Nowadays we can see many publications titled “payment facilitator versus online marketplace”, “PayFac versus ISO”, or even “PayFac versus acquirer”. So, is there a rivalry between a payment facilitator and other intermediary entities or “middlemen” of merchant services industry? Analytical studies show that PayFacs are rapidly increasing their market share and doubling their revenues with every coming year. These developments may seem disturbing to some analysts, but, in reality, they reflect the natural course of things. In fact, emergence of PayFac model back in 2010 or 2011 was caused by the need for some intermediary service provider (more sophisticated than an ordinary ISO) between an acquiring bank and a merchant.
Payment Facilitator and Acquirer: Symbiosis
Payment facilitation services, primarily, focus on merchant lifecycle, from merchant underwriting to merchant funding to chargeback management and fraud protection. Before PayFac concept came into play, the respective functions had to be performed by merchant acquirer. Acquiring banks willingly delegated them to payment facilitators in exchange for part of liabilities and residual revenues. The arrangement made life easier for merchants, acquirers, and PayFacs alike. Merchants get underwritten more efficiently, while acquirers are relieved of some merchant services, delegated to PayFacs for a reward. So, what we are witnessing is a symbiotic (and by no means a predatory-competitive) relationship.
Payment Facilitator and ISO: Survival of the Fittest
Independent sales organizations (ISO) brough prospective merchants to acquirers in exchange for commission. They did not participate in underwriting and funding processes. Applicants still had to contact the acquirer directly to get merchant accounts and spend many days waiting for the decision. PayFacs assumed the respective functions (as explained above), so PayFac partnership became more beneficial for both acquirers and merchants, than partnership with an ISO. As a result, traditional ISOs are presently vacating the “habitat” for PayFacs. Their main options include becoming a wholesale ISO or implementing a PayFac model. “The fittest survives”.
Payment Facilitator and Marketplace: Separate Ways
Both payment facilitator and online marketplace are types of models, developed to improve the functioning of electronic payment industry. However, their respective specific functions do not intersect much. As we explained above, the primary function of a PayFac is to support merchant lifecycle (merchant underwriting and onboarding, sub-merchant funding, transaction settlement, payment reconciliation, handling of chargebacks and refunds, reporting etc.). The main function of a marketplace is to allow multiple retailers to vend their products and services through a unified sales platform for a commission. Just like some other companies (SaaS platform providers, ISV, franchisors, investment companies), an online marketplace, usually, has an established customer base and KYC logic. So, it is easier for a marketplace to implement a PayFac model than for a business that starts its payment facilitation project from scratch. However, becoming a full-fledged or white-label PayFac is a free choice of the marketplace owner. Amazon and Uber, for instance, are marketplaces, but not PayFacs in a traditional sense. And they do not seem to compete with PayFacs in any way.
Payment facilitators are a unique type of middlemen between merchants and acquirers. They perform their intended roles and do not compete with other intermediaries for revenues, however in the long run, they might replace traditional ISOs, because they offer broader feature sets. Most probably, in the near future we will see new modifications of PayFac model, better adjusted to the realities of the present-day market environment.