Understanding What a PayFac Does

Understanding What a PayFac Does

New entrants into the payments industry have a lot of acronyms and contractions to sift through, and one that’s becoming more and more common is PayFac – short for payment facilitator. The PayFac model is readily gaining popularity across the industry, but merchants and industry pros alike who are more familiar with independent sales organizations (ISOs) might not know exactly what PayFacs do, what makes them different, and how they fit into the industry. The following is a quick overview of payment facilitators that will answer each of those questions and explain why the PayFac model is growing so rapidly. 


What PayFacs Do In the Payments Industry

PayFacs are businesses that resell merchant services on behalf of a payment processor, lightening the processor’s load and earning a slice of every transaction fee – known as a residual – in the process. In essence, a PayFac is an agent for a payment processor, but a unique twist to the PayFac model is that the PayFac is actually a merchant with their own merchant account sponsored by a bank. The PayFac recruits their own sub-merchants, whose transactions are pooled under the PayFac’s master account, not unlike the way large third-party processors like PayPal and Square operate.  

PayFacs offer their sponsoring partners the ability to onboard merchants to processing services in an extremely hands-off way, as they are responsible for almost everything to do with their sub-merchants’ processing, from initial recruiting and acquisition, through approval, through ongoing service and support.


How Payment Facilitators Differ From ISOs

PayFacs serve as a liaison between merchants and payment processors, just like ISOs do, but there are some significant differences between how the ISO model and the PayFac model operate. 

First and foremost, ISOs pass merchants on to payment facilitators and don’t handle anything to do with the processing itself. The processor makes the approval decision, and, except in the case of wholesale ISOs, the processor is on the hook for underwriting and any associated liability. With a PayFac, they process their sub-merchants under their own merchant account and merchant identification number (MID.) In turn, the PayFac is responsible for acceptance decisions, underwriting, and the ongoing performance of their sub-merchants. 

Along with the added risks and responsibilities, PayFacs gain a number of advantages that ISOs don’t. Because they can sign contracts directly with merchants, they have a lot more flexibility and control over the services they provide. The ability to take on merchants that might not make it through the ISO application process means PayFacs can often build larger portfolios faster. They also have more control over pricing and, in turn, they may be able to earn more than an ISO would on any given merchant. 


Why Merchants Choose Payment Facilitators

There are a number of reasons a merchant might choose to work with a PayFac. The first and most common is that the application process for a PayFac is much faster and less stringent, making it easier and more convenient for some merchants to get approved. That speed and convenience aren’t free, though, and merchants can generally expect to pay higher transaction fees than they would with an ISO. 

Another big benefit is that the PayFac is solely responsible for distributing funds to merchants, meaning merchants may see the deposits from their batched payments faster than they would with a traditional payment processor arrangement, where two and three-business-day holds are common. 

Some merchants also prefer payment facilitators for their simplicity. Most PayFacs charge flat-rate fees, which are consistent and simple to understand. However, flat-rate fee models are also almost universally more expensive, making them less than ideal for merchants doing a significant volume of monthly sales. 


How PayFacs Use Payments Technology

Much like their ISO cousins, payment facilitators utilize payments technology to both improve the recruiting and sales process and provide better ongoing service to their merchants. PayFacs and ISOs alike lean heavily on customer resource management (CRM) software like IRIS CRM, the industry’s top payments CRM. 

Payments CRMs provide lead management and sales tools needed to recruit more merchants while slashing the time, money, and effort it takes to close deals. Advanced automation in the lead management process and access to complete customer data ensure that PayFacs can process leads more efficiently, and provide a sales process that makes each lead feel like they’re getting the most personal attention possible. 

Payments CRMs also provide a variety of productivity tools designed to make the operation of a PayFac or ISO as frictionless as possible. IRIS CRM, for instance, comes with an advanced residuals management and reporting suite, an automated merchant onboarding tool, a private-label customer support system, a complete communications suite, a built-in power dialer, and much more. 

To find out more about how a payments CRM can help your PayFac or ISO gain a competitive edge, do more with your leads, and boost your residuals, schedule a free guided demonstration of IRIS CRM today.

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