What is a Payment Facilitator? (PayFac)

A Payment Facilitator (PayFac) is a model that simplifies the merchant account enrollment process, allowing businesses to accept payments more easily. PayFacs act as a master merchant, under which individual businesses can operate as sub-merchants. This setup reduces the complexity and time required for each business to individually establish a merchant account with a bank or payment processor. By using a Payment Facilitator, platforms and marketplaces can quickly onboard businesses, enabling them to accept payments from customers without the need for each business to undergo a lengthy and complex approval process.

Payment Facilitators handle the processing of transactions, manage the flow of funds, and take responsibility for compliance with payment industry standards and regulations. They also deal with fraud detection and prevention, making it easier for small businesses and startups to securely accept payments without significant upfront investment in security and compliance infrastructure.

Common Types of Platforms and Marketplaces That Use Payment Facilitators 

The PayFac model is particularly beneficial for various types of online platforms and marketplaces that connect sellers with buyers. Here are some common examples:

• E-commerce: Online stores and marketplaces that sell products or services directly to consumers. PayFacs facilitate transactions by handling payment processing, making it easier for small vendors to sell online.

• Invoicing: Platforms that provide invoicing and billing solutions for businesses, freelancers, and consultants. Payment Facilitators enable these platforms to accept payments directly through invoices, streamlining the payment process for both the service provider and the client.

• Fundraising: Crowdfunding platforms and donation-based websites use Payment Facilitators to collect contributions from a wide audience. This model simplifies the process of accepting donations for various causes and projects.

• Booking: Services that allow customers to book appointments, accommodations, or reservations. PayFacs enable these platforms to process payments for bookings, enhancing the convenience for users and service providers.

• Travel and Ticketing: Websites and apps that sell tickets for events, travel, and transportation. PayFacs facilitate the payment process, allowing customers to easily purchase tickets online.

• Retail: Brick-and-mortar stores that also sell products online can benefit from Payment Facilitators by integrating online and in-store payment systems, providing a seamless shopping experience for customers.

• On-demand Services: Platforms that connect consumers with service providers for immediate or scheduled services, such as ride-sharing, food delivery, and home services. PayFacs enable these platforms to efficiently process payments, ensuring a smooth transaction for both parties.

The Payment Facilitator model supports the growth of these platforms and marketplaces by simplifying the payment process, reducing barriers to entry for small businesses, and ensuring secure and efficient transactions. This model has become increasingly popular as businesses seek more streamlined and user-friendly payment solutions to meet the demands of the digital economy.

How do Payment Facilitators Work?

• Simplified Merchant Onboarding: PayFacs have a master merchant account with a bank or payment processor. Businesses that sign up under a PayFac are onboarded as sub-merchants under this master account, bypassing the need for each business to individually apply for a merchant account.

• Transaction Processing: When a customer makes a payment, the PayFac processes the transaction through its master merchant account. The funds are initially received by the PayFac, which then distributes them to the appropriate sub-merchant’s account.

• Compliance and Security: PayFacs are responsible for ensuring that transactions comply with industry standards such as PCI DSS (Payment Card Industry Data Security Standard). They also implement security measures to protect against fraud and data breaches.

• Management and Reporting: PayFacs provide sub-merchants with tools for managing transactions, accessing financial reports, and analyzing sales data. This helps businesses keep track of their finances and make informed decisions.

The Advantages of Payment Facilitator

• Multiple Payment Methods: PayFacs enable businesses to accept a wide range of payment methods, including credit cards, debit cards, and digital wallets. This flexibility meets customer expectations for convenient payment options.

• Empowers E-commerce: By facilitating easy payment processing, PayFacs empower even small e-commerce platforms to compete effectively in the digital marketplace. Businesses can focus on their core offerings without worrying about the complexities of payment processing.

• Smooth Onboarding Process: The PayFac model significantly reduces the time and paperwork required for businesses to start accepting payments. This swift onboarding process is especially beneficial for small businesses and startups looking to quickly enter the market.

• Flexible Contracts: PayFacs often offer more flexible contract terms compared to traditional merchant accounts. This flexibility can be advantageous for businesses with fluctuating sales volumes or those experimenting with new products and services.

• Fraud Prevention Tools: PayFacs provide sophisticated fraud detection and prevention tools as part of their service. This reduces the risk of fraudulent transactions, chargebacks, and other security issues, offering peace of mind to both businesses and their customers.

• Predictable Fee Structure: PayFacs typically offer a clear and predictable fee structure, which can include transaction fees, monthly fees, or a combination of both. This transparency helps businesses manage their finances and calculate their costs more accurately.

History of PayFacs

The concept of Payment Facilitators began to take shape with the advent of online payments and the need for a more streamlined, efficient way for businesses to accept electronic payments. Traditional merchant services were often too cumbersome and slow for the fast-paced digital market, requiring each merchant to go through a lengthy and complex application process to open a merchant account.

As e-commerce grew, so did the need for a more flexible and accessible solution. Enter the PayFac model, which simplified this process by allowing a single entity (the PayFac) to act as a master merchant that could onboard businesses (sub-merchants) under its umbrella. This innovation significantly reduced the barriers to entry for small and medium-sized businesses looking to sell online.

The rise of major online platforms and marketplaces further propelled the adoption of the PayFac model. Companies like PayPal, Stripe, and Square have become synonymous with the PayFac model, offering businesses easy-to-use platforms for processing payments, managing transactions, and more.

What is a Payment Facilitator Model?

A Payment Facilitator Model is a framework that allows a payment facilitator (PayFac) to streamline the merchant account enrollment process. Under this model, the PayFac is authorized to onboard businesses as sub-merchants under its master merchant account. This arrangement simplifies the process of accepting payments, making it faster and less cumbersome for businesses to get started.

The Functions of a Payment Facilitator

Underwriting and Onboarding

One of the primary functions of a PayFac is to conduct underwriting and onboarding for its sub-merchants. This involves assessing the risk associated with each business before allowing them to process payments under the PayFac’s master account. The PayFac must ensure that the sub-merchant complies with legal and financial regulations, minimizing the risk of fraud or financial loss.

Transaction Monitoring

PayFacs are responsible for monitoring transactions processed by their sub-merchants. This includes keeping an eye on transaction volumes, detecting unusual patterns that may indicate fraud, and ensuring that transactions comply with industry standards and regulations. Effective transaction monitoring helps maintain the integrity of the payment system and protects against financial crime.

Merchant Funding

After transactions are processed, the Payment Facilitator facilitates the funding of its sub-merchants. This involves collecting the funds from transactions, deducting any fees, and transferring the net amount to the sub-merchant’s account. The efficiency and reliability of the merchant funding process are crucial for maintaining trust and satisfaction among sub-merchants.

Chargeback Management

Chargebacks occur when customers dispute a transaction, often due to fraud or dissatisfaction with a purchase. Managing chargebacks is a critical function of PayFacs, involving disputing unjustified chargebacks, recovering funds when possible, and providing tools and guidance to sub-merchants to minimize chargeback occurrences. Effective chargeback management helps protect the financial stability of both the PayFac and its sub-merchants.

The Payment Facilitator model plays a vital role in today’s digital payment landscape, offering a streamlined solution for businesses to accept online payments. By handling critical functions such as underwriting, transaction monitoring, merchant funding, and chargeback management, PayFacs enable businesses of all sizes to focus on growth and customer service, rather than the complexities of payment processing.

Difference Between a Payment Facilitator and a Payment Processor

Payment Facilitator (PayFac):

• A PayFac acts as an intermediary between merchants and payment processors. It simplifies the merchant account enrollment process by allowing businesses to sign up as sub-merchants under its master merchant account.

• PayFacs are responsible for underwriting and onboarding merchants, which involves assessing risk and ensuring compliance with legal and financial regulations.

• They manage the entire payment lifecycle, including transaction monitoring, merchant funding, and chargeback management.

• PayFacs provide a more integrated and seamless payment experience for merchants, often offering additional services such as analytics, fraud prevention, and financial reporting.

Payment Processor:

• A payment processor facilitates transactions between merchants and banks (both the acquiring bank and the issuing bank). It handles the technical aspect of processing payment card transactions, including authorization and settlement.

• Payment processors are responsible for transmitting transaction data, ensuring that transactions are completed securely and efficiently.

• They do not manage merchant accounts directly but instead work with banks and other financial institutions to process payments on behalf of merchants.

• Payment processors typically offer fewer services directly to merchants compared to PayFacs and are more focused on the backend processing of transactions.

Obligations of a Payment Facilitator

• Underwriting and Compliance: PayFacs must conduct thorough underwriting for each sub-merchant to assess risk and ensure compliance with all relevant laws and payment industry standards, such as PCI DSS.

• Transaction Monitoring: They are obligated to monitor transactions for signs of fraud or unusual activity, implementing security measures to protect against unauthorized transactions.

• Merchant Funding: PayFacs are responsible for ensuring timely and accurate funding of sub-merchants’ accounts after transactions are processed.

• Chargeback Management: Managing chargebacks, including disputing charges when appropriate and working with sub-merchants to minimize the occurrence of chargebacks.

• Customer Support: Providing support to sub-merchants for issues related to payment processing, including technical support and guidance on best practices for transaction management.

• Regulatory Compliance: Ensuring that all transactions comply with local and international regulations, including anti-money laundering (AML) laws and know your customer (KYC) requirements.

Simon IoT & Payment Facilitators

By leveraging a PayFac, Simon IoT can offer its customers a seamless payment experience, whether for recurring subscriptions, on-demand services, or pay-per-use models. This partnership could also alleviate the administrative burden of managing multiple merchant accounts and compliance requirements.