A payment facilitator (PayFac) is a service business that provides merchants with a sub-merchant account. Payment facilitators like Square, Stripe, and Stax serve as an intermediary between a merchant acquirer Large financial organizations such as banks that provide merchant accounts and a business owner (or merchant) to make merchant account applications easier and provide better terms for small businesses.
Payment facilitators came about as a means for small business merchants to avoid the complex and time-consuming process of applying for a merchant account directly with a merchant acquirer. This makes payment facilitators ideal for startups and small businesses (regardless of type and model).
How Payment Facilitators Work
Payment facilitators can be compared to a retailer. It “buys” a merchant account for a wholesale price and resells the service to its customers (small businesses) with a markup. Afterward, PayFacs provides merchants with the payment processing system they need to start accepting payments.
Here is an overview of the steps:
Payment Facilitator Sets Up a Master Merchant Account
The payment facilitator applies for a master merchant account with a merchant acquiring bank. It undergoes stringent underwriting and is offered long-term contracts and wholesale rates for very large processing volumes. Once approved, a payment facilitator receives a merchant ID.
Related reading: What is a Merchant Account?
Payment Facilitator Onboards Sub-merchants
The payment facilitator then offers small businesses “frictionless underwriting” for its sub-merchant accounts Also known as Payment Service Provider (PSP) merchant account) . This results in merchant accounts that are easy to apply for and are often instantly approved.
Frictionless underwriting is a payment facilitator’s series of automated checks and data collection systems that allows it to underwrite merchants in seconds. You will see this in some payment processor websites during the “sign up” process.
Payment Facilitator Works With a Payment Processor
Along with the sub-merchant account, some payment facilitators work with independent payment processors. A payment processor’s role is to:
- Provide a secure payment gateway or payment platform, and
- Begin the payment process by sending the transaction information to the merchant’s acquiring bank.
However, nowadays, most payment facilitators are also payment processors. For example, Square, Stripe, and PayPal fulfill the role of payment facilitators and offer their own payment processing tools.
The Role of Payment Facilitators in Payment Processing
To maintain good standing with the merchant acquirer as the merchant of record The service provider legally responsible for processing customer payments such as the PayFac , payment facilitators perform the following functions during the payment process:
- Transaction monitoring: Payment facilitators set procedures for identifying potentially fraudulent transactions. This includes fraud prevention features with a variety of verification tools and machine learning capabilities.
- Chargeback management: Payment facilitators work with the sub-merchant and the merchant acquiring bank to manage the chargeback process. It retrieves the documentation needed to fight the chargeback from the sub-merchant and sends it to the acquiring bank for processing.
- Merchant funding: Not only do payment facilitators set the speed and frequency of fund settlements, but they also directly fund their sub-merchants. Merchant acquirers take time and have payout limitations which payment facilitators absorb as the main merchant of record.
Related reading: How Payment Processing Works
Payment Facilitator Bills the Sub-Merchant for Services
Retailers will purchase a product from suppliers in large volume for wholesale rates and resell them to customers at cost plus incidental fees (such as shipping) and a retailer’s markup. This closely resembles how PayFacs sell and earn from sub-merchant accounts.
In return for their services, payment facilitators can set their own terms and fees including the merchant acquirer’s fee, the payment processor’s fee, and the payment facilitator’s markup. These fees make up the transaction rate that PayFacs charge to merchants. Square, for example, charges a transaction fee of 2.6% + 10 cents.
Learn more about transaction fees: Credit Card Processing Fees Explained
Payment Facilitator vs Payment Processor vs Independent Sales Organization (ISOs)
Before we go into which businesses should use payment facilitators, let us first establish the difference between PayFacs, ISOs, and payment processors. The best starting point is to look at the types of merchant accounts:
- Aggregate (or sub) merchant account: Comes from a master merchant account awarded to a payment facilitator. A single merchant ID (MID) can board multiple sub-merchant accounts.
- Dedicated merchant account: A merchant account used by a single merchant with its own merchant ID.
Payment facilitators work directly with a merchant acquirer to provide small businesses with sub-merchant accounts. Although it is possible for merchants to directly work with a merchant acquirer, ISOs are agents of merchant acquirers that can provide merchants with a dedicated merchant account. Payment processors provide the technology for processing transactions between the merchant acquirer and the merchant.
Payment Facilitator | Independent Sales Organization | Payment Processor | |
|---|---|---|---|
Works with merchant acquirer to | Provide merchants with a sub-merchant account | Provide merchants with an individual merchant account | Process payments for merchants |
Merchant account type | Aggregate merchant account | Dedicated merchant account | N/A |
Additional services | Can have its own payment processor | Can have its own payment processor | Can integrate with independent PayFacs and ISOs |
Compatible businesses | Low-volume businesses and startups | Mid- to high-volume businesses | Any business type |
Which Businesses Should Use Payment Facilitators?
Most businesses with a processing volume under $1 million a year have a sub-merchant account. In general, businesses whose annual processing volume is less than $1 million should work with a payment facilitator.
Tip: If you are already working with a payment facilitator/ payment processor, check the terms and conditions. It will have a section specifying that merchants who exceed $1 million in annual processing volume will be redirected to the merchant acquirer for a dedicated merchant account.
Pros & Cons of Businesses Using Payment Facilitators
| PROS | CONS |
|---|---|
| Instant merchant account approval and quick setup | Unexpected account closures and frozen funds |
| Simple fee structure and no long-term contracts | Expensive payment processing fees |
| Single point of contact for payment processing and other merchant services | Limited control over merchant account |
| Faster payouts because PayFac handles merchant funding | Limited customization over available merchant services |
| Takes PCI compliance responsibility away from merchants | |
Startups and small businesses often struggle to pass the merchant acquirer’s underwriting process mainly for lack of (or limited) business credit history. The process is time-consuming and eats away at a small merchant’s funds. Payment facilitators provide the convenience that small businesses need to start running their business.
On the other hand, the nature of master/aggregate merchant accounts means that merchants have very limited control. If other sub-merchants using the same payment facilitator become problematic (i.e., experience large chargebacks or turn out to be fraudulent), your business may suffer from unexpected frozen funds or account closures. The payment processing fees are also considerably more expensive compared to if you are directly working with a merchant acquirer.
Examples of Popular Payment Facilitators
As we mentioned earlier, most payment facilitators in the industry are also payment processors. Some even work as a standalone payment processor offering dedicated merchant accounts for large-volume businesses merchant accounts (ISO). Below is a list of leading payment facilitators in the industry.
Payment Processor | Fee Structure | Also Functions as an ISO | |
 | Built-in | Flat-rate pricing, zero monthly account fees | No |
 | Built-in | Flat-rate pricing, zero monthly account fees | No |
 | Built-in | Interchange-plus pricing, zero monthly account fees, automated volume discounts | Yes |
 | Built-in | Subscription model, wholesale transaction rates with volume-based monthly plans | Yes |
Related reading: Get our complete list of recommended payment facilitators with the best merchant services
Frequently Asked Questions (FAQs)
These are some of the most common questions I encounter about payment facilitators. Click through the questions to learn more.
The PayFac model creates a single point of merchant services contact for smaller merchants. It consolidates merchant services such as merchant account provider, payment processing, payment security, and PCI compliance, making the task of setting up a business more convenient for merchants.
A payment facilitator allows merchants the convenience of being instantly approved for a merchant account. It comes with an integrated (or even built-in) payment processor so merchants only have to deal with one company for its merchant services. A PayFac also takes care of PCI compliance and payment security so merchants don’t have to. It also offers simple fee structures, often with zero monthly account maintenance fees and short-term contacts.
Payment facilitators charge merchants for the overall payment processing convenience. This includes a fee for the use of its merchant account and a markup every time a merchant processes a payment.
Yes, PayPal is a payment facilitator, which is why there are often issues with frozen funds and account holds. It uses a single master merchant account to offer sub-merchant accounts to its millions of merchant clients. PayPal is also a payment processor.
Bottom Line
A payment facilitator simplifies the merchant services portion of setting up a business for small merchants. While the nature of a sub-merchant account means expensive fees for accepting credit card payments and the risk of unexpected closures as well as frozen funds, the overall convenience of a hassle-free merchant account weighs more, priority-wise, for businesses that are just starting up.
That said, the industry has a long list of payment facilitators/payment processors, and the job of finding the provider that best matches the business needs falls on the merchant. Visit our various guides to different merchant service providers to help get you started.
