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Payment Facilitators - PayFac
January 29th, 2024

Demystifying Payment Facilitators — A Guide to Simplifying Electronic Payments!

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What Is a Payment Facilitator?

A Payment Facilitator (PayFac) is a company or organization that acts as an intermediary between merchants and payment processors to simplify the process of accepting electronic payments. The primary role of Payment Facilitators is to streamline the onboarding of merchants and make it easier for them to accept payments, particularly for smaller businesses that may not have the resources or expertise to set up their merchant accounts.

Here’s how the process typically works:

  1. Merchant Onboarding: Instead of each merchant having to go through the often complex and time-consuming process of establishing a merchant account with a payment processor, a Payment Facilitator aggregates multiple merchants under its master merchant account.
  2. Sub-merchant Accounts: The PayFac then creates sub-merchant accounts for each merchant within its system. These sub-merchant accounts enable each business to accept payments independently.
  3. Risk Management: Payment Facilitators often assume some level of risk by aggregating multiple merchants under their master account. They usually have systems in place to manage and mitigate this risk, such as underwriting processes and monitoring for fraudulent activity.
  4. Simplified Integration: PayFacs provide simplified integration options, making it easier for merchants to incorporate payment processing into their websites, apps, or other platforms.
  5. Fees: Payment Facilitators may charge fees to cover their services, including transaction fees and other charges. These fees can vary based on the PayFac and the services they offer.

Square and Stripe are examples of well-known Payment Facilitators. They have popularized the model by offering simple onboarding processes and making it easy for smaller businesses to start accepting credit card payments without the need for a traditional merchant account.

It’s important to note that while Payment Facilitators offer convenience, they may not be suitable for all types of businesses, especially those with high transaction volumes or unique risk profiles. Larger businesses may still prefer to establish their merchant accounts with payment processors for more control and potentially lower costs.

Who Is Involved in the Payment Facilitator Ecosystem?

The Payment Facilitator (PayFac) ecosystem involves several key entities, each playing a specific role in facilitating the processing of electronic payments. Here are the main participants in the Payment Facilitator ecosystem:

Payment Facilitator (PayFac):

  1. Role: The central entity that aggregates multiple merchants under its master merchant account. The Payment Facilitator simplifies the onboarding process for merchants, streamlining their ability to accept payments.


  1. Role: Individual businesses or merchants that are onboarded by the Payment Facilitator. Each sub-merchant is granted a sub-account within the PayFac’s system, allowing them to accept payments independently.

Payment Processors:

  1. Role: The entities responsible for the actual processing of payment transactions. Payment processors handle the authorization, settlement, and clearing of transactions. In the PayFac model, the Payment Facilitator works with payment processors to process transactions on behalf of its sub-merchants.

Acquiring Banks:

  1. Role: Banks that underwrite and provide merchant accounts to Payment Facilitators. Acquiring banks assume the financial risk associated with processing payments and are responsible for settling funds to the Payment Facilitator’s master merchant account.

Card Networks (Card Associations):

  1. Role: Organizations such as Visa, Mastercard, American Express, and others establish the rules and standards for payment card transactions. Payment Facilitators work within the guidelines set by these card networks.

Independent Sales Organizations (ISOs) and Sales Agents:

  1. Role: ISOs and sales agents may be involved in the distribution and sales of Payment Facilitator services. They act as intermediaries between the Payment Facilitator and potential merchants, helping with the sales process and sometimes providing additional services.

Regulatory Bodies and Compliance Entities:

  1. Role: Various regulatory bodies and compliance entities oversee and regulate the payment industry. Payment Facilitators must adhere to regulations related to data security, anti-money laundering (AML), and other industry standards.

Technology Providers:

  1. Role: Companies that provide technology solutions, including payment gateways, APIs, and other tools that enable the integration of payment processing into the systems of both Payment Facilitators and sub-merchants.

Fraud Prevention and Risk Management Services:

  1. Role: Entities that offer services for fraud detection, prevention, and risk management. Given that Payment Facilitators aggregate multiple merchants, they often implement robust risk management practices to protect against fraudulent activities.

Merchants and Customers:

  1. Role: Merchants are businesses that leverage the services of Payment Facilitators to accept payments. Customers are the end-users who make payments to merchants using various payment methods, including credit cards, debit cards, and other electronic payment options.

This ecosystem is interconnected, and effective collaboration among these entities is essential for the smooth operation of the Payment Facilitator model. Payment Facilitators act as intermediaries, bridging the gap between merchants and the broader payment infrastructure.

The Functions of a Payment Facilitator —

A Payment Facilitator (PayFac) performs several important functions within the payment processing ecosystem, streamlining the process of accepting electronic payments for merchants. Here are the key functions of a Payment Facilitator:

Merchant Onboarding:

  1. Simplified Application Process: Payment Facilitators provide a simplified and expedited onboarding process for merchants. This includes the collection of necessary information and documentation required for payment processing.

Aggregation of Merchants:

  1. Master Merchant Account: Payment Facilitators aggregate multiple merchants under their own master merchant account. This aggregation model allows for a quicker and more accessible onboarding process for smaller businesses.

Sub-merchant Accounts:

  1. Creation of Sub-Accounts: Each merchant onboarded by the Payment Facilitator is assigned a sub-merchant account. These sub-accounts enable each business to independently accept payments.

Payment Processing Integration:

  1. Developer-Friendly Tools: Payment Facilitators offer application programming interfaces (APIs), SDKs (software development kits), and other integration tools to make it easy for merchants to integrate payment processing into their websites, applications, or point-of-sale systems.

Risk Management:

  1. Underwriting and Monitoring: Payment Facilitators assess the risk associated with each merchant during the onboarding process. They may implement underwriting procedures to evaluate factors such as the business model, financial stability, and potential for fraud. Ongoing monitoring helps identify and mitigate risks.

Relationship with Payment Processors:

  1. Partnerships with Processors: Payment Facilitators establish relationships with payment processors to facilitate the actual processing of transactions. They work with these processors to ensure seamless and secure payment processing on behalf of their sub-merchants.

Funding and Settlement:

  1. Settlement of Funds: Payment Facilitators handle the settlement of funds from processed transactions to the sub-merchant accounts. This includes the timely transfer of funds to the merchants after deducting any applicable fees.

Customer Support:

  1. Support Services: Payment Facilitators often provide customer support services to assist merchants with any issues related to payment processing, account management, or technical integration. This support is crucial for maintaining a positive merchant experience.

Compliance and Regulatory Adherence:

  1. Compliance Oversight: Payment Facilitators must adhere to regulatory requirements and industry standards. They implement measures to ensure compliance with data security standards, anti-money laundering (AML) regulations, and other relevant guidelines.

Fee Structure:

Transaction Fees: Payment Facilitators charge fees to cover their services. These fees may include transaction fees, setup fees, and other charges. The fee structure can vary based on factors such as transaction volume, business type, and the level of services provided.

Monitoring and Reporting:

Transaction Monitoring: Payment Facilitators implement systems to monitor transactions for unusual or fraudulent activity. They may provide reporting tools for merchants to track their payment activities and analyze transaction data.

Expansion of Services:

Additional Services: Some Payment Facilitators offer additional services beyond basic payment processing, such as subscription management, invoicing, and analytics, providing added value to their merchant clients.

In summary, Payment Facilitators play a crucial role in simplifying and expediting the process of accepting electronic payments for businesses. By aggregating merchants, providing streamlined onboarding, and managing the complexities of payment processing, they enable a wide range of businesses to access electronic payment capabilities.

What Types of Companies Are Becoming Payment Facilitators?

Various types of companies are becoming Payment Facilitators (PayFacs), reflecting the broad appeal of this model across different industries. Payment Facilitators often cater to smaller businesses and those with less complex payment processing needs. Here are some types of companies that commonly adopt the Payment Facilitator model:

Technology Platforms:

  1. Examples: Online marketplaces, software as a service (SaaS) provider, and other technology platforms.
  2. Rationale: Companies that offer digital platforms, such as marketplaces connecting buyers and sellers or software providers offering subscription services, may become Payment Facilitators to streamline payment processing for their users.

Mobile Point-of-Sale (mPOS) Providers:

  1. Examples: Companies providing mobile payment solutions, often used in retail or service industries.
  2. Rationale: Mobile POS providers may adopt the PayFac model to simplify onboarding for small businesses and enable them to accept card payments using mobile devices.

E-commerce Platforms:

  1. Examples: Online retailers, small e-commerce businesses, and platforms facilitating online sales.
  2. Rationale: E-commerce platforms can become Payment Facilitators to offer integrated payment processing services, making it easier for their merchants to accept online payments.

Financial Technology (Fintech) Companies:

  1. Examples: Fintech startups, especially those focusing on providing financial services to small businesses.
  2. Rationale: Fintech companies may leverage the PayFac model to enhance their suite of services by offering simplified payment processing solutions to their business customers.

Software Providers:

  1. Examples: Companies offering business management software, point-of-sale systems, or invoicing tools.
  2. Rationale: Software providers may become Payment Facilitators to complement their existing offerings, allowing users to seamlessly integrate payment processing into their software applications.

Small Business Service Providers:

  1. Examples: Companies offering a range of services to small businesses, such as accounting, marketing, or website development.
  2. Rationale: Service providers to small businesses may adopt the PayFac model to offer an all-in-one solution, integrating payment processing into the suite of services they provide to their clients.

Independent Software Vendors (ISVs):

  1. Examples: Independent software developers creating specialized applications for specific industries.
  2. Rationale: ISVs may choose the PayFac model to simplify payment integration for their clients who use their software applications for specific business functions.

Healthcare Technology Providers:

  1. Examples: Companies offering healthcare software solutions, telemedicine platforms, or other health-related technologies.
  2. Rationale: Healthcare technology providers may adopt the PayFac model to offer integrated payment processing for medical services, subscriptions, or other healthcare-related transactions.

Membership and Subscription Platforms:

  1. Examples: Companies providing membership or subscription-based services.
  2. Rationale: Membership and subscription platforms can use the PayFac model to make it easy for their clients to handle recurring payments and subscriptions.

Event Management Platforms:

  1. Examples: Companies providing event planning and management software.
  2. Rationale: Event management platforms may adopt the PayFac model to simplify payment processing for event organizers, including ticket sales and registration fees.

It’s important to note that while the PayFac model is well-suited for many businesses, it may not be suitable for all types of companies, especially those with high transaction volumes or specific risk profiles. Larger enterprises with complex payment processing needs may still opt for traditional merchant account arrangements with payment processors.

How Does a Company Become a Payment Facilitator?

Becoming a Payment Facilitator involves several steps, including legal, technical, and financial considerations. Here is a general outline of the process:

Legal and Regulatory Compliance:

  1. Understand Regulations: Gain a comprehensive understanding of the regulatory landscape related to payment processing in the regions where you plan to operate. This includes compliance with data security standards, anti-money laundering (AML) regulations, and other relevant laws.
  2. Legal Structure: Ensure that your company’s legal structure and business model align with regulatory requirements. Consider consulting legal experts with experience in payment processing to navigate the complexities of compliance.
  3. Obtain Necessary Licenses: Depending on the jurisdiction, you may need to obtain specific licenses or certifications to operate as a Payment Facilitator. Check with relevant regulatory bodies to determine the necessary licenses.

Establish Banking Relationships:

  1. Acquiring Bank Partnership: Build relationships with acquiring banks that are willing to underwrite your Payment Facilitator business. Acquiring banks plays a crucial role in providing merchant accounts and settling funds.
  2. Due Diligence: Be prepared to undergo due diligence by acquiring banks, including providing information about your business model, financial stability, risk management procedures, and compliance measures.

Risk Management and Underwriting:

  1. Develop Underwriting Processes: Implement robust underwriting processes to assess the risk associated with the merchants you onboard. This may include evaluating factors such as business type, financial stability, and potential for fraud.
  2. Fraud Prevention Measures: Establish effective fraud prevention measures and risk management protocols to protect against fraudulent activities. This is crucial for maintaining the integrity of the Payment Facilitator model.

Payment Processor Partnerships:

  1. Select Payment Processors: Choose one or more payment processors to handle the actual processing of transactions. Establish partnerships with processors that align with your business needs and can provide the necessary technical support.
  2. Integration Support: Work closely with payment processors to integrate their systems into your platform. This includes implementing APIs and other technical solutions to enable seamless payment processing for your sub-merchants.

Technology Infrastructure:

  1. Build or Integrate Technology: Develop or integrate the necessary technology infrastructure to support payment processing. This includes creating user-friendly interfaces for merchants, implementing secure payment gateways, and ensuring compliance with industry standards.
  2. Developer Resources: Provide developers with the tools and resources they need for merchants to easily integrate payment processing into their websites, applications, or point-of-sale systems.

Onboard Sub-Merchants:

  1. Simplified Onboarding: Streamline the onboarding process for sub-merchants to make it quick and user-friendly. Develop an online application process and collect the necessary documentation for account creation.
  2. Customer Support: Offer robust customer support services to assist sub-merchants with any issues related to payment processing, account management, or technical integration.

Risk Monitoring and Compliance Oversight:

Ongoing Monitoring: Continuously monitor transactions for unusual or fraudulent activity. Implement tools and processes to detect and respond to potential risks promptly.

Compliance Oversight: Regularly review and update compliance measures to ensure ongoing adherence to regulatory requirements and industry standards.

Fee Structure and Revenue Model:

Establish Fee Structure: Define your fee structure, including transaction fees and any other charges associated with your Payment Facilitator services. Ensure that the fee model is transparent and aligns with the value you provide to sub-merchants.

Launch and Marketing:

Launch: Once all the necessary components are in place, launch your Payment Facilitator services to the market. Communicate the benefits of your platform to potential sub-merchants.

Marketing and Outreach: Implement marketing strategies to attract merchants to your platform. This may include online marketing, partnerships, and other outreach efforts.

Feedback and Iteration:

Gather Feedback: Collect feedback from sub-merchants and payment processors to identify areas for improvement. Use this feedback to enhance your services and address any challenges that arise.

Becoming a Payment Facilitator requires careful planning, adherence to regulations, and the development of a robust technical and operational infrastructure. It’s advisable to work closely with legal experts, acquiring banks and payment processors to navigate the complexities of the payment processing industry.

Conclusion —

In summary, a Payment Facilitator (PayFac) simplifies electronic payment acceptance for businesses. To become one, companies must ensure legal compliance, establish banking relationships, integrate with payment processors, and build user-friendly technology. The PayFac model is popular among various businesses, offering accessibility and simplicity in payment processing. It democratizes electronic payments, making them easier for smaller businesses to adopt. The model reflects a trend toward inclusive and efficient financial services.

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