systems. Square and Stripe emerged as pioneers in the realm, but now there are numerous PayFac options to choose from.  

Statista reports that in 2022, 49% of all global eCommerce transactions were done with digital wallets, followed by credit cards (20%) and debit cards (12%). The eCommerce industry raked in an estimated $5.8 trillion in 2023 and this number may surpass $8 trillion by 2027. 

There is no doubt that cashless transactions will continue to grow as the eCommerce space explodes. All this to say, PayFacs will continue to be essential to businesses for their payment processing needs. 

What are Payment Facilitators (PayFacs)?

PayFacs enable businesses like vertical SaaS companies to accept various payment methods efficiently and securely. They simplify the merchant onboarding process, manage underwriting, and handle PCI compliance, offering merchants a convenient way to access payment services without the need for individual merchant accounts. In other words, businesses can use the software platforms provided by their PayFacs to accept electronic payments. 

A PayFac is responsible for:

• Aggregating transactions

• Managing the underwriting process

• Handling compliance (know your customer or KYC, anti-money laundering or AML, PCI DSS, etc.)

• Simplifying the onboarding process

• Providing payment processing services

• Offering support to merchants

• Managing risk and fraud detection

• Facilitating settlement

How Do PayFacs Work?

Traditional merchant account setup entails a complex procedure for businesses to acquire a merchant ID (MID). In contrast, payment facilitators offer a streamlined approach by furnishing sub-merchant accounts to retailers, eliminating the need for MID applications.

PayFacs have master merchant accounts due to their association with acquiring banks. This enables the swift onboarding of sub-merchants without extensive underwriting, thus expediting the process compared to traditional merchant accounts.

PayFacs vs. Payment Processors

Payment processors handle transactions by facilitating communication between banks and merchants, ensuring smooth fund transfers. They manage the technical aspects of payment processing.

On the other hand, payment facilitators are service providers of merchant accounts, enabling software companies to consolidate various services such as payments and invoicing into a single platform. While payment processors focus on transaction execution, PayFacs specialize in merchant onboarding and aggregation services.

Working with payment processors like FirstData, Stax, TSYS, or Worldpay involves unique contracts with stakeholders, and longer, more complex onboarding processes and hence, higher processing fees.

Payment processors suit eCommerce or physical businesses due to their specialized offerings. As such, big companies handling large volumes of complex transactions would do better with a payment processor. They offer customized payment solutions that are scalable.

A PayFac model is better for companies looking to avoid the headache of acquiring merchant accounts. This not only provides a seamless and easy onboarding process but also simplifies and quickens the process of accepting payments.

PayFacs vs. Independent Sales Organizations (ISOs)

An ISO, or independent sales organization, acts as an intermediary or third-party agent between merchants and payment processors, facilitating merchant services but typically having less involvement when compared to PayFacs.

Both PayFacs and ISOs assist merchants in payment acceptance, but they diverge significantly in their risk involvement, operational control, payment distribution, contracts, and technology.

PayFacs assume liability for merchant onboarding and processing, manage settlements directly, and invest heavily in tech infrastructure. In contrast, ISOs act as agents for payment processors, offering more diverse processor options to merchants but with less involvement in risk management and settlement processes.

An ISO such as Total Merchant Services works best for small businesses that want a varied range of payment options, more than what a payment facilitator model can offer, but do not require too many risk management services. 

PayFacs vs. Merchant of Record (MOR)

An MOR, or merchant of record, is the entity legally responsible for processing payments and managing transactions on behalf of a merchant. This includes handling chargebacks, refunds, and compliance issues with regulations and standards. Amazon would be a great example of an MOR.

The MOR oversees the transaction lifecycle comprehensively, while a PayFac streamlines payments. The core tasks of MORs are to handle legal, financial, and compliance aspects whereas the main aim for PayFacs is to simplify payment processing and onboarding.

Working with an MOR makes the most sense in regulated industries, while PayFac suits smaller businesses seeking simplicity in payment structures.

PayFacs vs. Aggregators

Both PayFacs and aggregators are quite similar when it comes to core functionalities. To the end customer, the benefits are the same. A payment aggregator also consolidates transactions under its merchant account, enabling businesses to accept payments without individual merchant accounts.

However, there is a key difference. A PayFac provides its sub-merchants with unique sub-merchant IDs but an aggregator will only use its own ID for transactions. Aggregators like PayPal and Square offer a faster setup but less control. Hence, PayFacs are ideal for businesses needing autonomy, while aggregators suit those prioritizing ease of use.

PayFacs vs. Payment Service Providers (PSPs)

While PayFacs aggregate transactions under a master merchant account, PSPs provide a comprehensive suite of financial services beyond payment processing, catering to a broader spectrum of needs in the payments ecosystem. PSPs such as Stripe and Adyen offer more payment-related services such as subscription billing, reporting, and analytics. 

PayFacs vs. Merchant Acquirers

Merchant acquirers play a different role than PayFacs in the payment processing pipeline. Merchant acquirers work directly with merchants/businesses to establish individual merchant accounts. This offers greater customization but has longer setup times and more stringent requirements.

Working with merchant acquirers is best for large and complex businesses with a lot of resources. They can approach acquiring banks for their merchant services such as Chase Merchant Services.

Choosing the Right Payment Partner

As you can see, there are multiple players in the payment industry, so choosing the right partners for your business needs may seem complicated. In general, focus on the following and then decide which solution may be right for you.

To select the right payment partner:

• Assess your business size and transaction volumes

• Consider industry regulations and compliance requirements

• Evaluate different providers based on their services, fees, and support quality

• Prioritize compatibility and scalability

• Ensure there is seamless integration with the software your business uses currently

Most PayFacs provide easy-to-use APIs so their applications are easy to plug in with the existing software platforms of their clients. Moreover, collaborating with a PayFac enhances the end customer’s payment experience through efficiency and convenience by providing simple, quick transactions. 

Final words

The best feature of a PayFac solution is that it integrates seamlessly with a business’s existing payment technology and removes all the paperwork and compliance hassles related to accepting card payments. As digital transactions become more commonplace, PayFacs are definitely here to stay.