Your Guide to Payment Facilitators
Payment facilitators are an important part of the modern payments stack, but what do they actually do?
What is a payment facilitator?
Payment facilitators, aka PayFacs, are essentially mini payment processors. They provide services that allow merchants to accept card-not-present (CNP) and card-present (CP) payments.
Payment processing has a lot of moving parts, but PayFacs make it easier to integrate with a payment processor, and in turn, let software platforms start accepting payments faster. Many businesses outsource to a payment facilitator, while others become payment facilitators with a technology partner or by building the infrastructure in-house.
The History of Payment Facilitation
The first payment facilitators didn’t show up on the payments scene until the late 2000s. They’ve since become essential to how the payments industry works and are an important part of the payments layer cake. The original PayFacs were companies like Stripe and Square, but there are now hundreds of PayFacs.
Before payment facilitators were part of the equation, it was necessary for merchants to create an account with a merchant acquirer, but the process was (and still is) tedious and time-consuming. Payment facilitators make onboarding merchants much easier, so they can be ready to accept payments much faster.
Payment facilitation is a perfect model for software platforms that are consistently onboarding merchants because it deals with a lot of the legwork and complexity of onboarding and underwriting.
Traditional Merchant Accounts vs Modern PayFacs
With traditional merchant accounts, businesses are required to apply for a merchant account and purchase or build the necessary software and hardware needed to accept card payments. With modern PayFacs, businesses are onboarded to the PayFac’s platform and the PayFac acts as the go-between by hooking into a payment processor directly.
What is a merchant account?
A merchant account allows licensed businesses to accept various forms of payments for their products and services. But you can’t just run to the bank and open one. You have to apply for a merchant account through a payment processor and go through a stringent application process. Approval is more likely for low-risk companies, but those in high-risk categories can still receive approval, albeit with higher fees.
Here are some consideration factors for merchant accounts:
The length of time the business has been operational
Credit reports (personal and business)
Previous merchant accounts (if any)
What is a merchant acquirer?
The merchant acquirer is the bank that hosts a company’s merchant account. This is the entity that collects funds for merchants and credits them to their accounts.
While you would still need a business account, working with a PayFac lets you skip the processor application and start taking payments faster. This is because you’re onboarding with the PayFac, which already has a relationship with a processor. It also already has a relationship with a payment gateway or includes a gateway in its own stack.
How does a company become a payment facilitator?
We won’t sugarcoat it for you. Becoming a full-fledged PayFac requires a ton of time, money, and due diligence. The good news is that there is another way to take advantage of the PayFac model without so much “leg work.”
For context, here’s what the road to becoming a payment facilitator usually entails:
Building your own payment infrastructure
This is by far and large the most difficult, lengthy, and costly part of becoming a payment facilitator. You’ll need to build and maintain all the technology used to accept payments, such as APIs, a payment gateway, systems for onboarding and reporting, and other related payment management tools.
Negotiate a payment facilitation agreement with a payment processor
This agreement typically involves PCI DSS requirements and certifications, operational guidelines, indemnity and liability clauses, assignment of rights, EMV compliance (i.e. chip and pin), data security, exclusivity (if applicable), and confidentiality clauses, etc.
To better understand where the processor fits in the equation, read our blog Understanding the Payments Layer Cake.
Create an agreement for all your sub-merchants to review and sign
These agreements cover areas such as fee structures, compliance requirements, settlements, terms, termination clauses, limits of liability, and other related issues.
Achieve Level 1 Payment Card Industry Data Security Standard (PCI-DSS) status via a certified Qualified Security Assessor (QSA)
PayFacs must qualify for Level 1 PCI compliance (the highest compliance level). This encompasses an on-site evaluation of the business, which ensures it satisfies security requirements. Think of it like the old “white glove” test. The compliance squad (figuratively) puts on white gloves and runs their fingers across specific areas of your business to make sure it’s clean. If there’s no dirt on the glove, you pass.
Establish an underwriting process
Underwriting is how a PayFac assesses potential customers and determines the risk of processing payments for them. This is done by collecting information about the merchant, such as business type, background, financial history, credit score, fraud and chargeback history, and billing policies.
Migrate over your existing customer base
If switching from another payments provider, you’ll need to migrate your existing customer base to the new provider. This is often a tedious process and some PayFacs and processors make it difficult to transfer the necessary information.
Create applicable organizational changes and allocate internal resources to handle your new responsibilities as a payment facilitator.
What does a payment facilitator actually do?
Now that we’ve talked about what it takes to become a PayFac, let’s dive into their responsibilities. Since the daily operations of a payment facilitator can be unclear—especially if you’re new to payments—we’ve broken payment facilitation down into three pillars:
Pillar 1: Onboarding and underwriting The PayFac handles all of the compliance checks on new merchant applications and ensures that they are safe to bring onto the platform.
Pillar 2: Transaction monitoring The PayFac protects against possible fraud by monitoring every transaction that is processed through the platform.
Pillar 3: Funding and reconciliation The PayFac conducts the settlement process and does payouts to merchants on a pre-set schedule.
Partnering with a PayFac vs becoming a PayFac with a technology partner
There are two ways to payment ownership without becoming a stand-alone payment facilitator.
Partnering with a PayFac (outsourcing to a PayFac) With this payments model, you are outsourcing the bulk of your payment responsibilities to a PayFac. This is the quickest and most “user-friendly” way of getting started with integrated payments.
Becoming a PayFac with a technology partner This option gives you full control over your payments and higher revenue opportunities, but it entails expanding your in-house payment operations and assuming the risks of becoming a PayFac.
What’s unique about Finix is that we let you start out by partnering with us as the PayFac and can later enable you to transition into becoming a PayFac yourself, using Finix technology. This option gives you even more control and saves you a significant amount of development time and money. Learn more about the different payment models with pizza. Yum.
Demystifying payment provider terms: Partnering with a PayFac vs PayFac-as-a-service
You might have heard the terms PayFac partnership, managed payment facilitation, managed payment solution, outsourcing to a PayFac, PayFac-as-a-service (PFaaS), PayFac-in-a-box, or PayFac-as-a-whatever—but when it comes down to it, all of these terms mean essentially the same thing.
You’re partnering with a payments provider to handle most of the work for you.
At Finix, this is our Flex offering, and it’s a great starting point for platforms wanting to take more ownership over their payments experience.
The benefits of managed payment facilitation: We’re the payments experts so you don’t have to be
How does outsourcing to a PayFac benefit SaaS platforms? For starters, the majority of payment operations are handled by the provider so that you can focus on what matters most—building your product and serving your customers.
You’re also no longer at the mercy of a third-party payment processor with no means of controlling the customer experience, like in the ISO/referral model. For example, in an ISO relationship, you’re unable to customize the onboarding experience for your customers, but with managed payment facilitation, you can.
To learn more about the differences between these payment models, see our blog: PayFac vs ISO: Weighing Your Payment Options.
Now let’s dig a little more into the details.
Lower upfront costs
As we mentioned earlier, becoming a PayFac is an expensive (and time-intensive) endeavor. When partnering with a provider like Finix, this isn’t as much of an issue. In fact, there are no additional costs to integrating with a PayFac outside of development costs for integration and operations for back office management. Luckily, when outsourcing to a PayFac, overseeing payments doesn’t require a dedicated team.
When it comes to merchant onboarding, a payment solution such as Finix’s Flex solution simplifies the process via API. This allows for a quick approval process as the PayFac handles the sanction screenings, high-risk merchant lookups (e.g., MATCH™), and other Know-Your-Customer (KYC) checks. This way, your merchants can start accepting payments within a matter of days.
Attract more customers to your platform
While the managed payment facilitation model can’t actually give your business a “magnetic personality,” it can help drive customers to your platform. The reason for this is that outsourcing to a PayFac gives you the ability to create white-labeled, frictionless customer experiences. It also affords the possibility of offering better rates to your customers.
Developer-friendly and reliable API
Next on the list of benefits is the magic that makes it all possible. Okay, maybe it isn’t magic, but if the tech is done right, it sure seems like it. The secret is in the APIs.
With a partner like Finix, you have access to reliable and developer-friendly APIs that you can easily integrate into your own platform. This means you don’t have to create and maintain this technology yourself, which is a huge advantage to partnering with a PayFac.
An all-in-one payments solution
Part of the appeal of outsourcing to a PayFac is that it cuts out the need for third-party technology like payment gateways. As mentioned earlier, this is because your PayFac partner will either already have a relationship with a gateway, or as is the case with Finix, it’s a part of its tech stack.
The PayFac is also already hooked into a payment processor, which eliminates the need for your company to apply for a merchant account directly with an acquiring processor.
Compliance and risk
Dealing with payment regulations and compliance issues is a team effort. PayFacs offer assistance with compliance, but everyone needs to do their part. That said, with managed payment facilitation, the PayFac handles most of this for you.
For example, using your provider’s built-in tokenization and gateway solution can greatly reduce your Payment Card Industry (PCI) scope. This way, you can let the PayFac worry about obtaining (and maintaining) full PCI Data Security Standard Level 1 compliance.
Fraud protection and monitoring
Another bonus to this payment model is fraud and risk monitoring. While this varies depending on the provider, most PayFacs offer services that help reduce fraud. Finix, for example, offers ongoing risk and real-time fraud monitoring.
Reporting and visibility
Outsourcing to a PayFac can also provide greater insight into your transactions. The level of visibility is dependent on your PayFac provider. At Finix we give your platform and your merchants visibility down to the transaction level.
Benefits of the PayFac with a technology partner model
Becoming a PayFac with a technology partner comes with all the perks of the outsourcing model, but offers you even more control over your payments experience and higher revenue opportunities.
However, this model does require more money and time investment on your part and comes with higher risks. It’s also not easy to get certified as a PayFac, which comes at the discretion of the payment processor(s).
How to get started with payment facilitation
When choosing which direction you want to go for your platform, there’s some important factors to keep in mind:
Your company’s goals
Knowing your company’s long-term payment goals will go a long way in helping you decide what type of service you require and which provider you want to partner with. For example, if you know you want more control over your payment experience but don’t want to take on a lot of risk or deal with high-level compliance requirements, outsourcing to a PayFac is a logical choice. With Finix you always have the option to become your own PayFac later without having to replace your payments technology, so you can get started without fear of getting stuck.
How quickly you want to start accepting payments and controlling this aspect of your customer experience also matters. When outsourcing to a PayFac, you can get up and running in as little as a couple of days (depending on your business model). If you’re choosing to become a PayFac with an enablement partner, you can get started in months, rather than the years it would take you to build all the technology in-house.
When outsourcing to a PayFac, which is where the Finix Flex model fits in, your overhead costs are significantly lower than if you choose to become a PayFac with an enablement partner (Finix Core).
When outsourcing most of the payment process, you don’t need a dedicated payments operation team nor do you incur the typical overhead that comes along with being a PayFac.
There are perks to both models but your budget will be a large part of which option you’ll ultimately choose, at least when first starting out.
The amount of responsibility and risk you’re willing to take on
As with your budget, responsibility and risk differ depending on which payment model you choose for your business. While outsourcing to a PayFac doesn’t nullify all risks and responsibilities, it does carry the brunt of the load. If you wish to become a PayFac, you’ll need to be prepared to assume more risk and payment operations responsibilities.
Dedicated staff (if any)
As your own PayFac, you’ll need a team that’s dedicated to payment operations. This requires highly specialized expertise and therefore, a larger budget. That doesn’t mean you’re completely on your own, though. A technology partner like Finix still provides you with the support and guidance you’ll need to be successful.
When partnering with a PayFac, you have a built-in payments operation team that handles the heavy lifting for you.
There’s more than one path to accepting payments
As you can see, there is more than one way to accept payments. If you’re a SaaS platform that wants to own, manage, and earn revenue from your payment transactions, managed payment facilitation or becoming a PayFac with a technology partner is the way to go.
With Finix, companies wanting to get started with payment facilitation can get up and running and start generating revenue from their payments faster. And there’s plenty of room to grow.