PayFacs Are Forcing Innovation on Processors, But Processors Kill Innovation. So What Now?

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The survival of the fittest is a well-known concept: the strong survive and the weak disappear. In the world of payments and technology, strong is often associated with longevity given the complexities of launching and igniting new payments technologies.

If you are a business owner, you’re responsible for lots of tough decisions. And, one of the most recent decisions that you’ll have to make when accepting payments is if you’re going to sign up with an aggregator, such as PayPal, or go through the rigorous and stressful process of applying for a merchant account.

In other words, are you going to stick with the traditional merchant account service provided by an independent sales organization (ISO) or embrace the newer, and more promising, sub-merchant account —known as a payment facilitator.

What is a PayFac?

A payment facilitator(PayFac) is a merchant service provider that simplifies the merchant account enrolment process. PacFac work on a sub-merchant platform where merchants no longer require their own MID, but are boarded directly under the PayFac’s master MID account.

This allows merchant services to be offered in a very elegant and very efficient manner. PayFac have an crucial role in facilitating transactions by allowing white-labeled payment processing services that can be integrated into a merchants whole solution or as certain part of the PayFac’s own platform as a service. PayFacs facilitate the fluidity of funds on behalf of their sponsored merchants.

History of PayFac:

The payfac model was popularized in the late 1990s providing a way to help small- and medium-size businesses accept online payments more easily. In the past, a bank’s onboarding requirements were catered to larger businesses that could manage the complex, costly, and time-consuming legacy setup processes. Essentially, these companies had to become experts in payments along with that, also building their core business and product.

Why PayFac?

PayFacs are all the rage because you can onboard merchants hassle free, quickly and often command greater processing profit. Traditionally, a payments processor would need to collect business information from a merchant, assess risk based on that data, and tell the merchant if they were accepted. This could take weeks. PayFacs instead become certified with acquirers directly as a master merchant and assume the risk of whatever merchants they themselves onboard. PayFacs have their own risk assessment tools but the verification process is faster and thus less rigorous than traditional methods. PayFac downsides are that a data breach or faulty analysis of merchant risk could be financially ruining. 

There are about thousands of software companies that would benefit from becoming their own PayFacs. The model might even make sense for larger merchants with franchisees, too.

1. Quickly start accepting payments:

Signing up for a PayFac account is fast and easy process. Setting up a merchant account isn’t hard but it can be tedious and it takes longer. With a PayFac account, the onboarding process is quicker , hassle free and you can begin accepting payments almost immediately.

2. Less compliance regulations:

Banks and payment processors usually take on a certain amount of risk by letting businesses open merchant accounts. Compliance typically entails a whole list of tasks like KYC, PCI compliance, tax reporting and more. Luckily, the PayFac model comes with fewer compliance requirements than signing up for a proper merchant account. The solution helps merchants make the most of cross-border opportunities – enabling payments for goods purchased, while staying on the right side of fraud, risk, tax and regulatory and legal compliance.

3. Less risk to the business:

Because you are only considered a sub-merchant, the majority of the risk is passed on to the master merchant. Also, though the fees tend to be higher, you only pay when a transaction is actually processed. Your PayFac may usually charge a flat price based on the number of transactions you process, which gives you added transparency. PayFacs have their own risk assessment tools but the verification process is faster and thus less rigorous than traditional methods. To manage, understand and mitigate risk, build systems and internal policies to conduct due diligence. 

4. PCI compliance:

PayFac provides the payment processing services, settlement of funds, and billing to the merchant. Funds are settled to the PayFac’s account and it’s determined by the PayFac to move the funds to the merchant. This means that the technology which is required would be PCI level 1 compliant.

5. Better fraud control:

Be alert and proactively prevent fraud on the platform and block or review suspicious transactions. Submitting evidence to card networks when needed for chargebacks on behalf of sub-merchants.  In the event of chargebacks, as well, request your PayFac to submit evidence to card networks. This means more peace of mind and hassle free for you as a sub-merchant.


The definition of a payment facilitator is still an evolving process—so is its role.  Unfortunately for the market, acquirers have all the money, and they thusly make the rules. Until someone materially disrupts interchange true innovation in payments will be fleeting. So become a PayFac while the getting’s good, because the processors will shoot the prices up.

One of the main advantages of the PayFac model is that it speeds-up the onboarding process. As a Payment Facilitator you have the right to set-up sub-merchants quickly, which streamlines new client acquisition since they don’t have to fill out paperwork or provide documentation in order to set-up their account.

Even though there are a lot of considerations, anxiety, costs, and risks to becoming a payfac, there are a lot of benefits to adding payments to a platform or marketplace. Payments functionality will help differentiate the platform in competitive markets and improve the experience for sub-merchants.

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