What is a Payment Facilitator?

So, if a business wants to accept credit card payments, they need a Payment Facilitator. But what is a Payment Facilitator and how does it apply to you?

This guide explains the payment facilitator model, its role, benefits and challenges for those looking to use this route for their software business. We will look at how Payment Facilitators simplify transactions, offer flexible payment types and robust risk management, and navigate regulatory complexities. Through real world examples and future trends, see how Payment Facilitators are changing payment services and SaaS industries.

What is a Payment Facilitator?

Definition and Role in the Payment Ecosystem

A Payment Facilitator, is a key player in the payment ecosystem, a bridge between businesses and the complex world of payment processing. Unlike traditional models where businesses need to set up individual merchant accounts, a Payment Facilitator is a master merchant account that allows multiple businesses (sub-merchants) to process payments under its umbrella.

Payment facilitation goes beyond just being a payment processor. It encompasses the entire payment process from transaction authorization to settlement and often includes additional services like fraud prevention and risk management. Payment Facilitators are also responsible for underwriting and compliance, ensuring KYC and AML regulations are met.

The History of Payment Facilitator

Background and Emergence of the Payment Facilitator Model

The concept of Payment Facilitators emerged as a response to the changing needs of the digital payments industry. Historically, businesses had to go through a long underwriting process to get a traditional merchant bank account from acquiring banks or payment processors. This was a time consuming and painful process, especially for small and medium sized businesses.

The Payment Facilitator model changed this by introducing the concept of a master merchant account. Under this model, Payment Facilitators acts as an intermediary, simplifying the process for sub-merchants to accept payments. This eliminated the need for individual merchant accounts for each business, simplifying the onboarding process and reducing barriers to entry.

**Impact on the Payment Industry and Businesses Payment Facilitators have had a big impact on the payment industry. They opened up payment processing services to a wider range of businesses and allowed online marketplaces, independent sales organizations and software companies to embed payment functionality into their platforms without a huge time and resource commitment.

The Payment Facilitation model also introduced a new level of flexibility in payment acceptance. Businesses can now offer multiple payment types, including credit card acceptance and alternative ways to pay, and improve the user experience and expand their customer base.

How the Payment Facilitator Model Works

Components of the Payment Facilitator Model

Master Merchant Account

At the heart of the Payment Facilitator model is the Master Merchant Account. This is essentially a central account held by the Payment Facilitator, which is the umbrella for all transactions processed on behalf of its sub-merchants. The Payment Facilitator, being the master merchant, takes on the underwriting and compliance responsibility, simplifying the process for businesses under its wing.

Sub Merchant Account

A sub merchant account is an individual account that operates under the master account. Each sub merchant, typically a business or an independent sales organization, has its own account and can process payments. But unlike traditional merchant accounts, these sub merchant accounts are managed and overseen by the Payment Facilitator, reducing the administrative burden and complexity for the sub merchants.

How Payment Facilitators Work and Process Transactions

Payment Facilitators simplify payment processing by using their Master Merchant Account to process payments on behalf of sub merchants. They manage the entire payment cycle from accepting to processing electronic payments and ensure security and compliance.

A key function of Payment Facilitation is risk management. They use fraud prevention strategies and monitor transactions to mitigate financial risk, which is high due to the volume of transactions they handle.

Payment Facilitators also add value to the payment experience by offering payment gateways, international payments and digital payment solutions. This simplifies payment processing and adds value to the businesses they serve.

Benefits of a Payment Facilitator

Simplified Payment Processing and Onboarding

The Payment Facilitator model simplifies the payment processing experience. By consolidating multiple merchant accounts into one Master Merchant Account, it eliminates the need for individual businesses to go through the lengthy underwriting process. This means businesses can start accepting payments quickly and efficiently.

Multiple Payment Options

Payment facilitation allows for multiple payment options, including credit cards, online payments and alternative payment methods. This is key in today’s diverse payment landscape where customers expect to be able to pay their way.

Improved User Experience and Customer Satisfaction

Payment Facilitators improve the user experience when they embed payments in software and simplify the payment process. This applies not just to the software using the Payment Facilitator model but also to the businesses they serve. Easy onboarding and smooth payment transactions lead to higher customer satisfaction and can impact customer loyalty.

Challenges and Considerations

Cost and Time to Become a Payment Facilitator

Becoming a Payment Facilitator is a significant financial and resource intensive effort, especially for software companies new to the payments space. It’s a project that can take anywhere from 6 months to over a year. The initial investment is heavily compliance and infrastructure with upfront costs of $500,000 and $100,000 annually. These figures can vary depending on the extent of existing platform integrations, level of in-house payment processing expertise, need for third party consultants and whether the implementation will be done in-house or require new hires.

Regulatory Compliance and Know Your Customer (KYC) Requirements

While payment facilitation offers many benefits, it can also be complex, especially regulatory compliance. Payment Facilitators must comply with Know Your Customer (KYC) requirements. They must ensure all sub merchants under their master account are verified and compliant with various regulations. This can be a time consuming and resource intensive process requiring constant monitoring and updates to stay aligned with changing regulations.

Risk and Fraud Prevention

Risk management and fraud prevention are key for Payment Facilitators. They are responsible for all transactions processed under their umbrella, which means monitoring for suspicious activity and AML measures. Balancing effective fraud prevention with a seamless user experience can be tricky as too much prevention can slow down transactions and customer satisfaction.

Technical and Operational Complexities

Being a Payment Facilitator comes with technical and operational complexities. Integrating payment processing services into existing systems, having a secure and reliable payment gateway and managing the infrastructure to support multiple payment methods are just a few of the technical challenges. Payment Facilitators must also have robust operational strategies to handle customer inquiries, dispute resolutions and transaction monitoring.

PayFac as a Service (PFaaS)

If you’re thinking the above challenges and considerations are a bit too much to handle, you’re not alone. The PayFac as a Service model exploded quickly as many companies realized bringing payments in-house is a tough mountain to climb. It offers ISVs all the benefits of being a Payment Facilitator without having to make the large investments in infrastructure and compliance to support the Payment Facilitator business model.

Partner or Payment Facilitator?

Now that we’ve broken down what a Payment Facilitator is, the benefits and of course the risks, you might be asking, “What’s best for my business?”

Considering the costs, challenges and risks, partnering with a payment facilitator like Clearent is a much simpler solution you should consider. This partnership approach bypasses the expenses, risks and regulatory compliance challenges of being a Payment Facilitator on your own. Plus it creates a new revenue stream for your business and access to more features and value added services.

The Future of Payment Facilitators

Trends and Predictions for the Payment Facilitator Model

The Payment Facilitator model is poised for significant growth and evolution. As businesses increasingly seek streamlined payment solutions, the demand for Payment Facilitators is expected to rise. One key trend is the integration of advanced technologies like artificial intelligence and machine learning, which can enhance fraud detection and improve operational efficiency. Additionally, the push towards global expansion and support for international payments is likely to shape the future of Payment Facilitator, making them more versatile and appealing to a broader market.

Global Impact

The Payment Facilitator model will have a big impact on the global landscape. By simplifying payments and offering more flexibility Payment Facilitators will enable businesses of all sizes to accept payments and expand into new markets. This will lead to more competition and innovation in the payment industry and ultimately better services and more payment options for consumers. As Payment Facilitators evolve they will also play a key role in financial inclusion by providing payment solutions to underserved markets and regions.

In summary the future of Payment Facilitators is bright and full of opportunity. With ongoing technology and global commerce on the rise Payment Facilitators are here to stay. Their ability to adapt and innovate will be key to how businesses and consumers interact with financial transactions in the future.