Payment facilitators, commonly referred to as PayFacs, are intermediaries who are able to deliver value to the payments industry by a simple match merchants and electronic payment processing services.

And, while some may still find the PayFac model complex, the truth is that it has many inherent benefits which can give companies a competitive advantage. Payment fintechs have been steadily growing as the model sees high demand. As such, it is important to understand how the PayFac model works and how to benefit from it.

The Advantages of the PayFac Model

The most common advantage is how PayFacs empower merchants by granting them the ability to accept both credit and debit payments either physically at their store with an integrated payment service or online on their websites. However, there is much more to it.

Payment facilitators also speed up the process, making it smoother and giving heightened control over merchant selection and pricing. Moreover, fraud protection is a key PayFac feature whose importance is clearly on the rise.

How Does the PayFac Model Work for Payment Facilitators?

The payment facilitator will see a great deal of control by going with this model as alternatively independent sales organization models (also known as ISO models) allow for very little forms of control over the merchants they work with.

Given that payment facilitators are thus granted total control to pick and choose the merchants they work with, over their pricing, and over the way they charge them, the pool of clients widens and with it a substantial larger source of potential revenue.

PayFac Model Serving Merchants

For starters, the onboarding process becomes incredibly faster, and a great deal of friction is immediately removed.

Moreover, with those gains comes an opportunity to gain higher margins, offer a better customer experience and find access to other processing services.

What Are the Main Differences between ISO Models and PayFac Models?

Independent sales organization models and PayFacs have many similarities, but their key differences really set them apart. These differences can be categorized into three different types.

How Payment Facilitators Do Their Underwriting and Risk

As sub-merchants operate on a facilitator MID and/or merchant account the risk becomes higher than operating within the ISO boundaries.

However, by doing so, there’s more control to pick and choose which merchants to work with. On the flip side, the underwriting responsibility and added risk fall under their own responsibility, meaning they are liable for losses which arise from the actions of their merchants.

In fact, wholesale ISOs who occasionally end up taking on part of the underwriting process will still share the risk with payment processors, meaning that retail ISOs effectively end up taking on zero liability for the transaction risk.

How Integration is Done with PayFacs

The PayFac model thrives on its integration capabilities, namely with larger systems.

The most known examples are website-building companies which can provide integrated payment options, meaning ecommerce customers will see their experience improved as they will no longer need to actively look for third-party payment solutions.

This is one of the PayFac model cornerstones and one that really puts them on track for new revenue possibilities: adding value to a customer rather than just trying to find ways of facilitating payments.

ISOs can’t compete on this level as they are strictly payment companies.

How PayFacs and ISOs Handle Sub-Merchants

ISOs process is simple: they acquire new merchants and assign that client information to a certain payment processor which will subsequently issue that merchant with an account and a unique merchant identifier (commonly referred to as MID).

However, the PayFac model deals with this in an entirely different manner as merchants won’t get a MID issued for them, rather they will see transactions processed on the PayFac’s MID.

As such, a key distinction is that PayFacs will sign contracts with the merchants directly, while ISOs become third parties between payment processors and merchants.

What Are Fintech Payment Processing Companies Doing Right Now?

Fintech payment processors will manage all the logistic processes of accepting cashless payments for the merchants’ products and/or services. As such, they will empower merchants with software, occasionally hardware (like PoS systems), but most commonly back-end infrastructure.

Some will offer buy-now pay-later features which ecommerce companies can fully integrate on their websites, others will have 'split the check' features, or p2p payment capabilities.

The competition is fierce. A market outlook report recently estimated that the payment processor solutions market will reach roughly $150 billion by the end of the decade.

What Are the Best PayFac Platforms?

Before starting our list, it is important to mention that different platforms have different unique selling propositions, meaning that they will cater to each individual need of your company differently.

Accordingly, there isn’t a single best platform, but rather the best for you and your business.

Stripe

Stripe has quickly grown and become the gold standard in terms of online payments.

It handles billions of dollars every year and is constantly pushing the envelope and developing the most elegant tools for e-commerce.

Its APIs are designed perfectly and in terms of functionality, it doesn’t really get any better than this.

With Stripe, you can craft the best possible product and deliver a seamless, tailor-made experience to your users, regardless of the nature of your business.

From crowdfunding platforms to subscription services. From ecommerce stores to marketplaces. Everything is personalized, everything is scalable.

Stripe has truly found the formula to keep millions of companies happy and running.

Stripe Features:

Pricing: 2.9% + $0.30 per charge.
Customer Support: 24/7 live customer support online.
Payment Processing Software: ACH Check Transactions, Bitcoin Compatibility, Online and Mobile Payment Capabilities, Debit Card Support, Recurring Billing.
Billing and Invoicing Software: Billing Portal, Custom Invoices, Customer Portal, Contingency Billing, Contact Database, Tax Calculator, Multi-Currency capabilities.
Payment Gateways: ACH / eCheck support, buyer authentication features, fraud prevention, both credit and debit support, recurring billing.
Other features: Incredible ecosystem with numerous tech partners, consulting partners, and service providers.

Square

Square is synonymous with quick, safe, and easy payments regardless of what you’re selling. Streamlining invoices is incredibly easy and Square allows you to create, send and track them.

Remote credit card payments are possible either over your computer or the phone. Setting up your online store and accepting payments with Square is an incredibly seamless process as the platform really emphasizes speed.

Square Features:

Pricing: 2.75 to 3.5% + $0.15 per charge.
Customer Support: Business hours.
Payment Processing Software: Bitcoin Compatibility, Point of Sale transactions, Signature capture capabilities, Gift Card Management, Online and Mobile Payment Capabilities, Debit Card Support, Recurring Billing.
Credit Card Processing: Contactless NFC, E-signature, Electronic receipts, mobile card, PCI compliance.

BlueSnap

BlueSnap excels at payment processing, recurring billing, invoicing, and subscription management.

BlueSnap features an incredible All-in-One accounts receivable which is known as the gold standard in terms of payment processing, subscription management, recurring billing, and invoicing.

In fact, billing and invoicing with BlueSnap are a thing of beauty as their invoice editor encourages their clients to create their own snappy invoices.

Creating doesn’t stop there as clients can also create their own customer portal with automatic charging, payment collection, late fees, and many other features.

ACH, SEPA, and wires are possible with BlueSnap’s payment processing capabilities and even partial payments are possible, meaning that BlueSnap is one of the top payfacs offering massive help for business owners everywhere.

BlueSnap Features:

Pricing: From $35/user per month with monthly and yearly billing options.
Customer Support: 24/7 Live Support.
Payment Processing Software: Billing and Invoicing Software, Subscription Management Software, Quoting Software, Recurring Billing Software, Accounts Receivable and Accounts Payable Software, CPQ, Vendor Management, Purchasing Software.
Other features: Training (Webinars, In person, Online).

Braintree

Braintree is a Paypal service so logically it integrates it perfectly, and it allows for their clients to leverage the entire Paypal network and use it as well as its next-gen tech to its fullest extent.

However, other things like Venmo, Apple Pay, Google Pay, and so forth are also seamlessly integrated as well. Braintree specializes in tools which empower you, such as fraud prevention tools, data security, and operational streamlining.

Moreover, it features some of the most well-known brands in the world, so it is a great solution for those willing to expand their markets.

BrainTree Features:

Pricing: Depends on location which process transactions. (Ex in the US: Cards and in digital wallets: 2.59% + $.49 per transaction, Venmo: 3.49% + $.49 per transaction, ACH Direct Debit 0.75% per transaction).
Customer Support: 24/7 Support.
Payment Processing Software: ACH, Online and Mobile Payments, Debit Card Support, Recurring billing, Gift card management, buyer authentication, multi-currency.

WePay

Their APIs are incredibly flexible and will certainly offer a reduction of your technical overhead while improving your business' overall user experience.

WePay also provides software platforms, payment infrastructure for ISVs (or independent software vendors), meaning that small businesses are able to improve their risk management while they monetize payments and get their money in a fast and easy manner.

APIs make white label integrated, payment facilitators, and/or referral models payments possible.

WePay Features:

Pricing: Depends on location. (Ex for transaction fees in the US: Cards and in digital wallets: 2.59% + $.49 per transaction, Venmo: 3.49% + $.49 per transaction, ACH Direct Debit 0.75% per transaction).
Customer Support: 24/7 Support.
Payment Processing Software: ACH and e-check support, fraud prevention, Online and Mobile Payment technologies, Point of Sale Transactions, Debit Card Support, Recurring billing, subscriptions, buyer authentication, PCI compliance, multi-currency.

Is a PayFac a PSP?

Payments facilitator or payfac are in essence a third-party entity which operates as a payment services provider (or PSP). PayFacs have the master merchant account (or MID) as they register merchants on sub-merchant accounts while having a contract with the acquiring bank.

Then, they proceed to arrange communication between merchant and acquiring bank. As such, ISO and PSP are basically two different types of merchant accounts.

Is a PayFac a Payment Processor?

Payment processors and payment facilitators aren’t exactly alike.

Processors will act as a gateway setting their clients up with an individual merchant account while the merchant will still have a direct relationship with the acquiring bank.

In a PayFac model, however, the merchant will establish a business relationship with the payment facilitator, and it is the latter who will maintain the relationship with the acquiring banks with its master merchant account.

This means that the key difference usually lies in the underwriting method and how they see merchant services.

The acquiring bank will underwrite the PayFac (and not the merchant) as the facilitator will assume liability for the financial risk at hand for their own merchant sub-accounts.

As such, with a payment processor your company won’t be 'subcontracted', rather the processor will work as a mediator for it, much like a traditional merchant account.

In turn, that means that it retains a lower risk of chargebacks.

Is a PayFac Model Right for Your Business?

As your business develops, many questions will start to arise, namely concerning what your goals will be in terms of bringing payments in-house.

Accordingly, moving forward, you’ll want to at least know the answer to these questions:

When bringing payments in-house what will you prioritize? Looking for new lines of revenue, or aiming at a faster expansion rate?
When you think of a solution, what do you envision ideally? A solution solely for online payments or with the off chance of additional payment methods and financial services?
What does your timeline look like and how likely and willing are you to invest in payment resources detriment of your core business?
Where do you see your business going in the future, and how will you bridge that gap from the way it is today?
Sometimes competitive advantage is built by having massive breakthroughs. Sometimes it is achieved by smoothing edges, taking small steps, revamping processes and so forth. And, by going with a PayFac model, you might be doing just that.