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What is a payment facilitator (PayFac)?

What is a payment facilitator (PayFac)?

According to data from the Pew Research Center, 41% of today's consumers don't use cash at all. To accept cards and online payments, you'll need a PayFac.

Establish an online commercial presence by learning more about the ins and outs of payment facilitators.

What is a PayFac (Payment Facilitator)?

A Payment Facilitator (PayFac) is a third-party service that lets merchants accept various forms of non-cash payments like credit/debit cards or digital payments. It offers the infrastructure for seamless payment processing.

How do PayFacs work?

There's more than one payment facilitator model, though all of them work similarly. Their primary purpose is to ensure merchants can process payments from various sources.

The PayFac as a middleman

Most commonly, the payment facilitator will act as a middleman between your business and your bank. The PayFac will perform the payment processing for you, then deposit them into a designated bank account where you'll later be able to access those funds.

The PayFac as a merchant account provider

A PayFac can also provide you with a merchant account through which you can process payments directly.

While some PayFacs may offer a traditional merchant account, others use a sub-merchant account. The advantage of a sub-merchant platform is that retailers don't need to go through the lengthy underwriting process to obtain their own merchant ID (MID).

Sub-merchant accounts require a PayFac with a pre-established relationship with an acquiring bank. The PayFac will maintain a master merchant account, allowing the payment service to sign up sub-merchants who operate under the PayFac's master MID.

PayFacs and online business

Online businesses can get one of two different types of merchant accounts from the PayFac.

A payment service provider (PSP) is ideal for small to midsize businesses that do less than $1 million annually. Otherwise, you can use an independent sales organization (ISO), which allows for higher volume but can create delays in transaction times.

Examples of Payment Facilitators

Payment facilitation can be solutions for your online shopping cart or software companies that help you process transactions. Common examples include:

  • Stripe
  • Stax
  • PayPal
  • Square
  • Adyen

What about Amazon? Is it a PayFac?

Yes, Amazon allows merchants to conduct business through their platform, which makes them a payment facilitation service. But what makes Amazon different is that the company also functions as a merchant of record, providing not just a set of payment services but also facilitating online retail and handling the products you sell.

How do PayFacs make money?

PayFac companies generate revenue in two distinct ways. First, they make money from the sale of the software itself. In most cases, PayFac providers operate in a software-as-a-service (SaaS) model, meaning merchants will pay a regular subscription fee to use their services.

Second, PayFacs charge a small fee each time you use the service to accept customer payments. The exact amount varies but is usually a small flat fee and a fractional percentage of the total sale.

This means merchants have to pay money to use these services, but the result is a thriving payments ecosystem that keeps you and your customers happy.

The advantages of PayFacs

A payment facilitator is an indispensable part of any modern business. Merchants can benefit from these payment processing services in several distinct ways. Here are some of the greatest advantages of using a payment facilitator.

Multiple payment methods

A PayFac is one of the fastest, most efficient ways to start processing multiple payment options in your business. The right facilitator will allow you to accept electronic payments and card payments to expand your business into online marketplaces where you can process electronic payments from your customers.

Even service-based business owners might consider investing in a facilitator. Offering direct ways to pay can encourage your clients to pay their invoices promptly, which improves your cash flow and makes it possible to set up recurring payments.

Empowers e-commerce

Online sales are only possible with a system that allows you to process electronic payments. By investing in a PayFac, you'll be able to open an online store.

If you're a brick-and-mortar merchant, you can use a PayFac to offer online options to reach a broader customer base or even offer buy-online-pick-up-in-store options to offer greater customer convenience and give yourself a competitive edge.

Smooth onboarding process

PayFacs and payment aggregators work much the same way. The key difference lies in how the merchant accounts are structured. In a payment aggregator, all merchants use the aggregator's MID, whereas a PayFac will sign each merchant up using a sub-merchant account with separate ID numbers.

Moreover, at many banks, the underwriting tool they use to approve a merchant account needs to examine multiple pieces of business data, making it challenging for new businesses that simply need more company history to satisfy these eligibility requirements.

A PayFac saves you from opening your own account since you'll typically be classified as a sub-merchant within the PayFac's ecosystem.

The facilitating company will maintain a master merchant bank account, which means sub-merchants can join quickly and easily. This is much easier than opening your own account. Depending on your bank, it can also help you avoid additional onboarding fees.

Flexible contracts

Since you're not using the merchant services of a traditional bank, you won't be locked into a contract with the acquiring financial institution. Instead, the PayFac will be responsible for screening and underwriting their sub-merchants, which allows them to offer flexible terms.

This can translate into competitive rates and flexible term periods for business owners. Shopping around for the right facilitator can help you find a processing service that fits your needs and budget.

Fraud prevention tools

Many PayFacs have financial protection tools built into their software or PayFac model. For example, anti-money laundering (AML) tools can protect your business from fraud, and even online business owners can rely on anti-fraud tools to weed out scams.

In fact, the facilitating company will primarily be responsible for ensuring that transactions are legitimate and that your business complies with all established regulations. That makes a PayFac a vital part of your company's risk management strategy and duty to keep your customer data safe and secure.

Predictable fee structure

If you open a traditional merchant account with a local bank, you could face unexpected fees and rate hikes when you least expect it. The simplicity of a PayFac model protects you from these sorts of hidden costs and allows you to integrate the payment processing costs into your broader operating budget.

Comparing PayFacs to other processing methods

There are other ways to process non-cash forms of payment. Here's how a payment facilitator differs from other common industry terms and methods.

Payment facilitator vs. payment processor

The main difference between a PayFac and a payment processor lies in how merchant accounts are organized. Payment processors rely on independent sales organizations (ISOs) to distribute their payment solutions, which requires a longer onboarding and underwriting process.

Because PayFacs use sub-merchant accounts, the process is much smoother. And because the facilitating company screens each transaction, PayFacs offer more robust fraud prevention than a payment processor alone.

Payment facilitator vs. payment gateway

A payment gateway is mainly used to communicate between a merchant's online marketplace and the payment processor. In other words, the payment gateway isn't actually performing the transaction in the traditional sense but only transmitting the sales data to the processor and the credit card networks.

A PayFac will function as a payment facilitator in this general sense (though it's important to note the differences outlined above), and you can use a payment gateway to translate data between the PayFac and the credit card providers.

PayFac vs. ISO

Independent sales organizations (ISOs) are a more traditional payment processor. MasterCard refers to these ISOs as the Member Service Provider (MSP), though the two are one and the same.

ISOs allow business owners to set up merchant accounts and can assist in helping them accept payments. However, they tend to be much slower to set up and can take longer to process each payment.

Technically, a PayFac can be used to set up an ISO, but this is usually reserved for online businesses. More commonly, a PayFac will enable you to set up a sub-merchant account, making it much easier to set up an account and begin accepting customer payments.

PayFac vs. payment aggregator

How to choose a payment facilitator

What makes a good PayFac? Here are some qualities and features you should keep an eye out for when selecting a payment facilitation provider.

1. Look for a smooth onboarding process

In general, PayFacs will offer a seamless application and onboarding process. But it's always wise to ensure that you'll be able to quickly and easily get your payment system set up and connected to your online store if you have one.

Here's a tip: look at customer reviews. These testimonials can offer you clues about the actual experiences of business owners seeking to implement these services.

2. Make sure you can accept all card networks

If you want to offer as many payment options as possible, confirm that the PayFac you invest in accepts all major credit cards. After all, some card providers offer rewards and other offers. Accepting electronic payments may encourage customers to make a purchase or pay their invoices more promptly.

3. Compare fee structures

The National Retail Federation reports credit card processing fees exceeded $71.1 billion in 2021 for Visa and MasterCard alone. While each payment processing fee is relatively small, these fees can snowball, increasing your overhead costs and taking a bite out of your bottom line.

As such, you'll want to compare the rates of multiple PayFacs to ensure that you're getting the best deal.

That means comparing the rates of each swipe as well as the cost of the software itself. Remember to double-check to ensure you won't encounter any hidden fees that can drive up the final price of the facilitation service.

4. Check the security protocols

You'll also want to be confident that your PayFac offers robust security and compliance protocols. These tools can protect your customers' sensitive financial data and prevent your business from being victimized by credit card fraud.

Ideally, you'll want a PayFac that keeps its software regularly updated to protect against hackers and other forms of cybercrime.

5. Find PayFacs that process international payments

Depending on your industry, you may want to find a PayFac that allows you to process international payments. Not every business will require this feature, but eCommerce merchants can expand their reach by processing payments from around the globe.

BILL: Simplify your AR and AP with end-to-end automation

Consider using BILL to accept payments and process them with ease. BILL doesn't just empower you to receive these payments — it also integrates with your accounting software so you can effectively keep tabs on cash flow and sales data.

And because the whole system is cloud-based, you can accept electronic payments on the go and monitor your most valuable data through the intuitive user dashboard.

Learn more by visiting BILL's payments page.

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