As consumers, our experience with credit card payments is a tiny sliver of the world we call electronic payments. However, understanding the digital payment landscape has become essential for businesses. Millions of electronic payments processed daily highlight the shift in consumer behavior and the importance of aligning with a payment service that meets your business needs.

Whether just getting started accepting online payments or seeking to embed payment solutions with your software platform, the choice you make will shape your ability to compete and grow in the digital marketplace. As we explore the differences between payment processors and payment facilitators, our goal is to provide the insights needed to make an informed decision for the right path for your business’s future.

What is a Payment Processor?

A payment processor serves as the critical intermediary in the digital payment ecosystem, facilitating transactions between merchants, banks, and customers. These entities, often embodied by traditional banks or specialized financial companies, play a pivotal role in enabling businesses to accept electronic payments. Their key functions include authorizing transactions to ensure customers have sufficient funds, transferring funds from the customer’s bank to the merchant’s account, and maintaining stringent security and compliance measures in line with PCI DSS standards. This helps to ensure that every transaction is not only smooth but also secure from potential threats.

The advantages of using a payment processor are clear, offering businesses the ability to accept a wide range of payment methods, thereby expanding their customer base and enhancing transaction security. However, these benefits come with their own set of challenges, including transaction fees that can impact profitability and the complexity of navigating compliance requirements.

What is a Payment Facilitator?

A Payment Facilitator simplifies the payment acceptance process, differing from traditional payment processors by enabling businesses, especially software companies offering merchant services, to streamline the way they handle transactions. Unlike payment processors that act as intermediaries between banks, merchants, and customers, Payment Facilitators allow businesses to accept payments directly under their umbrella, effectively reducing the need for individual merchant accounts. This model is particularly beneficial for software platforms that aim to offer embedded payment solutions to their users.

Payment Facilitators play a crucial role in simplifying payment acceptance by managing the onboarding of merchants. For small and medium businesses, this process is simplified, making it easier for these businesses to start accepting payments quickly. Additionally, Payment Facilitators take on the responsibility of managing compliance and risk, ensuring that transactions adhere to industry standards like PCI DSS without burdening the individual merchants.

Payment Facilitator vs Payment Processor: The Core Differences

Understanding the nuances between Payment Processors and Payment Facilitators is crucial for businesses navigating the digital payment landscape. Each plays a distinct role in the electronic payment cycle, impacting everything from transaction speed to compliance and fee structures.

Merchant Accounts

The distinction between Payment Facilitators and Payment Processors is fundamentally rooted in how they organize and manage merchant accounts, a factor that greatly influences the merchant onboarding process and the degree of control over customer experiences. 

Payment Facilitators streamline operations under a master merchant account structure, assigning merchant IDs to clients. This approach not only accelerates the merchant onboarding process by leveraging a consolidated account system but also grants Payment Facilitators enhanced control over the payment experiences they offer to their customers.

In contrast, Payment Processors typically engage Independent Sales Organizations (ISOs) or Independent Software Vendors (ISVs) to sell and distribute their payment solutions, necessitating that each merchant submit an individual application to obtain their own merchant IDs. This relationship inherently introduces additional steps to the onboarding process, which could delay the setup for merchants. 

The Electronic Payment Cycle

Payment Processors act as the bridge between the merchant, the customer’s bank, and the merchant’s bank, facilitating the authorization, processing, and settlement of transactions. This traditional route can sometimes slow down the settlement process due to the multiple steps involved. Payment Facilitators, on the other hand, streamline this cycle by aggregating transactions under a master merchant account, speeding up the time it takes for funds to settle with merchants.

Compliance and Risk Management

Both entities must adhere to PCI DSS compliance requirements, but their approaches to managing security and fraud prevention can differ. Payment Processors typically offer robust security measures as part of their core services, requiring merchants to comply with their protocols. Payment Facilitators, while also ensuring compliance, may simplify the process for the merchants by managing these requirements on their behalf, reducing the compliance burden on individual businesses.

  • Payment Processors: Serve as intermediaries in transactions.
  • Payment Facilitators: Streamline the payment cycle by aggregating transactions.

Onboarding Processes

The onboarding experience varies significantly between the two. Payment Processors often require a more detailed application process, including credit checks and verification of business details, which can extend the setup time. While, Payment Facilitators offer a more streamlined approach, allowing merchants to sign up quickly, often with minimal paperwork, enabling businesses to start accepting payments faster.

Supported Payment Methods

Payment Processors typically support a wide range of payment methods, from credit and debit cards to ACH bank transfers and more, catering to businesses with diverse needs. Payment Facilitators are also able to offer various payment options, but this can be particularly advantageous for businesses looking for an all-in-one solution that includes payment processing as part of a larger suite of services.

Fee Structure

Understanding the fee structure is essential. Payment Processors usually charge per transaction, including a mix of fixed fees, percentage fees, and sometimes monthly fees, depending on the services used. Payment Facilitators might offer simpler, often flat-rate pricing, which can be easier to manage for small and medium-sized businesses.

Benefits of becoming a Payment Facilitator vs Partnering with a Payment Processor

Becoming a Payment Facilitator and partnering with a Payment Processing company are distinct paths in the digital payment sector, each with unique steps and challenges. While becoming a Payment Facilitator provides businesses with greater control, they must navigate a complex regulatory landscape, secure a sponsorship from an acquiring bank through a rigorous vetting process, and develop a technological infrastructure for managing payments, including compliance and fraud monitoring.

On the other hand, partnering with a Payment Processing company still offers ISVs the benefit of monetizing payments while leveraging established infrastructure for secure and efficient transaction processing, without the need for extensive compliance management or technological investment. This route can significantly reduce the operational burden, allowing businesses to focus on their core offerings. However, it may come with higher transaction fees and less control over the payment experience. 

As a full-service provider, Clearent can provide your software an embedded payment solution through flexible partnership models including a PayFac as a Service model coming soon.

Wrap Up

In wrapping up our exploration of Payment Processors and Payment Facilitators, it’s clear that each offers distinct advantages and considerations for businesses navigating the digital payment landscape. The choice between the two hinges on understanding their roles in the electronic payment cycle, compliance and risk management strategies, onboarding processes, supported payment methods, fee structures, and the nature of contractual relationships.

Choosing the right payment solution is not a one-size-fits-all decision. It requires a careful assessment of your business’s size, growth trajectory, customer payment preferences, and operational capabilities. Whether opting for the comprehensive services of a Payment Processor or the direct control offered to ISV by becoming a Payment Facilitator, the goal should always be to enhance the customer experience, streamline operations, and ensure financial transactions are secure and efficient.

Article by Clearent by Xplor

First published: February 16 2024

Last updated: July 18 2024