A payment facilitator (PayFac) is a type of merchant services company that provides business owners with a way to accept electronic payments, both online and in-store. PayFacs provide a similar service to standard merchant accounts, but with a few important differences. Most important among those differences, PayFacs don’t issue each merchant their own individual account. Instead, they offer sub-merchant accounts without unique merchant IDs. In essence, PayFacs are third-party merchant services providers, not unlike popular processing platforms PayPal and Square. Rather than each merchant’s transactions being processed individually, merchants are pooled, and their transactions are processed in aggregate using the provider’s master merchant account. This setup offers some benefits like ease of access, but also some drawbacks including potentially higher costs. 

 

How do PayFacs Fit Into the Payments Ecosystem?

Payment facilitators fall in between payment processors and merchants, much in the way independent sales organizations (ISOs) do. Unlike ISOs, who are reselling payment processing services on behalf of another company, payment facilitators provide the payment processing themselves, just on a sub-merchant basis. 

A sub-merchant account effectively enables a merchant to do business underneath the umbrella of the PayFac. Rather than applying to a payment processor for their own account with a unique merchant ID (MID), a merchant applies directly to the PayFac. The PayFac then performs its own due diligence and grants the merchant access to process transactions under the PayFac’s MID, which is provided to the PayFac through a large payment processor or bank partner.

The PayFac is effectively lending their MID to their merchants. By lending their MID, any fraud, financial issues, or other problems that arise with those merchants fall directly on the PayFac – a relatively high level of risk for both the PayFac and the processor issuing the master MID. As a result, many PayFacs perform consistent, ongoing due diligence and risk assessment to minimize potential exposure and maintain a healthy relationship with their own merchant account provider. 

 

What are the Primary Benefits and Drawbacks of Going with a PayFac?

The main benefit PayFacs offer merchants is that they’re more easily accessible than most standard merchant accounts. Obtaining a traditional merchant account isn’t necessarily difficult, but it is an involved process that requires a decent level of due diligence and a certain level of business history on behalf of the merchant. That can make traditional merchant accounts unattractive for entrepreneurs looking to dip their toes into a new venture, hobbyists, and companies doing low sales volumes. 

A sub-merchant account with a PayFac, on the other hand, is much easier to set up. In the case of large processors like PayPal and Square, an account can be set up and ready to use in a matter of hours. Smaller PayFacs may take slightly longer, but getting approved by a PayFac is still almost universally faster and easier than applying for a traditional merchant account. 

The flipside of the equation is that, because PayFacs make it easier for merchants to get accounts, they also take on more risk. The risk is offset through higher fees and more strict limitations. Payment facilitator accounts will generally charge a slightly higher transaction fee than traditional merchant accounts, especially ones based on the interchange-plus pricing model. The differences are small, but they add up over time, which is one of the reasons most large merchants prefer to have their own MIDs.

PayFacs may also place transaction limits on certain sub-merchant accounts to ensure the potential damage from issues like fraud is limited. Those limits can often be increased or removed with additional due diligence, but they still represent a potential point of friction. But, despite the costs and limitations that may exist, many small merchants prefer PayFacs, especially as an entry point before a business is ready to take on its own MID. 

 

How are PayFacs and ISOs Similar?

Despite their differences, ISOs and PayFacs do have some things in common. On the surface, the most obvious similarity is that they both provide a type of passthrough service designed to help merchants access payment processing. While they go about providing that service in very different ways, both are businesses designed to link merchants with payment processing without overwhelming processors directly. 

Another similarity between ISOs and PayFacs is their ability to leverage technology to improve reach, service delivery, and profitability. PayFacs suffer from many of the same challenges as ISOs, including recruiting merchants in a fiercely competitive environment and a mountain of disparate reporting on each sub-merchant account. Systems like customer resource management platforms can eliminate many of a PayFac’s problems by centralizing their most important tasks like lead management and sales, and automatically collecting, combining, and presenting reporting across their entire merchant portfolio. 

IRIS CRM has long been the CRM platform ISOs lean on the heaviest to promote growth and cut waste, and it offers the same utility to PayFacs looking to improve and streamline their lead management, reporting, and daily admin tasks. 

To find out more about everything IRIS CRM can do for your payment facilitator, schedule your free guided demonstration now.