What is the Payment Facilitator Model (PayFac)? Full Definition - Ikajo


What is the payment facilitator model? Full definition

What is the payment facilitator model? Full definition
Business Development Specialist
Yuliia Mamonova
Table of Contents

    Fintech keeps growing and evolving. The payment facilitator is soon to become one of the hottest trends in the industry. We don’t blame you if you haven’t heard about one. Or if you think of it as of a payment aggregator.

    In this article, we are going to cover all the main aspects relating to payment facilitators. We’ll show what helps it work the way it works. And why these payment companies have emerged plus how they protect themselves from risks.

    All-in-all, let’s start a journey into the alternative to accepting payments, merchants have got used to over the years.

    What is a Payment Facilitator?

    There are various interpretations of the payment facilitator or PayFac, in short. The PayFac definition we’d like to provide goes as follows.

    A payment facilitator is an alternative to the traditional merchant service provider. The PayFac model runs on a sub-merchant system. That means merchants do not need to have their own MID. The model eases an account acquisition, and lets merchants accept payments under the master MID account.

    Banks refer the PayFacs to FinTech players that process transactions under the one sub-merchant platform.

    Some describe this option as an evolution of the payment services that have been working on the market for so long. Another definition of PayFacs claims that most of them work as SaaS businesses. That approach is also true. The model provides merchants with a white-label payment processing solution, and it lets accept payments via a sub-merchant platform. Yet, we’ll hold on to the first notion as it describes the PayFac’s nature the best way.

    Why have Payment Facilitators emerged?

    Due to the complexity of getting onboard with major payment service providers, the industry has come up with a new solution. The payment facilitator increasingly fastens the onboarding process. Also, it’s easier for a merchant to start accepting money.

    Thus, to start working with the facilitator, merchants need to share seven to eight key data features. Then a special underwriting algorithm checks them. In case if the data fits the requirements, the system approves the application. Moreover, it does it in real-time.

    How do you start with PayFac?

    We may describe PayFac’s onboarding process in five steps.

    1. The merchant finds an appropriate payment facilitator.
    2. To open an account, the merchant provides seven to eight key data features.
    3. The PayFac uses an underwriting tool to check the features.
    4. The tool approves or declines the application is real-time.
    5. If the merchant fits the requirements, PayFac onboards is a sub-merchant under the master MID.

    Also, it’s essential to mention that PayFac is a Mastercard model, while the one for Visa is a payment service provider.

    How does PayFac work?

    To provide merchant services, the payment facilitator should undergo certain procedures. We can describe them as an ecosystem. It’s a set of parties and actions that the PayFac performs to deliver several services to merchants. What parties are in the ecosystem?

    • An acquiring bank. It’s a vital part as everything works through the master MID. Firstly, the payment facilitator needs to open a merchant account with the acquirer. It’s where it will hold the deposits. So, the acquiring bank is in charge of the PayFac customers’ transaction processing. The acquirer makes the payment facilitator’s check and dictates a variety of requirements.
    • A payment processor. To ensure the correct money flow, the payment facilitator needs to partner with the payment processor. It will authorize the transactions and transfer them to the card network. Also, it’s reliable for the funds’ settlement between the issuing and acquiring banks.
    • Sponsors. Usually, it’s possible to unite the processor’s and acquirers’ functions. Those functions are together known as the sponsor. Accordingly, we remind that the PayFac needs to have an account in the bank, which is the part of the credit card network (Visa or Mastercard).
    • Sub-merchants. They are, consequently, the merchants that own an account with the PayFac. The name goes as follows, as the seller doesn’t have a separate merchant account with the MID. It works as a sub-merchant via the master account, the owner of which is the payment facilitator.

    What are the Payment Facilitator’s functions?

    PayFacs perform several actions during the merchants’ onboarding and processing. Let’s take a closer look at them.

    • Underwriting. This step is vital for PayFacs. As they place all the sellers on the one MID, it essential to ensure they are not scammers. So, the underwriting procedure includes some parties. First and foremost, the facilitators follow Know Your Client (KYC) practices. The facilitator ensures the company is what it claims to be. Then it ensures, the company has nothing to with crime and terrorism. The main guide here is Mastercard Member Alert to Control High-Risk Merchants. As we’ve mentioned earlier in this article, PayFacs require lesser time to perform underwriting. That is possible, thanks to the advanced technologies they use. The software automates the checks and flags any suspicious activity.
    • Monitoring. After the seller gets onboard under the sub-merchant account, PayFac stays responsible for the transactions’ monitoring. It makes sure they follow government and card networks’ guidelines. Should the transaction look suspicious, the PayFac will pass it for further investigation to the risk management department.
    • Funding. This function includes paying out the income the sub-merchant has earned. Of course, this feature requires the facilitators to be more attentive to fraud and legal guidelines. Nevertheless, they can offer a better experience for the sub-merchants and have more control over the funds.
    • Chargeback control. Besides other monitoring functions, PayFacs are also responsible for the chargeback management. They handle the whole process alongside with the acquiring bank. So, the payment facilitator is in charge of the provision of the legal documents to make an investigation.

    What are the Payment Facilitator’s particularities?

    At this point, we’d like to share some specific information about PayFacs. They are not necessarily drawbacks, but you need to factor them in.

    • Flat-rate fees. As all transactions flow through one MID, the PayFac is unable to personalize rates. So, the fees will be equal to all the sub-merchants. They won’t vary depending on the transaction or card type. In its turn, some merchants may face higher fees compared to the classic payment processor.
    • Volume restrictions. As some merchants use the same account, some constraints may apply. Thus, annual limits for Visa are $100,000 and for Mastercard $1,000,000.
    • Worse customer support. As PayFacs have plenty of users, they cannot offer high-quality support.


    So, considering what you know about PayFacs now, you can decide if it is your option. Are you ready to agree with the facilitation fee? Can you pick lower quality support in the exchange of faster onboarding? Sure, there’s a list of payment facilitators trusted by many like Square or Stripe. But are their services really for you?

    Anyway, choose what’s better for your business. If you want to dive deeper into the payment processing, Ikajo’s team will gladly answer your questions. You can ask them by filling in the short form.

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