Keeping it simple, if a business wants to accept credit card payments, they will need a PayFac, AKA Payment Facilitator. But what exactly is a PayFac and how does it apply to you?

This guide unpacks the PayFac model, highlighting its role, benefits, and challenges for those looking to explore this route for their software business. We will explore how PayFacs streamline transactions, offer flexible payment methods, and ensure robust risk management, while also navigating regulatory complexities. Through real-world examples and future trends, discover how PayFacs are reshaping the payments and SaaS industries.

What is a Payment Facilitator (PayFac)?

Definition and Role in the Payment Ecosystem

A Payment Facilitator, commonly referred to as a PayFac, is a pivotal player in the payment ecosystem, serving as a bridge between businesses and the complex world of payment processing. Unlike traditional models where businesses need to establish individual merchant accounts, a PayFac operates as a master merchant account, enabling multiple businesses (sub-merchants) to process payments under its umbrella.

The role of a PayFac extends beyond mere payment processing. It encompasses the management of the entire payment process, from transaction authorization to settlement, and often includes additional services like fraud prevention and risk management. PayFacs are also responsible for the underwriting and compliance aspects, ensuring adherence to regulations like Know Your Customer (KYC) and Anti Money Laundering (AML) standards.

The Evolution of PayFacs

Historical Context and Emergence of the PayFac Model

The concept of Payment Facilitators (PayFacs) emerged as a response to the evolving needs of the digital payments industry. Historically, businesses had to go through a lengthy underwriting process to obtain a traditional merchant account from acquiring banks or payment processors. This process was often cumbersome and time-consuming, especially for small and medium-sized enterprises.

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

Impact on the Payment Industry and Businesses

The advent of PayFacs has had a profound impact on the payment industry. It eased access to payment processing services, allowing a broader range of businesses to accept electronic payments. This was particularly beneficial for online marketplaces, independent sales organizations, and software companies, who now with substantial time and resource commitments could now embed payment functionality into their platforms on their own.

The PayFac model also introduced a new level of flexibility in payment acceptance. Businesses could now offer multiple payment methods, including credit card acceptance and alternative payment methods, enhancing the user experience and expanding their customer base.

Understanding the PayFac Model

Components of the PayFac Model

Master Merchant Account

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

Sub Merchant Accounts

Sub Merchant Accounts are individual accounts that operate under the Master Merchant Account. Each sub merchant, typically a business or an independent sales organization, has its own account, allowing them to process payments. However, unlike traditional merchant accounts, these sub accounts are managed and overseen by the PayFac, significantly reducing the administrative burden and complexity for the sub merchants.

How PayFacs Operate and Manage Transactions

PayFacs streamline payment processing by using their Master Merchant Account to handle payments for sub merchants. They manage the entire payment cycle, from accepting to processing electronic payments, while ensuring security and compliance.

A critical function of PayFacs is risk management. They employ fraud prevention strategies and monitor transactions to mitigate financial risks, vital due to the high volume of transactions they oversee.

Additionally, PayFacs enhance the payment experience by offering services like payment gateways, support for international payments, and digital payment solutions. This not only simplifies payment processing but also adds value for the businesses they serve.

Benefits of Using a PayFac

Streamlined Payment Processing and Onboarding

The PayFac model significantly streamlines the payment processing experience. By consolidating multiple merchant accounts under one Master Merchant Account, it eliminates the need for individual businesses to undergo lengthy underwriting processes. This leads to a quicker onboarding process, allowing businesses to start accepting payments quickly and efficiently.

Flexibility in Accepting Multiple Payment Methods

PayFacs offer the flexibility to accept a wide range of payment methods, including credit cards, digital payments, and alternative payment methods. This versatility is crucial in today’s diverse payment landscape, where customers expect the convenience of using their preferred payment methods.

Enhanced User Experience and Customer Satisfaction

By simplifying the payment process, PayFacs contribute to an enhanced user experience. This not only applies to the businesses using the PayFac model but also to their customers. Smooth and hassle-free payment transactions lead to higher customer satisfaction and can positively impact customer loyalty.

Challenges and Considerations

The Costs and Time Associated With Becoming a PayFac

Becoming a Payment Facilitator (PayFac) can be a substantial financial and resource draining undertaking, especially for software companies new to the payments sector. An effort that you should expect to take anywhere from 6 months to over a year. The initial investment relies heavily on compliance and infrastructure with up-front costs nearing $500,000 and $100,000 annually. These figures can fluctuate based on several factors, including the extent of existing platform integrations, the level of in-house payment processing expertise, the potential need for external consultants, and whether the implementation will be handled by current staff or requires hiring new personnel.

Regulatory Compliance and Know Your Customer (KYC) Requirements

While PayFacs offer numerous benefits, they also face significant challenges, particularly in regulatory compliance. Adhering to Know Your Customer (KYC) requirements is crucial for PayFacs. They must ensure that all sub merchants under their master merchant account are verified and compliant with various regulations. This can be a complex and resource-intensive process, requiring constant vigilance and updates to stay aligned with evolving legal standards.

Managing Risk and Fraud Prevention

Risk management and fraud prevention are paramount for PayFacs. They are responsible for overseeing all transactions processed under their umbrella, which involves monitoring for suspicious activities and implementing anti-money laundering measures. Balancing effective fraud prevention while maintaining a seamless user experience can be challenging, as overly stringent measures might impede transaction speed and customer satisfaction.

Technical and Operational Complexities

Operating as a PayFac involves dealing with technical and operational complexities. Integrating payment processing services into existing systems, ensuring secure and reliable payment gateways, and managing the infrastructure to support multiple payment methods are just a few of the technical challenges. Additionally, PayFacs must have robust operational strategies to handle customer inquiries, dispute resolutions, and transaction monitoring effectively.

The Rise of PayFac as a Service (PFaaS)

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

In a few weeks we’ll be sharing another post diving deeper into the PayFac as a Service model and Benefits. Better yet, in 2024 Clearent will be releasing their very own PayFac as a Service solution.

If you want to stay up to date on new products, blogs, innovative payment strategies and all things integrated payments, subscribe to our newsletter Payment Pulse: Where ISVs Get Payments News.

Partner or PayFac?

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

Considering the costs, challenges and risks associated, partnering with a payment facilitator such as Clearent is a far simpler solution you should consider. This partnership approach effectively bypasses the expenses, risks, and regulatory compliance challenges that come with independently establishing oneself as a Payment Facilitator. Plus, a partnership still creates a new avenue for payment monetization for your business, while also providing access to an expanded range of features and value added services.

The Future of PayFacs

The PayFac model is poised for significant growth and evolution. As businesses increasingly seek streamlined payment solutions, the demand for PayFacs 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 PayFacs, making them more versatile and appealing to a broader market.

Potential Impact on the International Landscape

The proliferation of PayFacs has the potential to transform the international landscape significantly. By simplifying the payment process and offering more flexibility, PayFacs can empower businesses of all sizes to expand their reach and tap into new markets. This could lead to increased competition and innovation in the payment industry, ultimately benefiting consumers with better services and more payment options. Furthermore, as PayFacs continue to evolve, they could play a pivotal role in promoting financial inclusion by providing payment solutions to underserved markets and regions.

In conclusion, the future of PayFacs is bright and full of possibilities. With ongoing technological advancements and a growing emphasis on global commerce, PayFacs are well-positioned to make a lasting impact on the payment industry. Their ability to adapt and innovate will be crucial in shaping how businesses and consumers engage in financial transactions in the years to come.

Article by Clearent by Xplor

First published: November 17 2023

Last updated: May 30 2024