Payment Facilitator Model Explained

Fintech industry is constantly evolving. Emergence of new types of players is an indicator of this evolution. Payment facilitator model is a relatively new concept. However, it is rapidly gaining popularity. Many people confuse it with other terms, such as payment aggregator, payment service provider, or merchant of record.

If you want to have a better understanding of PayFac model, this article is for you. In it we will outline the key points around payment facilitator model operation. We will also explain how it appeared, and why it is so lucrative and popular.

What Defines the Payment Facilitator Model?

A payment facilitator is a middleman between an acquiring bank and a portfolio of sub-merchants. Unlike an independent sales organization (ISO), it performs merchant underwriting on behalf of the acquirer. It also accepts payments under a single unified MID on behalf of all its sub-merchants. In fact, it actively participates in the whole sub-merchant lifecycle. And assumes lots of responsibilities, delegated by the acquirer.

Who Can Become a PayFac?

Implementation of a payment facilitator model is a bit easier for you, if you have an established customer base. It is even better if you have KYC logic in place for background verification. So, technically, SaaS billing platform owners are in the best position for becoming PayFacs. Indeed, beside KYC logic and customer base, they have ready-made technical solutions. These solutions allow SaaS companies to smoothly implement payment experience.

However, payment facilitator model was not some project of SaaS payments providers. It emerged as a result of evolution of fintech industry.

So, Where Did Payment Facilitator Model Come From?

Originally, prospective merchants had to get merchant accounts directly from payment service providers or PSPs. A PSP was, usually, an acquiring bank. ISOs referred merchants to acquirers, but did not handle the underwriting process. As a result, merchant onboarding and underwriting was a long routine. It took time and involved lots of paperwork.

Eventually, acquirers realized that onboarding every single applicant separately was not worth the trouble. They delegated the task to new middlemen for a part of merchant services fees. So, a new type of entity, called a PayFac, emerged. It underwrites multiple sub-merchants under a single MID. If you are underwritten as a merchant by a PayFac, you can start processing in a matter of hours after application submission. The arrangement is beneficial for all the interested parties: acquirers, PayFacs, and their sub-merchants.

Getting Underwritten by a Payment Facilitator

Let us assume, you want to accept electronic payments as a sub-merchant of some PayFac. Here are the steps you should take.

1. Find a PayFac. Examples include PayPal, WePay, Square, Stripe. These are the leaders, but there are others to choose from.
2. Complete an application form (usually, online). Basically, you have to complete seven or eight data fields in the form.
3. On the PayFac’s end your application is analyzed by special software. The software decides whether to approve it or not.
4. If your application is approved, you get onboarded under the PayFac’s master merchant ID. And, hey presto, you are ready to accept electronic payments!

Essential Partnerships for a PayFac

Now let us assume, you want to become a PayFac yourself. While payment facilitator model seems like a promising strategy, many businesses do not know how to approach it. Well, the basics are as follows.

• Acquiring partnership goes first! You have to find an acquiring bank, authorized to underwrite you as a payment facilitator. It will hold your deposits and be liable for your operations and for operations of your sub-merchants. So, it will charge specific fees and, potentially, withhold reserves to offset possible risks.
• Find a payment processor. A processor is an entity that authorizes transactions, going through your payment system, and sends them to card associations. An aggregated acquiring and processing service provider is sometimes referred to as a sponsor.
• Payment gateway. A payment gateway harmonizes payment data formats between your platform and the processor or acquirer. It also ensures payment security and fraud protection. Some gateway solutions are offered by acquirers. Others (including white-label payment gateway options) are offered by third parties.
• Sub-merchant portfolio. As a PayFac, you are going to accept payments on behalf of your sub-merchants under a single master MID. You will also handle lots of other functions as explained below.

Key Tasks Performed by a PayFac

Payment facilitator is responsible for handling the whole lifecycle of its sub-merchants. Particular tasks a PayFac should perform include the following ones.

• Merchant underwriting. The key point of PayFac model introduction is that PayFacs handle initial background verification of the applicants. High-risk type of business, issues with credit or processing history, are examples of things PayFacs look at when they onboard new sub-merchants.
• Ongoing monitoring. This task focuses on detection of any deviations from typical sub-merchant behavior. Even if initial background verification proved ok, later the merchant might resort to unethical business practices. A PayFac has to be able to detect them.
• Sub-merchant funding. As a master merchant, a PayFac handles the proceeds for sub-merchants’ sales. It is PayFac’s responsibility to pay out the net income the sub-merchants are entitled to. Plus, a PayFac should prevent potential consumer and merchant fraud in the process.
• Chargeback disputing. It is the PayFac’s responsibility to smoothly handle and investigate chargebacks issued by sub-merchants’ customers.

Concluding Remarks

These are the basic facts about payment facilitator model you should know about.

Emergence of the PayFac model triggered dramatic changes at the payment services market.

Accepting payments through a PayFac might be the best option for small-size and startup merchants. However, from sub-merchant’s perspective, this solution might be a bit expensive. It also provides little control over the process.

Becoming a PayFac is associated with large upfront costs and lots of new requirements. If you are not ready to face these costs and requirements all at once, you can resort to white-label payment facilitator model. It is a “try-it-before-buy-it” solution.

Feel free to contact the experts at UniPay Gateway to learn more about payment facilitator model. Moreover, our team can help you become a white-label or full-fledged PayFac yourself. Armed with more than a decade of experience, we will, definitely find a targeted advice for your particular business case.