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Payfacs: A guide to payment facilitation

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Oct 18, 2023
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In this guide to payment facilitation, we will explain what a payment facilitator is, how payment facilitators work and why there are so many payment facilitators operating across multiple sectors worldwide. You’ll see some key takeaways at the bottom, to summarise what we’ve covered along with some frequently asked questions.  

What is a payment facilitator? 

A payment facilitator (or Payfac) offers a service that enables their customers to accept electronic payments online or in person. At their heart, Payfacs are technology businesses that have created software to help their customers trade.  

With the digital market booming, payment facilitation has become a huge industry. Payfacs have empowered individuals and businesses to trade with very little paperwork or bureaucracy.  

If you didn’t know what a Payfac was, then you will almost certainly know of Payfacs that are household names. Being a Payfac is how e-commerce platforms like Shopify can help businesses sell physical goods online. It’s how invoicing platforms such as Xero can help businesses invoice their clients. It’s how Airbnb can help homeowners rent their properties. And it’s how Uber can offer its transportation services. If it wasn’t for these Payfacs, many individuals and businesses would be put off from trading. Payfac’s have made owning a business easy.  

How do payment facilitators work? 

A payment facilitator (or Payfac) is a merchant services provider that uses technology to simplify the payment collection process for its clients. A Payfac’s clients, also known as ‘sub-merchants’, are individuals or business owners that are trading goods or services.

With the rise of digital, Payfacs have become hugely popular because the Payfac service inherits the complexity of accepting online payments. A Payfac will:

  • Manage all businesses that require merchant services.  

  • Own the relationship with card networks such as Visa and Mastercard® and take responsibility for following their policies and procedures. 

  • Be responsible for complying with the payment card industry’s requirements and obtaining a PCI compliance certificate.  

  • Audit transaction activity.    

  • Own responsibility for moving their customer’s money.  

What is a payment facilitator model? 

A payment facilitator (or Payfac) has created technology that enables an individual or business to trade without establishing a traditional merchant account. The technology business, partners with an acquiring bank to provide payment services to customers who use their technology platform. In this way, the technology company is acting as the “master” merchant account provider and their customers are “sub-merchants”.  

Within the Payfac model, there are three main parties involved. The acquiring bank, the Payfac payment facilitator, and the sub-merchant. The acquiring bank provides the structure for the financial transaction. The Payfac’s role is to act as the middleman between the acquiring bank and the sub-merchant. Importantly, the sub-merchant has no relationship with the acquiring bank, because they operate under the Payfac. 

The acquiring bank, however, is still responsible for ensuring that the Payfac follows their regulations and rules, in line with their operational procedures. And, because risk management is part of their job, it is the acquiring bank who is required to perform due diligence when the Payfac onboards sub-merchants. 

The two types of payment facilitator  

There are two main ways in which a Payfac can work:

  1. The first is the most common and popular because it can be done quickly and easily. In this scenario, the Payfac acts as a middleman between its customer (an individual or business) and the customer’s bank. The Payfac will process payments for its customer who can access these funds from their own bank account. This is how Payfacs like Shopify or Airbnb operate. 
  2. The other way that Payfacs can work is by acting as a merchant account provider. This means that the Payfac will provide its customer with a merchant account so that the customer can process payments through that merchant account. 

What are the benefits of becoming a Payfac? 

Why are there so many examples of Payfacs operating across such a wide array of industries? Well, technology has made it easier than ever for software providers to explore new opportunities and expand their offerings.  

Uber, for example, are a Payfac that describes itself as a “Tech company that connects the physical and digital worlds to help make movement happen at the tap of a button.” Interesting, isn’t it? Uber doesn’t see itself as a taxi business. No. Its vision is more ambitious. Uber is a technology company that facilitates transportation. Similar to Deliveroo, who use technology to facilitate home deliveries.  

Let’s examine the benefits of the Payfac model for software providers: 

  • Own the user experience – Most Payfac solutions have made the user experience their own. They have designed it. And they can evolve it at their whim. This is a fantastic benefit, because it means that they can continue to change the user experience to fit their business model or improve the customer’s user experience.  

  • Onboard sub-merchants at volume - Once they have developed the software, it is relatively easy for a Payfac to begin onboarding sub-merchants at volume. This is because a Payfac will have a partnership in place with an acquiring bank, and the freedom to accept more customers (sub-merchants) on its terms.  

  • Set up sub-merchants quickly – The Payfac model means that its customers can quickly start taking payments and generating income without the hassle of forming a relationship with an acquirer themselves. This makes being a sub-merchant very appealing. It can, for example take just 3–4 days for a Shopify customer to have their own online business up and running.  

  • Control the payment process – By handling payments directly within their own software, a Payfac can enjoy substantial control over the payment process. This means that a Payfac can choose when to pay out to merchants and what fees to charge them for their service.  

  • Enjoy fee flexibility – Payfacs can create a pricing and payment structure that reflects the nature of their customer portfolio. Some sub-merchants will operate at a high volume and may need to be paid more frequently than those who trade less frequently. Other sub-merchants may be riskier, and Payfac can therefore choose to distribute their funds less frequently to limit their exposure to this risk. 

  • Expand by exploring new revenue streams – Once a Payfac has developed its software and built up a sub-merchant customer base, it can expand its marketplace across other countries or sectors. Just look at how Uber have expanded their global reach and moved from taxing people to a transportation business that can deliver groceries and people. This flexibility can open up new revenue streams and fuel rapid expansion into new sectors and locations. 

  • Avoid payment processing fees – Because the Payfacs software acts as a payment processor, there is no need for a Payfac to work with one.  

Payfac vs Marketplace  

A Payfac is similar to a marketplace. What distinguishes them is the number of businesses a customer can transact with through that platform. Payfacs connect one customer to one business. A marketplace connects one customer to many businesses. Let’s look at some examples.  

Airbnb is a Payfac rather than a marketplace because its customers can only make one accommodation booking at a time, even though Airbnb offers a large range of accommodation providers on its platform. This is true of Uber, which is a Payfac and not a marketplace, because Uber customers can only book and pay for one Uber service at a time from one supplier, who in this case is a taxi driver.   

Marketplaces connect one customer to many businesses. For example, customers of Amazon can make purchases from multiple suppliers in a single transaction because Amazon operates as a marketplace. Etsy or Not On The High Street are also examples of marketplaces. They also offer goods or services from a range of suppliers and enable the customer to purchase more than one of these goods or services from multiple suppliers at one checkout.  

The term ‘marketplace’ can be confusing because we are talking about a digital marketplace. When the supplier trades at a physical marketplace, they operate one stall within the market, so the customer makes one transaction at a time with each trader. Just remember that with Payfacs, although there are multiple traders on a single platform, it is not an online marketplace if the customer can only purchase from one trader or service provider at a time.  

From a trader’s perspective, there are distinct advantages and disadvantages to choosing a Payfac or a marketplace. For example, when using a marketplace, the customer will normally only interact with the platform (think Amazon) rather than the actual seller. If you want to build a brand, it may be advantageous to work with a Payfac like Shopify than trade via a marketplace such as Amazon, Etsy or Not On The High Street because you can build a direct relationship with your customer. However, marketplaces are a great opportunity for traders to test product demand or sell their products at volume. And traders can learn a lot by directly competing against other traders in that marketplace, because the marketplace is able to give a wide variety of metrics to help them understand their competitive position. Note how we switch terminology between ‘traders’ and ‘suppliers’. Just to make things more confusing, traders and suppliers can also be referred to as ‘businesses’ or ‘merchants’. 

Key takeaways 

  • A payment facilitator or Payfac offers a service or platform to enable their customers to accept electronic payments online or in person. They are, at heart, a technology business that has developed software to help their customers trade. Payfac customers are also known as sub-merchants. 

  • There are plenty of examples of household names that are, in fact Payfacs. Shopify is a Payfac that helps businesses sell their physical goods online, through their own website. Xero is s Payfac that can help businesses invoice their clients. Airbnb is a Payfac that can help homeowners rent their properties. Uber is a Payfac that offers its customers transportation services.  

  • There are three players within the Payfac model: the acquiring bank, the Payfac and the sub-merchant. The acquiring bank provides the structure for the financial transaction. The Payfac acts as the go-between the acquiring bank and the sub-merchant. The sub-merchant has no relationship with the acquiring bank because they operate under the Payfac.  

  • There are several benefits to becoming a Payfac. Technology has made it easier than ever for software providers to explore new opportunities and expand their offerings. They can own the user experience, onboard sub-merchants at volume, set up sub-merchants quickly, control the payment process, be flexible on fees and expand by exploring new revenue streams.  

  • A Payfac is not the same as a marketplace. What distinguishes them is the number of businesses that a customer can transact with through that platform. Payfacs like Airbnb, Shopify or Uber connects one customer to one business. Marketplaces like Amazon or Etsy connect one customer to many businesses.  

FAQs

Q: What is a merchant or payment service provider? 
A: A merchant or payment service provider is an organisation that allows businesses to accept credit and debit cards


Q: What is a merchant account? 
A: A merchant account deposits receipts from a business’s card sales into their business bank account. 
 

Q: What is a sub-merchant? 
A: A sub-merchant is a Payfac customer. In Uber’s case, a sub-merchant is a taxi driver. In Airbnb’s case, a sub-merchant is an individual or business renting out some or all of their property.  


Q: Give me some examples of payment facilitators 
A: Shopify, Xero and Airbnb are all payment facilitators because they enable their customers to accept electronic payments online or in person without owning their own merchant bank account.  


Q: What payment processes are a Payfac directly responsible for? 
A: A Payfac is responsible for a wide range of payment processes including underwriting (the risk), onboarding the merchant (its customer), moving funds, resolving chargeback disputes, Anti-Money Laundering (AML) practices, risk monitoring, customer compliance and following card industry standards set by the payments card industry Standard Security Council (PCI DSS). 

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