There are many players involved in accepting card and mobile payments. These include payment facilitators and payment processors. Both help to enable the acceptance of payments. But what’s the difference?
This article delves into the key differences between payment facilitators and processors, and their potential impact on your payment processing strategy.
Introduction to Payment Facilitation
Payment facilitation is a modern approach to payment processing that empowers businesses to accept electronic payments with speed and simplicity. At the heart of this process is the payment facilitator, or PayFac, which acts as a bridge between merchants and the acquiring bank. Instead of requiring each merchant to set up a separate merchant account, the payment facilitator model leverages a master merchant account. This allows sub-merchants to process transactions and accept payments without the lengthy process of individual merchant account enrollment.
By streamlining the payment process, payment facilitation reduces barriers for businesses looking to start accepting electronic payments. Sub-merchants can be onboarded quickly, enabling them to focus on their core business while the PayFac manages the complexities of payment processing, compliance, and risk. This model is especially beneficial for software platforms, online marketplaces, and service providers that want to embed payments into their offerings and provide a seamless payment experience for their customers.
With payment facilitation, businesses can efficiently process transactions, manage multiple payment types, and scale their operations without the administrative burden of traditional merchant accounts. The result is a faster, more flexible, and more accessible way for merchants to participate in the digital payments ecosystem.
What is a payment facilitator?
A payment facilitator, also known as a PayFac, is a system that enables businesses to accept electronic payments from their customers. It acts as an intermediary between the merchant and the payment processor, streamlining the payment process and providing a seamless experience for both parties.
The rapid growth of e-commerce and online business models drove the need for more flexible and efficient payment solutions, which led to the development of the payment facilitator model.
Instead of each individual business or merchant setting up its own merchant account with a payment processor, a payment facilitator aggregates multiple merchants under its own master merchant account.
The PayFac model, also known as the payment facilitator model, was created to enable companies specializing in payments to reduce the complexity of entering the online payments space and offer services to a broader range of businesses, allowing them to focus on their core competencies. Unlike the traditional merchant account and traditional model, which require each merchant to go through a lengthy merchant account enrollment process and obtain a unique merchant ID, the PayFac model streamlines onboarding by allowing sub-merchants to be quickly added under a single master merchant ID.
This model is particularly beneficial for software companies looking to streamline electronic payments for their sub-merchants, enhancing revenue streams, improving customer experience, and providing better control over the payments process.
When it comes to merchant account providers, there are two options:
- An Independent Sales Organization (ISO)
- A Payment Service Provider (PSP), also known as a Payment Facilitator (PayFac)
Independent Sales Organization (ISO)
An Independent Sales Organization (ISO) is a key player in the payment processing landscape, serving as a third-party intermediary that connects merchants with acquiring banks and payment processors.
ISOs specialize in helping businesses set up merchant accounts and access a variety of payment services, including credit card processing, payment gateways, and fraud prevention tools.
Unlike payment facilitators, ISOs do not aggregate merchants under a single master account. Instead, each merchant works directly with the acquiring bank to establish their own merchant account. The ISO’s role is to facilitate this process, offering guidance, support, and access to multiple payment processors and acquiring banks. This allows merchants to choose from a range of payment solutions tailored to their specific needs.
While ISOs provide valuable payment services and can help merchants navigate the complexities of payment processing, they typically do not assume the same level of risk or control as payment facilitators. Merchants working with an ISO may experience a more traditional onboarding process and less flexibility compared to the streamlined approach offered by payment facilitators. However, ISOs remain a popular choice for businesses seeking a wide selection of payment processing options and personalized service.
What’s the difference between an Independent Sales Organization (ISO) and a Payment Service Provider (PSP)?
Both of them can help you with payment processing equipment and services. However, the main difference between the two is that with an ISO, you will get your own merchant account, but you must go through the traditional merchant account enrollment process and obtain a unique merchant ID. In contrast, a payment facilitator streamlines this by aggregating merchants under a single master account, eliminating the need for individual merchant IDs and simplifying onboarding.
How does a payment facilitator work?
See a short breakdown of the process: :
- Merchants register with a payment facilitator by providing basic information like their company name, tax ID number, and banking information.
- The payment facilitator assesses the merchant’s risk to ensure they meet the requirements for processing digital payments. They investigate the merchant’s legitimacy, as well as past financial transactions, and look for any signs of fraudulent activity. The acquiring bank plays a crucial role in this process by facilitating transactions between the payment facilitator, sub-merchants, and card networks, while also monitoring compliance and assessing risk. The payment facilitator and sponsoring bank conduct due diligence and an underwriting process to ensure compliance and manage risk before onboarding merchants.
- Once approved, the merchant can be instantly onboarded and start accepting payments using the payment facilitator’s platform. Payment facilitators can instantly onboard new merchants, allowing them to start accepting payments quickly. The facilitator collects transactions from multiple merchants and deposits them into the PayFac’s master account, with sub-merchant accounts created under this structure.
- After deducting their monthly fee and any other costs, the payment facilitator transfers the remaining funds from the PayFac’s master account to the merchant bank account associated with each sub-merchant.
Source: PayPro
Payment facilitator vs payment processor: what is the difference?
A payment facilitator is a service that combines multiple businesses under a single master account. This simplifies the onboarding process and integration for businesses. PayFacs also assume some risk, manage and process transactions themselves, and charge sub-merchants based on a percentage of the transaction volume.
A payment processor, on the other hand, requires each business to create its own merchant account. Payment processors provide technological infrastructure like systems and frameworks to businesses for accepting payments and offer a direct connection to consumers.
| Features | Payment processor | Payment facilitator |
| Merchant accounts | Each merchant has its own account. | Stores multiple merchants under a single master account. |
| Onboarding process | Individual merchants go through a more complex and time-consuming onboarding process. | Streamlines onboarding, making it quicker and simpler for sub-merchants. |
| Risk management | Individual merchants are primarily responsible for managing their own risk. | Assumes a role in risk management, often conducting underwriting for sub-merchants. |
| Integration | Provides infrastructure and connectivity for businesses to accept payments. | Offers easy integration with APIs and SDKs, allowing seamless embedding of payment processing. |
| Business model | Generates revenue through transaction fees and charges for processing payments. | Charges sub-merchants a fee based on a percentage of transaction volume. |
| Example companies | Worldpay, Adyen | Square, Stripe, PayPal (as a payment facilitator in certain scenarios) |
Payment facilitators work by owning a master merchant account and onboarding other businesses as sub-merchants under their umbrella. They manage the transaction processing, underwriting, and risk for these sub-merchants, making it easier for software providers and ISVs to integrate embedded payments directly into their platforms.
Summing up, a payment facilitator enables companies to concentrate on delivering an exceptional user experience to their customers, with integrated payments being only a part of it.
Additionally, PayFacs enable software companies and ISVs to start offering payment processing directly to their clients, leveraging advanced payments technology and embedded payments for a seamless experience. The PayFac model is especially beneficial for small businesses and medium sized businesses, as it allows them to monetize payments and streamline payment acceptance.
On the other hand, payment processors focus on establishing a direct connection between a business and its consumers, enabling them to start receiving payments quickly and easily.
One of the key payment facilitator benefits is the ability to offer seamless integrations, enhanced revenue generation opportunities, greater control over user experiences, and reduced risks associated with payment processing. These advantages make the payment facilitator model a compelling option for businesses looking to streamline their payment processes.
The must-have features of a payment facilitator
A payment facilitator, or PayFac, is an important tool that enables sub-merchants to smoothly accept credit card payments online. Payment facilitators must adhere to payment industry standards and maintain a secure payment system to ensure compliance and protect both businesses and customers. PayFacs undertake multiple essential functions to enhance the overall payment processing experience, including ensuring PCI compliance to protect sensitive payment data and maintain security during transaction handling.
Underwriting and onboarding process
Underwriting involves analyzing a merchant’s credit history and financial records to ensure that a business has the necessary resources to fulfill its obligations to customers. This process can be slow and requires many steps.
A payment facilitator acts as a merchant service provider, streamlining the onboarding process for new merchants by facilitating electronic payment processing and simplifying account setup. Payment facilitators significantly streamline the underwriting, which helps expedite onboarding. This efficiency allows merchants to start operations quickly, reducing the typical delays associated with traditional onboarding procedures.
Transaction monitoring
PayFacs play a crucial role in safeguarding the payment system’s integrity through transaction monitoring. In addition to monitoring transactions, payment facilitators use advanced fraud detection tools to identify and prevent suspicious activities, ensuring compliance with industry regulations and reducing the risk of fraudulent transactions. By controlling and detecting any signs of suspicious, fraudulent, or anomalous activities, these systems ensure a secure payment environment.
Sub-merchant funding
PayFac models differ from traditional ones in that they play a crucial role in enabling smooth financial transactions for their sub-merchants. Payment facilitators operate a sub merchant platform, managing multiple sub merchant accounts under a single master account to streamline funding and operations. They ensure timely funding, actively participate in revenue sharing, and foster closer relationships within the payment ecosystem.
This hands-on approach enhances financial control and operational efficiency, making sub-merchant funding a key element of the payment facilitator model.
Chargeback management
Working alongside acquiring banks, payment facilitators serve as intermediaries in the chargeback process. This software assists merchants by submitting necessary documentation during chargeback disputes. They facilitate the transfer of funds back to the cardholder, ensuring a smoother resolution process.
In summary, payment facilitators are more than just transaction facilitators. They also can accelerate onboarding, enhance transaction security, and manage chargebacks.
Benefits of Becoming a Payment Facilitator
Becoming a payment facilitator can offer numerous benefits to businesses, making it a strategic move for those looking to enhance their payment processing capabilities. Here are some key advantages:
- Increased Revenue: By becoming a payment facilitator, businesses can earn revenue from transaction fees and other payment-related services. This additional income stream can significantly boost overall profitability.
- Improved Customer Experience: Payment facilitators can offer a seamless payment experience to their customers, leading to increased customer satisfaction and loyalty. A smooth payment process can enhance the overall user experience, encouraging repeat business.
- Increased Control: Payment facilitators have more control over the payment process, enabling them to offer customized payment solutions to their customers. This flexibility allows businesses to tailor their services to meet specific customer needs.
- Competitive Advantage: By offering payment facilitation services, businesses can differentiate themselves from their competitors. This unique offering can help establish a business as a leader in its industry, attracting more customers and partners.
- Access to On Demand Services and Additional Services: Payment facilitators can provide on demand services, supporting flexible payment models such as subscriptions and pay-per-use. They can also offer additional services like fraud prevention, chargeback management, payment gateway solutions, POS systems, and mobile payment options, enhancing their overall value proposition and making their platform more comprehensive.
Overall, becoming a payment facilitator can be a strategic move for businesses aiming to increase their revenue, improve customer experience, and establish a competitive edge in the market.
Industry Regulations and Compliance
The payment industry is governed by a complex web of regulations and compliance requirements designed to protect both merchants and customers. Payment facilitators, independent sales organizations, and traditional payment companies must all adhere to industry standards such as the Payment Card Industry Data Security Standard (PCI DSS) and anti-money laundering (AML) laws. These regulations are essential for safeguarding sensitive payment data, preventing fraud, and ensuring the integrity of electronic payments.
For sub-merchants, navigating compliance requirements can be challenging and time-consuming. Payment facilitators play a crucial role in simplifying this process by providing guidance, support, and built-in compliance tools. They help merchants implement robust fraud prevention measures, including know your customer (KYC) checks and transaction monitoring, to detect and prevent suspicious activities. By ensuring compliance with industry regulations, payment facilitators reduce the risk of non-compliance, financial penalties, and reputational damage.
Partnering with a payment facilitator allows businesses to focus on growth and customer experience, while the PayFac manages the complexities of regulatory compliance and risk management. This partnership not only streamlines the payment process but also provides peace of mind, knowing that all necessary steps are being taken to ensure compliance and protect both merchants and their customers.
How to become a payment facilitator?
- Register your business with card associations
Begin by registering your business as a payment facilitator with card associations like Visa and MasterCard through your respective acquirer. For more guidance on launching a card issuing program, be prepared for an annual registration fee, typically around $5,000 per year.
- Establish partnerships with an acquirer bank
Building strong partnerships and relationships with payment processors and acquiring banks is crucial for the success of a payment facilitator. The acquiring bank is responsible for facilitating transactions and ensuring compliance with regulatory requirements. The crucial aspect of this partnership is your transaction processing terms and costs/fees.
- Ensure legal and regulatory compliance
Payment facilitator has to comply with KYC regulations by implementing robust customer identification procedures to prevent fraud and money laundering. PayFac also needs to establish AML protocols to detect and report suspicious activities, adhering to global AML standards.
- Create a strategic pricing approach
Your pricing strategy should be aligned with your transaction volumes. There are various pricing models, such as:
- Mark up payment costs
You can set your pricing by adding a markup to the per-payment processing costs. This approach works well for attracting a broad user base without imposing overly burdensome fees.
- Tiered plans
Another option is to incorporate payments into various pricing plans, each tailored to different customer needs. These plans may include flat fees alongside marked-up per-payment costs. You can also offer additional payments-related services, such as chargeback protection, to add value.
- Revenue share
You can enter into a revenue-sharing agreement with your PayFac to establish a mutually beneficial partnership. This collaborative approach aligns interests and can be an attractive proposition for both parties.
- Implement security measures
Prioritize the implementation of robust security measures, ensuring compliance with PCI DSS standards to safeguard sensitive financial information. This involves implementing and maintaining secure systems and processes to safeguard sensitive cardholder data throughout payment transactions.
- Build technological infrastructure
When creating a payment facilitator, the development approach you choose can significantly impact the efficiency of your product’s technological infrastructure. There are two ways to build your payment solution: creating software from scratch or using ready-made software like SDK.finance FinTech Platform.
Your platform should support a variety of payment types, including debit cards, and leverage advanced payments technology to ensure scalability and security.
In-house software development
Building your financial software from scratch gives you complete control over features, scalability, and updates. This approach allows you to align with your unique requirements and business model, but it also demands substantial resources in terms of time, manpower, and financial investments.
You must be ready to hire a technical team and long-term development of the FinTech architecture of your solution, which can take from several months to years.
Using a ready-made software
Ready-made solutions significantly reduce development time, providing a quicker market entry. Despite limitations in terms of customization, pre-developed solutions are more cost-effective than building from scratch, especially when factoring in development and maintenance expenses.
Barriers to Becoming a PayFac
While becoming a payment facilitator offers numerous benefits, there are also several barriers that businesses may face. These challenges require careful consideration and planning:
- Regulatory Requirements: Payment facilitators are subject to a range of regulatory requirements, including anti-money laundering (AML) and know-your-customer (KYC) regulations. Compliance with these regulations is essential to prevent fraud and ensure the legitimacy of transactions.
- Technical Requirements: Establishing a payment facilitator requires sophisticated technical infrastructure to process payments securely and efficiently. This includes robust payment gateways, secure data storage, and reliable transaction monitoring systems.
- Financial Requirements: Significant financial resources are needed to cover the costs of processing payments and managing risk. This includes initial setup costs, ongoing operational expenses, and reserves for potential chargebacks and fraud.
- Risk Management: Payment facilitators are responsible for managing various risks, including the risk of fraud and chargebacks. Effective risk management strategies are crucial to minimize financial losses and maintain trust with customers and partners.
Becoming a payment facilitator requires substantial investment and expertise. Businesses must carefully weigh these barriers against the potential benefits before deciding to pursue this path.
PayFac Alternatives
For businesses that are not ready or able to become a payment facilitator, there are several alternatives that can still enable them to offer payment services to their customers. These options provide flexibility and ease of implementation:
- Payment Processors: Payment processors like PayPal and Stripe offer comprehensive payment processing services without the need for businesses to become payment facilitators. These services handle the technical and regulatory aspects of payment processing, allowing businesses to focus on their core operations.
- Payment Gateways: Payment gateways such as Authorize.net and CyberSource enable businesses to accept payments online securely. These gateways provide the necessary infrastructure to process electronic payments, ensuring a smooth and secure transaction experience for customers.
- Merchant Account Providers: Merchant account providers like Bank of America and Wells Fargo offer merchant accounts that enable businesses to accept payments. These providers handle the complexities of payment processing, including compliance and risk management, making it easier for businesses to accept payments.
These alternatives offer businesses a range of options for providing payment services without the need to become a payment facilitator. By leveraging these solutions, businesses can still offer efficient and secure payment processing to their customers.
SDK.finance solution as a shortcut to becoming a PayFac
With SDK.finance payment acceptance software you can become a payment facilitator faster and launch your payment services without having to build your solution from scratch. Our pre-developed FinTech Platform serves as a flexible foundation for building any PayTech products, accelerating time-to-market.
The SDK.finance solution offers a streamlined payment acceptance process, providing maximum flexibility to customize the payment transaction flow. This solution enables merchants to offer frictionless transaction processing, both in-store and through a secure payment gateway for online transactions.
Explore the key features of SDK.finance software:
- transaction initiation
- payment acceptance
- regular payouts
- receipts generation
- refunds initiation
- merchant’s digital wallet
Additionally, it supports an unlimited number of currencies and allows merchants to accept various payment types, including card payments, digital wallet transactions, bank debit card payments, and more.
Wrapping up
Payment facilitators help businesses to simplify payment processing, and provide services to a wider range of clients more efficiently. They underwrite and onboard the sub-merchants and allow them to process electronic payments and seamlessly receive the funds.
To become a payment facilitator you have to ensure legal and regulatory compliance, create a strategic pricing approach, and build your payment infrastructure.
To accelerate your product launch you can use a pre-developed Platform like the one by SDK.finance and this way, monetize your solution faster.
