What is a Payfac Model?
Payment facilitation, also know as payfac, has quickly gained popularity over traditional acquiring thanks to its streamlined approach to payment processing that allows businesses to accept electronic payments without needing to establish a direct relationship with a traditional payment processor or acquiring bank. Payment facilitators serve as an intermediary, managing the complexities of processing and underwriting on behalf of its sub-merchants, while offering several benefits over traditional acquiring including a simplified merchant application experience and faster onboarding and go-live.
But like every aspect of payment processing – merchants and SaaS providers also have a choice when it comes to the “type” of payfac solution they adopt. We take a look at the features and benefits that make payment facilitation a more streamlined choice for ISVs, while also reviewing the different payfac types and their pros and cons.
Benefits of the PayFac Model
1. Ease of Entry for Sub-Merchants
- A more streamlined onboarding process is at the heart of payment facilitation. By simplifying the merchant application process, payfac allows small businesses, startups, and other sub-merchants to start accepting payments quickly without the hassle of traditional merchant account applications.
2. Integrated Services
- Payment facilitators provide the same services as traditional acquirers, including fraud prevention, chargeback management, and payment analytics, adding value for sub-merchants. Certain payfacs, such as Payfactory, provide a higher level of security with technologies such as PCI-validated point-to-point encryption and tokenization. Learn more about these solutions.
3. Scalability
- Payfac is highly scalable, enabling ISVs and software platforms to onboard dozens to hundreds of merchants each week, making it an excellent choice for businesses that anticipate rapid growth or fluctuating transaction volumes.
4. Enhanced User Experience
- By managing the payment processing infrastructure, payfacs can offer a seamless and consistent user experience, which is particularly beneficial for software-based businesses and marketplace platforms.
Key Features of the Payfac Model
1. Master Merchant Account
- The payfac holds a master merchant account with an acquiring bank and sub-merchants operate under this umbrella. This simplifies the onboarding process for individual merchants.
2. Quick Onboarding
- Sub-merchants can be onboarded quickly, often within hours, as opposed to the traditional underwriting process that can take several days or weeks.
3. Simplified Underwriting
- The payfac handles underwriting and compliance, reducing the burden on sub-merchants. They assess the risk of sub-merchants collectively rather than individually, allowing for faster approvals.
4. Risk Management and Compliance
- The payfac assumes responsibility for risk management, fraud detection, and regulatory compliance, offering a layer of protection for sub-merchants.
5. Consolidated Reporting
- Sub-merchants receive consolidated reports and financial statements from the payfac, simplifying financial management and reconciliation.
6. Fee Structure
- Typically, payfacs structure fees simply as a flat rate or a percentage of each transaction.
The Different Payfac Models
Payfacs create a more dynamic user experience for software platforms and there are several options for SaaS providers to choose from, depending on the amount of control and risk companies want to assume, and the revenue they would like to generate.
Becoming a Payfac
Some software platforms have opted to become their own payfac to gain complete control of the payment process and all payments revenue. This is the most involved and aggressive model, but one that allows the software platform to gain 100% of revenue. Considerations include:
- Time to market: Becoming a payfac can range from 12-18 months.
- Cost: Software buildout, integrations, bank sponsorships, PCI compliance, AML compliance, financial reserves, and registration can drive costs implementation and go-live costs into the hundreds of thousands.
- Risk: The software company assumes 100% of the risk and liability for their sub-merchants.
- Staff: Skilled payment industry team members are required to run underwriting, transaction risk monitoring, and daily financial settlement.
- Sales and support: All merchant account sales and customer support must be provided by the software company.
Payfac Direct Providers
Some larger providers now provide payment facilitation as a direct service to sub-merchants. Here, the software company can integrate to the payment platform and provide the platform’s payfac services to their merchants directly. However, this is considered more of a “pay to play” model where the software company is leveraging their processing only. Considerations can include:
- Margins: Many direct payfac providers will not offer revenue sharing and impose a high buy rate, which can lead to limited margins for the software platform and more costly processing for the sub-merchant (the ISVs’ clients).
- Merchant Ownership: In the direct model, it can be extremely difficult to support the portability of sub-merchants or transaction data to another provider, if the software company decides to go with a new payfac or payment processor.
- Support: A complaint among merchants and software companies with direct payfac providers is the lack of “human” support, with companies directing SMBs to chatbots or online forms for questions.
Payfac as a Service Providers
In this hybrid payment facilitation model, the payfac payment service provider becomes a payfac with Sponsor Banks; they act as a master merchant account and are able to set up sub-accounts for merchants same-day. Payfac as a Service providers differ from traditional payfacs in that they:
- Offer aggressive revenue shares.
- Allow portability of merchants and transactional data.
- Assume all merchant risk and liability.
- Provide flexible ISV and sub-merchant contracts to support specialized sub-merchant business models and state requirements.
- Can provide human support to the software platforms and rapid merchant service support.
This model can be ideal for software providers that want to offer their clients same-day onboarding, provide fast funding, and control the sub-merchant experience, while making payments revenue and increasing margins.
Check out our Embedded Payfac FAQs to get frequently asked questions and answers on embedded payment facilitation, plus definitions of payment processing terms.
Payfactory Simplifies Payment Facilitation
Payfactory simplifies embedded payment facilitiation for software platforms with a fast and frictionless developer and merchant experience. Our platform was designed to be gateway-friendly and seamlessly integrate with software systems to provide payfac with little to no development required, allowing our partners to minimize integration costs and quickly gain a new revenue stream.
Founded by payment industry veterans, we believe that embedded payment processing should be simple and intuitive, but also maintain the highest level of security, customer service and human support.
Learn more about our payment facilitation platform or contact us to speak with a member of our business development team.