Payment facilitators or the PayFac landscape used to be simplified and defined by offering customers the possibility of accepting electronic payments by granting access to their own infrastructure.
However, the nature of the game is changing as many companies as possible or merchant services are becoming payment facilitators themselves.
By having in-house payments offerings, companies can take greater control of their customer relations, better manage their risk, maximize control over their own operations, all while boosting their profit margins.
This newfound revenue stream may be hard to get, but it is expected to grow in the future, so if your company sees fit to join the payment facilitator ecosystem, now’s the time.
As such, read on to discover how the PayFac model works, how to get the best out of it, and how your company can become a payment facilitator.
Understanding the Payment Facilitator model
The PayFac model was created as a way of streamlining business’ processes in a way that would allow them to accept electronic payments.
PayFac will thus take the reins of the onboarding processes and other elements of the transaction flow for their customers, commonly referred to in the payment facilitator model as sub-merchants.
Originally, merchants who wished to accept credit card transactions were pretty much forced into setting up an account with a bank-sponsored company, most known as a merchant acquirer.
However, by doing so, merchants would be met with a highly complex and incredibly time-consuming process, something which would deeply hamper their businesses.
Accordingly, payment facilitators arose to put an end to this problem. They did so by setting up a system in which they remove friction by providing a master merchant account via an acquirer. In turn, their clients can start accepting payments via credit card.
Shortly after, companies were quick to understand that by becoming payment facilitators, their onboarding process would become better as would their payment experience.
Moreover, given that they knew their verticals and pursuing this line would generate significant revenue from payments, what ended up happening was a major influx of new payment facilitators across several industries.
Who Gets Involved in the PayFac Scene?
There are five main elements which compose the payment facilitator landscape.
The payment facilitators themselves
Which are companies providing the necessary infrastructure and allows their sub-merchants to accept payments via credit card. This crucial element underwrites and onboards all sub-merchants and subsequently empowers them with the technology that allows them to process electronic payments as well as to receive the respective funds from those payments.
The sub-merchants
Formerly known as ‘merchants’ (at least in the traditional model) the sub-merchants are the payment facilitator’s customers. As pointed out above, they get onboarded so that they can begin accepting electronic payments. To do so, they will need to go through a mandatory series of checks as a way to verify their own legitimacy. They can range from your average physical storefront dealing with card-present transactions or your online business which needs to accept card-not-present transactions.
The Acquiring Banks
Payment facilitators cannot operate on their own which means they need to enter into an agreement with either a licensed payments institution that is recognized by the card networks or an acquiring bank.
Acquiring banks will assume the payment facilitator’s risk. They will underwrite it and ensure that the required infrastructure, procedures, policies and technology are there to make things run smoothly and effectively.
Accordingly, the acquiring bank will keep a close eye on the payment facilitator, making sure that compliance is being upheld and the onboarding process is being done responsibly.
Lastly, the acquirer will be responsible for receiving and handling data and money which the card networks provide and then passing it to the payment facilitator.
The payment processors
Which are basically mandatory to operate as a payment facilitator. The payment processors take the responsibility of what concerns the processing and settling of every transaction that the payment facilitator’s sub-merchants initiate.
Every time a consumer makes a purchase with their card, the payment processor will receive a request for initial authorization and proceed to forward it to the matching card network. The card network will subsequently analyze it and send the authorization response back and once the transaction is finally completed the cardholder’s bank will follow suit and send the acquiring bank the funds.
The sponsors
Sponsors here work as an umbrella term which covers all entities which underwrite prospective payment facilitators or enable the payment facilitators’ entry into the system. It has also become almost standard to bundle acquiring banks and payment processing together and call them sponsors.
Accordingly, if a business is looking into becoming a payment facilitator, it is mandatory for it to apply for an account with a sponsor.
What Does a Payment Facilitator Do?
In essence, a payment facilitator takes on 4 major roles:
Underwriting and Onboarding
In the conventional models, merchants will need to apply for their merchant accounts via an acquiring bank. The process is complex, filled with bureaucracy and paperwork and incredibly time-consuming.
The role of the payment facilitator here is twofold as it needs to create a proper merchant platform or experience by crafting a tailor-made process for the merchant’s vertical or niche while simultaneously putting the process into high gear, removing friction and speeding things along.
However, before doing so the payment facilitator is required to perform some mandatory steps to confirm that the sub-merchant it’s about to underwrite posts that are no risk or threat to its ecosystem.
This is usually achieved by looking into KYC (Know Your Customer) data as it can provide information regarding the legitimacy of the prospective sub-merchant’s business.
Moreover, a different background check is done through lists of known high-risk merchants. Traditionally merchants, that might have been associated with criminal activities fit this profile. These checks are conducted with entities like the OFAC (Office of Foreign Asset Control) or by checking lists like Mastercard’s MATCH list (Member Alert to Control High-Risk Merchants).
Payment facilitators thus provide a near frictionless underwriting process which allows for sub-merchants to hit the ground running in seconds (rather than weeks), all while keeping the ecosystem safe.
Transaction Monitoring
Payment facilitators are taking liability for the transactions their sub-merchants are processing. This in turn makes them responsible for monitoring those transactions as they need to look for suspicious activities and anomalous behavior.
The standard way of doing so is via transaction monitoring software which records them, sorts through them all, and flags the ones which need to be further investigated.
Merchant Funding
There is a significant number of payment facilitators that are responsible for both the funding of their underlying sub-merchants and the reconciling of transactions.
By managing the funding process, payment facilitators became leaps ahead of the traditional models in which merchants were funded in a specific schedule which had to be set by the acquirer.
Facilitators obviously adhere to specific banking regulations and must be compliant with both government agency regulations and card brand standards and policies.
This shift left to sponsors creates payout structures for payment facilitators.
Chargeback Managing
Managing the chargeback process in tandem with the acquiring bank is standard practice. Submerchants which occasionally receive chargebacks are required to provide documentation which the facilitator then passes along to the acquirer. The acquirer, in turn, will initiate the chargeback and transfer the respective funds to the bank.
Can our Business Become a Payment Facilitator?
The road to becoming a PayFac is certainly hard but also rewarding.
As of now, software companies compose most of the influx of new adopters of the payment facilitator model, namely those who already have payment components in their underlying software.
As such, companies which already have verticals in e-commerce, POS systems, invoicing and billing, are taking the leap given that it empowers their customer experience while owning more of said experience and generating extra revenue from the process.
This added control and flexibility improve the payment experience and greatly enhances their overall product but isn’t limited to software companies.
Faisal Khan, a cross-border payments specialist, does a great rundown of the understanding PayFacs here:
In fact, companies can become payment facilitators if they take these 4 steps.
The 4 Steps to Becoming a Payment Facilitator
Do the math
It is quintessential to crunch those numbers and figure out if the ROI is worth entertaining the thought.
Surely, the payment facilitator model promises added revenue from each transaction your software processes, however, it demands capital and time.
An ROI analysis will give you some insight if the endeavor is worth it.
Policies and procedures are key
Operating as a payment facilitator isn’t just about reaping the profits of transactions.
There are policies which you must adhere to when underwriting sub-merchants, as well as procedures you must follow.
As a facilitator, you’ll be given the latitude to customize things depending on the industry and country your sub-merchants operate in, their risk tolerance, and even their size, however, you must ensure that there are criteria put in place in what concerns at least five things:
- Doing due diligence checks on their websites;
- Gathering and analyzing Know Your Customer and Know Your Business data;
- Dealing with business practices changes;
- Dealing with ownership changes;
- Performing manual reviews of applications.
Moreover, risk and fraud prevention measures must be put in place, and they must be a perfect fit into the payment facilitator verticals.
This means that they should include thresholds that flag transactions for manual review, the necessary steps for transaction review and investigation, the required procedures to handle chargebacks, a guide for reviewing high-risk transactions and so forth.
Payments Infrastructure: a crucial component
If you’re this far into the process of becoming a payment facilitator, you’ll be met with a fork in the road.
Here lies the important decision of how you’ll be handling the onboarding and service of your sub-merchants, which means you must either build out your own infrastructure or integrate someone else’s.
Accordingly, you should understand that the infrastructure must give you the capacity to take sub-merchant applications, gather KYC data, conduct KYC checks, automatically review and approve information, flag applications for manual review, underwrite prospective sub-merchants, board the merchant to its processor, monitor ongoing transactions, calculate each transaction’s fees, fund sub-merchants if necessary, detect and report possible anomalies/fraud, handle chargebacks, be able to provide sub-merchants with transaction data, and the list goes on and on.
Signing an agreement with a sponsor
After putting all procedures in place and finding the right infrastructure, the next step is to apply to a sponsor, meaning an acquiring bank and a processor.
As soon as that is done, you’ll be given a PFID (Payment Facilitator ID), and you can begin your underwriting, onboarding and servicing activities.
Wrapping up
The PayFac landscape is shifting. Software companies have proven to greatly benefit from going down the payments route and adding it to their arsenal.
They often join the payment ecosystem not as a priority but because of how they naturally cross paths with it so much.
However, entering this ecosystem isn’t limited to them and despite being a significant cost in doing so the benefits seem to be crystal clear for those who do.
Albeit often lucrative, it’s not always a straightforward business decision to take but fortunately, the PayFac ecosystem is incredibly supportive and has all resources at the ready for those who wish to succeed.
If you’re ready to act, now’s the time.
