The PayFac Model: A Simplified Approach to Payment Processing

By aggregating transactions under one master merchant account, the PayFac model simplifies payment processing

Let’s face it, scaling your platform is tough enough without payment headaches. Multiple acquirer contracts, weeks-long merchant-onboarding cycles and endless compliance checklists steal precious hours from your team.

Enter the Payment Facilitator (PayFac) model. By aggregating transactions under one umbrella, a PayFac handles the heavy lifting: PCI DSS compliance, chargeback monitoring and settlement. You no longer need to cobble together separate solutions for each market.

Let’s dive into how payment facilitators work, where they shine compared to traditional processing and the benefits of this model.

What is a Payfac Model?

Unlike traditional methods that require businesses to set up a direct merchant account with banks or payment processors, the PayFac acts as a master merchant. It facilitates payment capabilities for other businesses under its management, streamlining the entire process.

A Payment Facilitator (PayFac) functions as one overarching merchant account for dozens or thousands of individual sellers. You open a single account and every sub-merchant processes payments under that umbrella instead of slogging through their own banking relationship.

As the master account holder, you take on tasks banks typically handle: automated underwriting, fraud checks, PCI DSS compliance, chargeback monitoring, funding and detailed reporting. Sub-merchants simply fill out a quick digital application and quickly start taking payments.

How the PayFac Model Works

Here’s how the PayFac model works: 

• Master merchant account: A PayFac holds a master merchant account with a licensed card acquirer, allowing it to process payments on behalf of multiple sub-merchants. 
• Simplified onboarding: The PayFac model significantly reduces the time and complexity of merchant onboarding. Businesses can be approved and start accepting payments, sometimes right away.
• Aggregation of transactions: The PayFac aggregates transactions from all its sub-merchants and routes them through their partners’ payment infrastructure. 
• Risk management: The PayFac assumes responsibility for managing risk and fraud for all sub-merchants, including monitoring transactions and implementing security measures. 
• Fund settlement: PayFacs receive funds from customers, deduct their fees and transfer the remaining amount to the sub-merchant accounts. 
• Reporting and analytics: Many PayFacs provide sub-merchants with reporting tools and analytics to monitor transaction data and sales trends.

Key Benefits of the PayFac Model

The PayFac Model is considered a simplified approach because:

• Fast onboarding: Businesses start accepting payments much faster than when they need to be individually vetted.. 
• Reduced complexity: Sub-merchants don’t need to establish their own merchant accounts or navigate complex payment processing setups. 
• Lower barriers to entry: This model makes it easier for small and medium-sized businesses to access electronic payment processing capabilities. 
• Focus on core business: By handling payment processing, risk management and compliance, PayFacs allow businesses to concentrate on their primary operations. 
• Unified payment experience: PayFacs often provide a consistent payment interface across all sub-merchants, improving the customer experience

PayFac vs. Payment Aggregators

People often confuse payment aggregators with payment facilitators. Aggregators lump transactions together under a single merchant ID, while payment facilitators provide merchants with unique merchant IDs. This provides more granular reporting. 

This distinction matters for detailed financial reporting, tax documentation and managing customer disputes. An aggregator or merchant of record tends to be a better solution when trying to improve authorisation rates in international markets where merchants may not have a location or the ability to set up a local merchant ID. 

By using the aggregator’s local merchant ID, they can often improve credit card authorisation rates in those markets.   

PayFac vs. Independent Sales Organisations

A payment facilitator differs from being an Independent Sales Organisation. An ISO merely introduces merchants to acquirers and steps aside—it doesn’t aggregate transactions, carry liability or manage compliance.

A payment facilitator owns the risk and delivers a complete payment experience. PayFacs and ISOs both manage the relationship with customers. The key difference is that PayFacs charges processing fees directly to the customers and handles settlements directly to their merchants. 

ISOs handle front-line customer support, but settlement is handled directly by the underlying card acquirer. 

PayFacs tend to have the ability to generate more revenue through transaction fees and value-added services. However, their compliance burden and payments infrastructure needs are higher, creating a taller barrier to entry. 

In some cases, payment providers begin as ISOs and become PayFacs as their business size and capabilities grow.