What Is the Payment Facilitator (PayFac) Model?

Online transactions are now the norm in today’s always-online world, and it’s no secret that the global COVID-19 pandemic has caused a dramatic rise in e-Commerce sales all around the world. 

With more and more online transactions being performed, the demand for secure online payment functions is also rising. 

Both businesses and individuals are looking for better ways to perform and receive easy-to-use, secure, and reliable online payments, and one of the viable solutions is to use the service of a payment facilitator (PayFac).

In this post, we’ll explore the payment facilitator (PayFac) model, the benefits of using a payment facilitator service, and how you can become one. 

What Is The Payment Facilitator Model?

A payment facilitator, or shortened as PayFac, is essentially an organization that facilitates another business to start accepting online payment as soon as possible.

Why exactly, must a business be “facilitated”  when they want to accept online payment?

To really answer this question, we have to first learn about how businesses can start getting online payments without a payment facilitator, as we will discuss below. 

Accepting online payments without a payment facilitator

While it’s possible for businesses to start accepting online payments, especially credit card payments without the help of a payment facilitator, the process is lengthier and much more complex. 

Basically, the business must be approved by a bank capable of authorizing credit card payments, which is typically called an acquiring bank. This business must open a merchant account on this bank and then apply for a Merchant ID, or MID from this bank.

This is where things get trickier: the process of actually getting an approved MID can involve a lengthy and complex underwriting process. The acquiring bank will thoroughly assess the business’s credibility and financial situation, and even after all this, you are not 100% going to be approved. 

The payment facilitator (PayFac) model

Using a payment facilitator service essentially streamlines the process and reduces the time required for a business to start accepting online payment, which, for certain businesses, can literally mean whether they can start doing business or not. 

In a payment facilitator (PayFac) model, the payment facilitator is an approved merchant with its own Merchant ID (MID) that is authorized to share or aggregate this MID to other businesses. By sharing this Merchant ID, the payment facilitator facilitates other businesses to start receiving online payments right away. 

In a payment facilitator model, the business that is shared with the MID is called a sub-merchant. The sub-merchant does not need to undergo the lengthy underwriting process with an acquiring bank, and instead only needs to undergo a simpler and faster underwriting process with the payment facilitator.

The underwriting process in a PayFac model can vary, but at a high-level it involves the following steps: 

1. The business (sub-merchant) registers for an account on the payment facilitator’s website or application
2. To register, typically the sub-merchant applicant is required to provide basic business details like business name, address, phone number, monthly revenue, business type, etc.
3. The payment facilitator will verify the submitted information and check the validity as well as the applicant’s feasibility as a business. Typically a payment facilitator will use an automated underwriting tool to quicken the process.
4. The payment facilitator will either reject or accept the application. If the business is approved, then the payment facilitator onboards this business as a sub-merchant under its MID.

By streamlining the process of accepting online payments, the payment facilitator model will offer so many benefits, which we will discuss below. 

Benefits of Payment Facilitator Model

1. A faster and simpler underwriting process

In the PayFac model, the sub-merchant can essentially bypass the underwriting process of getting approved by an acquiring bank.

Typically an underwriting process in a PayFac model will only take a few minutes, especially with the help of an automated underwriting software utilized by the payment facilitator. 

2. The fair pricing structure for everyone

Payment facilitators typically offer a simple and transparent flat-rate pricing structure so it’s predictable and fair for the sub-merchant. On the other hand, the payment facilitator has the flexibility to adjust its fees depending on the market condition and other factors. The traditional model, on the other hand, often involves surprise rate changes and hidden fees. 

3. Versatility for both parties

In a PayFac model, the payment facilitator is the only one with a direct agreement with the acquiring bank, and the sub-merchants aren’t directly bound with a contract. The sub-merchants, in this case, are only locked into the payment facilitator’s policies. 

In this model, the payment facilitator gets more versatility with managing the sub-merchants, and vice versa the sub-merchants aren’t locked into the right rules of the banks. 

Becoming a Payment Facilitator

Being approved as a PayFact can be a very challenging process and your business will likely need to go through several detailed audits.

Online payment processing is a very heavily regulated industry. So, to become a payment facilitator a business must stay in compliance with various federal, state, and industry-specific regulations. 

This is where getting the help of payment facilitation consulting companies can significantly increase the chance of being approved as a payment facilitator by helping you in the following areas: 

• Getting approved

As discussed, the underwriting process you’ll need to undergo before being approved as a payment facilitator can be very challenging. Even if you already have a relationship with an acquiring bank, you can’t get help from them due to a potential conflict of interest. This is where getting the help of a professional consultant with a 100% approval rate like RPY Innovations can be very beneficial. 

• Policy implementations

Before you can be approved as a payment facilitator, your business must implement various policies to stay compliant with relevant regulations and the credit card networks’ preferences. RPY Innovations can help set up and implement these policies. 

• Training and education

RPY Innovations can help you organize regular training for your team, including familiarizing everyone with payment-related vocabulary so your team is more ready to communicate effectively as a payment facilitator. 

Wrapping Up

The payment facilitator model allows other businesses to start receiving online payments faster. In a payment facilitator model, the payment facilitator aggregates its approved Merchant ID with other businesses as sub-merchants that operate under the payment facilitator’s Merchant ID.