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Payment processing is the core of the online economy. And while selling online has never been easier - thanks to the proliferation of selling platforms - actually setting up payments functionality remains relatively inaccessible, and requires the maintenance of numerous systems and relationships.
That’s where payment facilitators (PayFacs) come in. A PayFac is a third-party services provider that acts as an intermediary between merchants and payment processors.
As well as reducing the administrative burden for sub-merchants, PayFacs have the flexibility to completely customize their payments program. That means they have full control over their customer experience and the flexibility to set their own payout schedules and fee structures.
Here, we explain what a PayFac is, how it differs from a marketplace, and the key benefits of becoming a PayFac.
What is a PayFac?
Essentially, PayFacs use the acquiring license of another company to provide payment services to sub-merchants.
First, a PayFac needs to establish a partnership with an acquiring bank, and get sponsorship to process payments for sub-merchants. It then needs to integrate payment gateways to enable online payment processing, and, finally, to ensure data security, it needs to be certified by the Payment Card Industry Data Security Standard (PCI DSS). If operating in other global regions, PayFacs may need to partner with local acquirers, gateways, and systems providers.
The PayFac is then responsible for managing its sub-merchants and processing all transactions on their behalf. This can often include setting up onboarding processes, ensuring compliance requirements are met, and paying out funds to sub-merchants on an agreed schedule.
However, with Checkout.com’s Integrated Platforms solution - that serves PayFacs and marketplaces - onboarding, compliance requirements, and schedule payouts are all handled by us. The solution is modular, so you can leverage the different capabilities you need, whether that is payments, payouts, or onboarding.
Sub-merchants are charged a higher rate than if they had a direct relationship with the payment processor. The idea behind the PayFac model from a sub-merchant’s perspective is that it provides them with a simpler and more streamlined way to accept payments without having to set up and manage separate accounts with multiple parties.
The most common types of PayFac platforms are:
- E-commerce
- Travel and ticketing
- Fundraising
- Retail
- Ridesharing
- Food delivery
Learn more: What is an ISO?
PayFac vs marketplace: what’s the difference?
A PayFac is similar to a marketplace in that it provides a platform for merchants to sell their goods or services, but there are key differences. A marketplace - such as Amazon, eBay, or Etsy - provides a platform for multiple merchants (or sellers) to sell their goods or services to each customer. By contrast, a PayFac connects one merchant to one customer at a time.
Both are perfectly legitimate options for smaller merchants that want to buy and sell goods without the hassle of setting up payments functionality from scratch. However, marketplaces can provide a broader range of services beyond payments, such as marketing, customer service, and fulfillment, while a PayFac usually focuses exclusively on payment processing.
Learn more: Marketplace vs platform: What's the difference?
What’s the difference for customers?
For customers, the key difference between a PayFac and a marketplace is that, when using a marketplace, the customer will generally only interact with the platform rather than the individual seller. They might register the name of the seller, but their intent has probably been to use, for example, Amazon to find great deals on a particular product, not to buy from a particular seller.
In contrast, with a PayFac, the customer will almost certainly interact directly with the individual sub-merchant, and in some cases may not even know that a PayFac is involved in the transaction. This means that, while the PayFac processes the payment, any questions or complaints about the purchase will be dealt with by the sub-merchant.
So, if a merchant is building a brand and must have a direct relationship with their customer, working with a PayFac is probably the way to go. On the other hand, if they’re dropshipping third-party goods, a marketplace could be their most suitable option.
Learn more: PayFac vs ISO: which one to choose for your business?
Benefits of becoming a PayFac
Massive technological leaps have made it easier than ever for software providers to explore new opportunities and expand their offerings, such as becoming a PayFac as a service. Below we break down the key benefits of the PayFac model for software providers.
Easily onboard sub-merchants
Once you become a PayFac it's relatively easy to start onboarding sub-merchants, as you will now have a partnership in place with an acquiring bank. Your sub-merchants can then quickly start taking payments and generating income for you without the hassle of forming a relationship with an acquirer themselves.
Explore new revenue streams
By taking on board sub-merchants across a variety of categories, you can quickly open your business up to new revenue streams and fuel rapid expansion into new sectors and locations.
Gain more control of the payments process
By handling payments directly within your own software - rather than using a third-party provider - you have more control over the payments process. As well as avoiding the payment processing fees of these providers, you have full control of the pricing and fees you charge sub-merchants.
Improve your user experience
In addition to the above, being able to embed payments into your own software gives you more control over your user experience.
Other ways most PayFac solutions help you improve your user experience are by giving you control over the creation of new applications and services - such as invoicing, subscriptions, and lending - and allowing sub-merchants to use your dashboard.
Choose when you payout to merchants
With the PayFac model, you can decide when you payout funds to your sub-merchants. For example, if you work with a risky merchant, you can opt to distribute their funds weekly or on any schedule that limits your risk exposure.
Explore Checkout.com’s solutions for PayFacs
Want to supercharge your payments offering? Checkout.com offers solutions for PayFacs, integrated platforms, and marketplace businesses. In fact, we've written an entire guide to marketplace payments if you're looking for more information.
Our Integrated Platforms solution makes it easier than ever to leverage the payment facilitator model. It’s fully customizable, highly scalable, and comes with built-in compliance tools to cover every necessary regulation.
With Checkout.com, you can:
- Transform your customer experience - take advantage of a range of features, including local payment methods and flexible payout schedules, to attract and retain customers.
- Customize your PayFac solution - using our modular payment technology, you can decide on your customer pricing models, offer alternative payment methods, and manage your risk appetite.
- Get actionable insights to fuel growth - you get access to invaluable customer transaction and reconciliation data that you can use to empower your teams and boost growth.
