The payment facilitator, or “PayFac”, model of merchant acquiring is growing extremely rapidly. In 2021, global payment facilitators processed over $500 billion in transactions – a 75% increase over the previous year and an 11x increase over the total just half a decade earlier. 

While companies like PayPal have been providing PayFac-like services since the late 1990s, the formal PayFac model didn’t really start to proliferate until the late 2000s and early 2010s. Today, payment facilitators are a key layer in merchant acquiring, matching merchants with payment services in a more flexible, often more convenient way than the traditional independent sales organization (ISO) model. 

But, despite its growing popularity, the relative youth of the model means PayFacs are still poorly understood in many corners of the industry. To provide some clarity, the following is an overview of what PayFacs do, and how the two biggest card networks – Visa and Mastercard – regulate both payment facilitators and their acquiring partners. 

 

What is a PayFac?

A payment facilitator is a merchant services company that acts as an intermediary between end merchants and an acquirer. The PayFac finds, recruits and services its merchants, providing them with transaction processing on behalf of the acquirer. That relationship gives rise to the term “payment facilitator” as the one company is facilitating transactions on behalf of the other. 

The relationship between a payment facilitator and an acquirer may sound a lot like an independent sales organization and, in many ways, it is. But there are some key differences that separate the two models and impart unique benefits and drawbacks on each. 

PayFac vs. ISO

The most important difference between a PayFac and an ISO is that PayFacs “own” their merchants – entering into direct contracts with them (albeit on behalf of an acquiring partner.) The PayFac takes on merchants as its own contracted “sub-merchants,” which process their transactions through the master merchant account provided to the PayFac by the acquirer. 

ISOs, by comparison, are generally third-parties to the relationship between a merchant and an acquirer – if they’re parties at all. In most cases, ISOs play no role in the underwriting or acceptance process, and in no case does an ISO play a role in the account issuing process. 

That key ability to select their own merchants and issue sub-merchant accounts provides PayFacs with higher levels of control, flexibility, and earning potential than ISOs enjoy. But it comes at a price, as PayFacs are directly responsible for their sub-merchants and, as a result, exposed to far more fraud and security risk than the average ISO. 

 

The Visa and Mastercard PayFac Rules

Visa and Mastercard are the two biggest card networks, and like their ISO cousins, PayFacs need to be registered with both in order to make offering credit card processing practical and competitive. That need for dual registration means PayFacs are bound by two sets of complex rules for operating – those set out in the Visa Core Rules and Visa Product and Service Rules, and those set out primarily in sections 7.6.5 and 7.8 of the Mastercard Rules. 

Luckily for PayFacs, the rules governing the Visa and Mastercard PayFac programs are effectively identical in practice, and staying compliant with one largely means also staying compliant with the other, with only a few exceptions. 

The following is a high-level rundown of some of the key rules laid out by card top card networks. However, it does not satisfy the need for an in-depth legal review of the full rules and compliance requirements for existing or potential PayFacs. 

Payment Facilitator and Card Network Relationships

Payment facilitators don’t have direct relationships with card networks like Visa and Mastercard. Like ISOs, they’re subject to a long and difficult registration process that involves extremely thorough due diligence and high fees. But, once registered, a PayFac falls entirely under the responsibility of its acquirer, and doesn’t deal with Visa or Mastercard directly. 

However, when considering the PayFac-card network relationship on a high level, the core rule to remember is that PayFacs can’t do anything that would damage the network, either financially or from a public relations or brand perspective. The Visa and Mastercard rules protect the companies’ interests by laying out a clear set of obligations for the relationship between acquirers, PayFacs, and sub-merchants and what each is responsible for. 

Payment Facilitator and Acquirer Relationships

Most of the rules governing PayFac and acquirer relationships fall under section 7.6.5 of the Mastercard Rules and section 5 of Visa’s rules. The most important things to remember about this relationship are that:

  1. While the PayFac “owns” its merchants and has a large degree of freedom, it is still working on behalf of the acquirer
  2. The acquirer is ultimately responsible for both the PayFacs it sponsors and those PayFac’s sub-merchants. However, that does not excuse the PayFac for its merchants actions, and acquirers regularly pass on significant risk to PayFacs in their agreements 

Other key rules common to both Visa and Mastercard include:

  • Payment facilitators can operate outside their acquirer’s licensed jurisdiction, but sub-merchants can’t. For instance, an acquirer in the U.S. licensed only within the country could sponsor a PayFac in Europe, but that PayFac could only recruit sub-merchants in the United States – the acquirer’s “Area of Use” in Mastercard terms
  • The settlement funds an acquirer grants PayFacs access to must only be used to pay sub-merchants
  • PayFacs can take on certain activities on behalf of acquirers, including merchant verification (underwriting), record retention, payouts, and account monitoring for fraud deterrence purposes. However, should a PayFac fail to perform any duty its agreed to perform, the acquirer is still ultimately responsible

Payment Facilitator and Sponsored Merchant Relationships

Unlike ISOs and the merchants they recruit, PayFacs have direct contractual relationships with their sponsored merchants, also known as sub-merchants. Some of the core rules common to both the Visa and Mastercard PayFac models include:

  • Payment facilitators can’t work under or recruit another payment facilitator. The PayFac must get its transaction processing services from an acquirer and it can’t sub-issue those services to another PayFac. 
  • Payment facilitators can’t take on staged digital wallets as sub-merchants. Staged digital wallets are wallets where the card payment information isn’t used directly and transactions happen in distinct funding and payout stages
  • A sponsored sub-merchant is responsible for maintaining compliance with all of the Visa and Mastercard rules, and the PayFac is responsible for any failure to do so
  • Sub-merchant agreements must include all the same provisions and standards that are part of a normal merchant agreement between a merchant and an acquirer
  • Payment facilitators have the right to immediately terminate sub-merchant agreements in cases where the merchant has engaged in fraudulent or wrongful actions 

One key difference between the Visa and Mastercard models is the threshold for when a merchant can no longer work with a PayFac and must sign directly with an acquirer. In the Visa system, that threshold is set at $1,000,000, barring a set of outlined exceptions. In the Mastercard system the threshold is set much higher, at $10,000,000 barring exceptions. 

High-Risk Internet Payment Facilitators

One area the Visa rules address specifically that the Mastercard rules don’t is high-risk internet payment facilitators. Sections 10.4.7 and 12.3.1 of the Mastercard rules outline the requirements and compliance standards for this category of payment facilitators. 

There is a long list of requirements acquirers must meet for working with high-risk PayFacs, but, on the PayFac end, the only additional requirements facing high-risk companies are:

  • A high-brand risk sub-merchant agreement must be signed by a senior officer of the high-risk internet payment facilitator
  • The high-risk internet payment facilitator must report acquisition of new sponsored merchants which post a high brand risk
  • The high-risk internet payment facilitator must report monthly transaction activity for all high-brand risk sponsored merchants

PayFac and Acquirer Risk Management and Liability

Mastercard lays out the sub-merchant screening responsibilities PayFacs must abide by in section 7.1 of the Mastercard Security Rules and Procedures. Visa outlines required sub-merchant information and the responsibility to collect and verify it in sections 5.1 and 5.2 of the Core Rules. 

While there are no specific prescriptions for how a payment facilitator or its acquirer must verify a merchant’s application information, the key thing to understand is that the PayFac is on the hook for verifying every single piece of required merchant information as true. That includes know-your-customer (KYC) and anti-money laundering (AML) checks, merchant location, vital business and founder information, accurate MCC assignment, and more. PayFacs may also be responsible for checking merchants against the Visa Merchant Screening Service (VMSS) and Mastercard Alert to Control High-risk Merchants (MATCH) system.

 

PayFac Enablement with NMI

While the vast commonalities between the Visa and Mastercard PayFac programs simplify the rules to an extent, it should be clear that operating as a payment facilitator still has the potential to be an extremely complex undertaking. 

NMI’s full commerce enablement system aims to reduce that complexity by providing all the tools PayFacs need to thrive through a single, centralized partner.  NMI’s PayFac-specific solutions, along with its automated underwriting system and leading payments CRM help PayFacs of all sizes simplify and automate their operations so they can spend less time managing repetitive recurring tasks and more time serving merchants and driving growth. 

NMI PayFac Enablement

NMI’s PayFac enablement tools provide automated sub-merchant onboarding and account management, KYC reporting, automated chargeback importation, consolidated platform reporting and much more. PayFacs can also provide sub-merchants with a wide variety of value-added services from NMI’s app marketplace, improving the merchant experience and opening up new revenue channels. 

Agreement Express PayFac Underwriting

Agreement Express (an NMI company) takes automated underwriting to the next level by performing 100+ rules-based and AI-driven data checks in as little as a minute. It also automates ongoing merchant monitoring, making sure new risks are caught as soon as they emerge. With Agreement Express, PayFacs can ensure each and every sub-merchant application gets the thorough underwriting it needs to meet Visa and Mastercard’s requirements, while simultaneously speeding up the due diligence process by days or even weeks. 

IRIS CRM PayFac Customer Resource Management

IRIS CRM (an NMI company) is the payments industry’s top customer resource management platform. Whether on its own or seamlessly integrated with NMI’s other full commerce enablement tools, IRIS CRM acts as the nerve center of a PayFac’s operations. It uses advanced task automation and payments-specific tools to streamline everything from merchant onboarding to residuals management to ongoing service and support and more – all from a single, user-friendly point of control. 

Together, these three systems make NMI’s full commerce enablement platform the most complete, convenient, and cost-effective way for PayFacs to sell merchant services and out-compete the field in an ever-tightening industry. 

To find out more, reach out to a member of our team or schedule a free guided demonstration today.