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Payment Facilitator
May 14th, 2020

What is a Payment Facilitator & How does it Work?

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Several industries out there need robust payment systems or we can say that their payment systems are the backbone of these businesses, for ex: eCommerce, travel & ticketing, fundraising, booking etc. With the constant growth of financial technology (FinTech), numerous ways of transacting money have come up, for ex: debit/credit cards, online payments via netbanking/digital banking, eChecks etc. These methods keep getting refined and improved as per the requirements of this industry.

What is a payment facilitator?

Payment facilitators also known as PayFacs are merchant service providers that make payment processing easier for the merchant. Eliminating the need for individual businesses to set up their unique merchant accounts for payment processing, PayFacs simplify the merchant enrollment process by using a sub-merchant platform for boarding them directly under the payment facilitator’s account.

After providing some basic information, any business can begin processing payments as a sub-merchant under the payment facilitator’s account. The payment facilitator sets up a master MID (Merchant Identification) account in which the merchants are set up as sub-merchants under the master MID account. Apart from an elegant and efficient method of merchant account disbursements, PayFacs are changing the whole game of payment processing by redefining the whole merchant services model. They simplify the merchant onboarding process by getting rid of the long underwriting process that takes weeks to get over, thus setting up merchants to start working in minutes.

Merchants who want to offer payment services, can register as sub-merchants under the PayFac’s account and start processing payments promptly. The payment facilitator has an agreement with the acquiring bank and boards merchants as sub-merchant under its own MID.

Payments Ecosystem & Payment Facilitators:

Just like other systems, a payment facilitator too is a cog in this huge machinery and it too works with other components of this huge payments ecosystem.

  • Acquiring Banks: Payment facilitators need a merchant account where deposits can be held before disbursements to sub-merchants. This is obtained from a bank which can be called as an acquirer. An acquiring bank is responsible for the transactions for its payment facilitator clients. For this reason, an acquiring bank gets to decide most of the rules of payment facilitators.
  • Payment Processors: These are the companies or service providers that authenticate and authorize the transactions and direct them to the respective card networks. A payment facilitator needs to integrate with a payment processor to carry out transactions the way they should be done.
  • Sub-merchant Accounts: These are the clients/customers of the payment facilitator. All the transactions of these sub-merchant accounts are carried out via a merchant account that is controlled by the payment facilitator.

Functions of a Payment Facilitator: Payment facilitators handle several tasks for their sub-merchants.

1. Sub-merchants onboarding & underwriting: Vetting and checking of sub-merchants before onboarding them is very important because in a way PayFac is taking the risk off from these sub-merchants on to their own shoulders. For this 8 data points are collected from the sub-merchants before they are onboarded, this process is called underwriting and is done to minimize the intrusion of bad players into the system.

For this PayFac use Know Your Customer (KYC) to verify the identity of businesses. This also involves cross-referencing sub-merchants against U.S. Treasury department’s Office of Foreign Asset Control (OFAC) as well along with several lists of defaulters in the market. Software and applications are used to check sub-merchants against these databases and flag any suspicious players.

2. Monitoring transactions of sub-merchants: PayFacs have to monitor sub-merchants for faulty transactions too. The transactions must be legitimate and according to the standards of the PCI-DSS compliance. Any suspicious transactions are flagged and the corresponding sub-merchant is off boarded from the wagon.

3. Funding the sub-merchants: In the PayFac model the facilitators have control over the funds and sometimes they help the clients by filling in their fund requirements and take the risk upon themselves. Paying off money the sub-merchants are owed, the PayFac service providers mitigate risks for their merchants and readily supply their clients the funds they need.

4. Management of chargebacks for sub-merchants: Chargebacks are a nightmare for clients. They are the result of canceled or incomplete transactions or when a customer raises a dispute. Payment facilitators settle such chargeback issues with the acquirer banks making it easy for the sub-merchants and giving them some relief.

Advantages of Payment Facilitators:
Payment facilitators offer a bunch of advantages over the conventional payment processors. Let’s take a look at these advantages:

1. Reduced time for underwriting: PayFacs ask for minimum information (8 key points) before onboarding a submerchant, thus making onboarding faster and more efficient as clients can complete the process in a matter of hours and begin processing payments.

2. Omni-channel capability: Just like the conventional payment processors, payment facilitators offer their services across platforms like mobile etc.

3. Saves time and efforts: A fast and effortless on-boarding and underwriting process allows clients to start transacting within 24 hours instead of days and weeks as compared to conventional models of payment processing.

4. Risk reduction: The major part of risks are transferred from the sub-merchants to the payment facilitator as they are the guarantor and are responsible for mitigating payments related risks.

5. Account audits: PayFacs actively audit accounts and ensure that no discrepancies creep in to the system. This makes the whole process safer and glitch free for the sub-merchants.

6. Following compliances & maintaining standards: The PayFac service providers ensure that compliancers like PCI-DSS and the required industry standards are followed taking the burden off the clients.

7. Flat fee model: Their model works on a flat fee system for each sub-merchant and thus they are very advantageous for small and medium businesses.

How to become a payment facilitator?

For becoming a payment facilitator, multiple systems for onboarding, payment processing, compliance, standards and risk management are needed. PayFacs have to maintain a good reputation with their acquirer banks and credit rankings in the market to function smoothly. 4 important components are needed to build a payment facilitator infrastructure:

1. An acquiring bank for holding funds
2. Payment gateways/processor integration
3. Certifications and compliances
4. Sub-merchant management systems.

The need for better and faster systems of payment processing will always exist. The eCommerce industry is on a boom and various small and medium businesses are looking for risk-free and easy payment processing systems. This is where fintech like PayFac comes into play. Their super easy onboarding and quick setups have interested several players to opt for these services. If you too have a small or medium sized business, then becoming a sub-merchant under a trusted payment facilitator is the right decision to make.


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