Payment Facilitator Model 101

Evolution of Fintech and Paymentech industries leads to emergence of new kinds of entities and concepts. Payment facilitator model, which has become very popular during the recent years, is one of them. In this article we are going to explain the essentials about PayFac model. Particularly, we will focus on the functions PayFacs perform and on the benefits of becoming a PayFac.

Payment Facilitator Model Definition

A PayFac is an intermediary entity, performing a set of functions (delegated by the acquiring bank) for multiple merchants. These functions include merchant underwriting, merchant onboarding, sub-merchant funding, and others. While an ordinary ISO provides just basic merchant services (refers prospective merchants to acquirers), a PayFac handles the whole merchant lifecycle.

Prospective PayFacs: Who Are They?

When it comes to becoming a PayFac, some companies seem to be “more equal” than others. They already have established customer bases that heavily rely and depend on their services. Besides that, they have “know-your-customer” logic, needed for sub-merchant background verification. So, the most promising prospective PayFacs include SaaS billing platform providers, franchisors, online marketplace owners, ISV, and venture capital firms.

The Origin of Payment Facilitator Model

Originally, merchant account applicants had to address acquirers directly. An acquirer or acquiring bank (not to be confused with an ordinary commercial bank) is a special bank authorized to issue merchant accounts. Later, ISOs started referring merchants to acquirers, simplifying the process for both categories of entities. However, at a certain point, it became unprofitable for acquirers to underwrite and service each individual merchant separately. So, the need for a new middleman arose. Payment facilitator was the new middleman. In exchange for part of merchant services fees, acquirers delegated most of merchant-lifecycle-related functions and responsibilities to PayFacs. The key benefit was that merchant underwriting procedure was considerably simplified. A new merchant is now able to accept electronic payments almost instantaneously.

Merchant Underwriting Procedure

Previously, getting underwritten as a merchant by an acquirer was a tiresome routine, involving a lot of paperwork, and taking weeks or months. After the emergence of PayFacs, the process was reduced to submission of a simple online application form.

Once you find a payment facilitator to partner with (Stripe, Square, PayPal, or any other), you complete a short application form (answer 7 or 8 questions). On the PayFac’s end your application is analyzed by the respective software. If it is approved, you can start accepting electronic payments as a sub-merchant of your chosen PayFac. As simple as that!

Key Partners of a Payment Facilitator

If you decide to become a payment facilitator, you have to get underwritten as one by an authorized acquiring bank. So, acquiring partnership is the most important one. Beside that, you will need to find a payment processor to authorize your transactions and send them to card associations. A processor is, essentially, a technical arm of your acquirer. A combined acquiring-and-processing partner is often called a sponsor. Finally, you will need to find a payment gateway partner to harmonize payment data formats across entities and to ensure payment security. Transactions submitted by your sub-merchants will be the lifeblood of your payment facilitator model. They will be processed under your unified master merchant ID.

Key Functions of a PayFac

A full-fledged PayFac handles the whole life-cycle of its sub-merchants. The key tasks a PayFac should perform range from merchant underwriting and onboarding to sub-merchant funding, from ongoing merchant monitoring and reporting to chargeback disputing. In essence, a PayFac is responsible for management of sub-merchant’s operations in a convenient and secure way, beneficial for the acquirer, the sub-merchants, and their respective customers.

Conclusion

Payment facilitator model is a product of gradual evolution of electronic payments world. Operating through a PayFac makes life easier for many merchants, especially, small-size ones. Becoming a PayFac is a costly and labor-intensive procedure. If you feel unable to cope with it all at once, but still want to be a PayFac, you can start with a white label payment facilitator model (a try-it-before-buy-it solution).

If you want to learn more about PayFac model, or become a payment facilitator yourself, don’t hesitate to consult our payment specialists. They, surely, know, how your company can benefit from the payment facilitator model.