In this article:

  • What is a PayFac?
  • The high-level steps involved in becoming a PayFac
  • PayFac technology requirements
  • The buy vs. build decision
  • NMI payment facilitator enablement (FACe): a one-stop solution


What is a PayFac?

A payment facilitator (PayFac) is a type of merchant acquirer that provides processing services to companies looking to accept card payments. Payment facilitators act as a middle layer in the payments industry, bridging the gap between merchants who need to accept credit cards and the acquiring banks authorized to issue merchant accounts by companies like Visa and Mastercard.

A payment facilitator provides merchants with access to processing through its own master merchant account. Rather than issuing each merchant its own unique account and merchant identifier (MID), a PayFac effectively vouches for each of its clients – known as sub-merchants – and allows those merchants to transparently process their own transactions through the master merchant account the PayFac has set up with its banking partner. 


How do PayFacs differ from ISOs?

Setting merchants up with payment processing has traditionally been a job handled by independent sales organizations (ISOs). In the grand scheme, ISOs and PayFacs provide merchants with a similar service – access to credit card processing. But, despite their surface-level similarities, the differences in the two business models are extremely important and have big impacts on the entire payments chain.  

First and foremost, the sub-merchant agreement PayFacs use is very different to how ISOs acquire merchants. ISOs are purely intermediaries. They pass merchants off to one of many acquiring banks they work with in exchange for a commission. And, while ISOs do have business relationships with their merchants, contractually, the merchants don’t belong to them. 

PayFacs, on the other hand, sign contracts directly with their sub-merchants. Processing ability flows entirely through the PayFac’s account, and the acquiring bank has no relationship with any sub-merchant, all of whom are wholly approved and owned by the facilitator. That has a couple of big implications for PayFacs. First and foremost, it means PayFacs have a lot more control over which merchants they work with than ISOs. But, it also means PayFacs are wholly responsible for the risks involved with allowing a sub-merchant to process payments. If something goes wrong or a merchant turns out to be a fraudster, the PayFac is on the hook for the fallout. No ISO bears that level of sole responsibility for the merchants they recruit.  

Why more and more acquirers are choosing the PayFac model

Both the PayFac and ISO acquisition models have unique benefits and drawbacks. While the PayFac model comes with some unique risks, the benefits of additional control and potentially higher margins have seen its popularity grow among two major categories of operators: traditional acquirers and independent software vendors.  

The PayFac model offers traditional acquirers more options, expanded control, and higher rewards

For traditional acquirers like ISOs, having more choice over which merchants to work with means a new pool of high-risk-high-reward clients can be tapped into, potentially kicking off significant portfolio growth. Owning the sub-merchant outright also enables acquirers to take more control over pricing, helping ensure healthy margins. 

Equally important, as a PayFac, an acquirer gains complete control over the merchant experience. That’s important in an industry where competitors like Stripe and PayPal make their living on the promise of a fast, frictionless signup. By taking full responsibility for risk, approval, and service delivery, PayFacs can improve competitiveness by streamlining the merchant experience in ways large acquiring banks and their ISOs may not be able to.

The PayFac model helps software vendors improve the user experience and tap into latent revenue streams 

The PayFac model has also enjoyed growing adoption among independent software vendors (ISVs), for whom it represents a way to offer payment services to users. Imagine an ISV offering DIY website-building tools. Many of its users likely run business websites and either do or would like to sell online. Previously, the ISV could offer those users everything but payment processing. Users looking to sell on their website would be forced to obtain their own payment services from an ISO or a third-party processor like PayPal or Stripe. 

Sending users away to obtain processing services from a third party not only reduced the quality of the user experience, it also left money on the table. With the PayFac model, the ISV can instead offer those same users the option to become sub-merchants, reducing friction and tapping into a new revenue source – the valuable transaction fees generated by each sub-merchant sale. 

Understandably, the PayFac model has grown rapidly in popularity with software vendors in a wide variety of categories. But many former ISOs have also opted to switch to the PayFac model to gain more control over everything from pricing to which types of merchants they can work with to the speed of the approval process and more. 


The high-level steps involved in becoming a PayFac

Becoming a PayFac is not necessarily a fast or simple process, but the rewards are well worth the time and effort. The journey to becoming a PayFac will vary for each company based on factors like their existing business model, their available financial resources, their goals for transaction processing, and more. However, generally speaking, the process can be broken down into the following high-level steps that will be universal across all new PayFac applications. 

Step 1) Partner with an acquirer or payment processor

New PayFacs must find an acquiring partner to issue them a master merchant account. Larger PayFacs may be able to partner directly with a large acquiring bank, but smaller and new PayFacs will likely find it easier to go through a processor. New PayFacs will need a detailed business plan outlining their intended operations and, in the case of ISVs, how payments will interact with their existing business model. 

Step 2) Register with the major card networks

A sponsoring acquirer isn’t only important for master merchant account access. Getting sponsored is also a key step in registering with the card networks. New PayFacs will need to register with each card network they want to accept. From a practical perspective, that means Visa and Mastercard at an absolute minimum. Each card network charges an initial registration fee of $5,000, and maintaining registration costs an additional $5,000 annually. New PayFacs can also expect to go through a thorough underwriting process to satisfy the card networks that they’re a safe partner. 

Step 3) Integrate with a payment gateway 

As with any merchant account, a PayFac’s master merchant account requires a payment gateway for transactions to flow through. New PayFacs will have to find a gateway provider and negotiate the fees that will be paid on each sub-merchant transaction. While PayFacs can opt to pass gateway fees directly to sub-merchants, minimizing them helps maintain competitive overall pricing. 

Step 4) Build out an effective technology stack

Beyond a gateway, there are a number of technology systems PayFacs need to have in place to operate competitively. At the very minimum, a new PayFac will need an onboarding system to take in merchant applications and establish approved applicants as sub-merchants. But, to compete effectively, PayFacs need a variety of other systems for merchant management, reporting, residuals management, billing, underwriting, security, and more. In modern digital payments, operating a successful PayFac is a high-tech endeavor. 

Step 5) Achieve PCI Level 1 compliance

PayFacs handle and often store end consumers’ sensitive personal and payment data. That means they’re responsible for becoming PCI compliant to ensure transaction security and minimize the risk of a data breach. And, because sub-merchant transactions run through the master merchant account, PayFacs are also ultimately responsible for their sub-merchants’ PCI compliance, as well. A new PayFac’s entire tech stack and even its physical operating location will need to be inspected, refined, and brought up to Level 1 of the Payment Card Industry Data Security Standard (PCI-DSS).  

Step 6) Develop risk models and onboarding strategies

Because the PayFac model carries extra risk, it’s exceptionally important that new entrants have both their underwriting and onboarding strategies absolutely locked down. Underwriting is of the utmost importance because it’s the step that identifies which potential sub-merchants are safe, which are too risky to do business with, and which are worth serving, but at a higher price point. While the ability to take on more risk and a wider pool of merchants is a strength of the PayFac model, doing so without an ironclad underwriting process in place is business suicide. 

A good onboarding strategy is also extremely important because it identifies the ideal types of merchants a new PayFac is targeting. Not all merchants fit every PayFac’s business model or risk tolerance. Planning out an onboarding strategy ensures time and crucial marketing dollars are only spent going after the right merchants, which in turn helps ensure the underwriting process is as smooth and efficient as possible. 


The buy vs. build decision

With so much dependence on technology to facilitate smooth operations, one of the biggest decisions PayFacs have to make is whether to build or buy the many systems they need to compete. The decision often hinges on the level of customization a PayFac needs – a factor that’s often dependent on its size. 

Newer and smaller PayFacs generally don’t have the need (or the resources) for highly customized processing, onboarding, or underwriting systems. In that case, choosing off-the-shelf systems is generally a better choice. Gateways, onboarding systems, underwriting systems, CRM and merchant management systems and just about everything a PayFac needs in its tech stack can be acquired with zero custom development needed. 

On the other hand, large, well-established international PayFacs with big budgets may find that going with in-house custom builds enables them to tailor systems to their unique needs. While this kind of customization comes at a significant expense – both upfront and through ongoing maintenance – it can sometimes represent a way for big PayFacs to squeeze out new efficiencies that can make a difference at a huge scale.  


NMI payment facilitator enablement (FACe): a one-stop solution

NMI FACe is a one-stop payment facilitator enablement platform – a turnkey tech stack in a box designed to provide PayFacs with everything they need to launch new sub-merchants in minutes without worrying about the costs or complexities of building. 

FACe provides registered PayFacs with:

  • Instant onboarding
  • Automated sub-merchant management
  • KYC check delivery and reporting
  • Sub-merchant billing and statements
  • Automated chargeback notifications
  • EMV-compliant payment hardware
  • Consolidated NMI reporting

Instant onboarding

FACe offers PayFacs the fastest, most convenient merchant onboarding experience available. The instant onboarding system enables PayFacs to create new sub-merchant accounts in minutes. It also creates both the sub-merchant account and the NMI platform account simultaneously, eliminating the need for any double entry. 

Automated sub-merchant management 

FACe communicates the necessary data points to the payment processor, fully automating the sub-merchant creation and management process. 

KYC check delivery and reporting

FACe provides all the tools PayFacs need to meet the unique know-your-customer (KYC) requirements that come along with the model. With NMI, PayFacs can collect KYC data, perform necessary evaluations, and access comprehensive reporting with ease. 

Sub-merchant billing and statements

FACe enables PayFacs to set unique rates for each and every merchant and automatically tracks the associated platform and credit card processing fees. The ability to easily set unique rates on a merchant-by-merchant basis makes it simple to correctly price in risk regardless of a merchant’s profile. PayFacs can also automatically send consolidated fee statements to all merchants in their portfolio outlining all platform and processing-related fees. 

Automated chargeback notifications

One of the most important parts of filing a successful chargeback defense is maximizing the short time window offered by the card companies. NMI FACe offers automated chargeback notifications, so both PayFacs and their merchants know about every chargeback that comes in, as soon as it happens. 

EMV-compliant payment hardware

PayFacs using FACe can offer merchants EMV-compliant payment hardware for mobile and in-store use. Access to more payment technologies helps PayFacs offer more complete services to merchants, and hardware also opens up a new source of monthly revenue. 

Consolidated reporting with the wider NMI ecosystem

FACe is fully backward compatible with NMI’s traditional merchant services. That means ISOs becoming PayFacs or adopting a hybrid model will have absolutely no issue with the existing merchants they’ve already boarded through NMI.


Take merchant management even further with IRIS CRM

PayFacs looking to streamline and control their operations on an even deeper level can also leverage IRIS CRM – the payments industry’s number one customer resource management platform, and a key part of NMI’s full commerce enablement system. 

IRIS CRM provides a unique set of sales and productivity tools designed to meet the specific needs of merchant acquirers. From better prospecting and merchant recruiting, to lightning-fast onboarding, to automated residuals calculations and beyond, IRIS CRM takes NMI’s processing services to the next level. 

Schedule a free guided demonstration of IRIS CRM or NMI FACe today.