Payment facilitator, or payfac, is a company that will act as a mediator between an online merchant (an eCommerce business, for example) and a credit card network. With the help of a payment facilitator, the merchant can now accept online credit card payment.
The payment facilitator model is actually relatively new but has since emerged to become a major trend in the online payment industry, and more players are now entering the game to start a payment facilitator business.
Below, we will discuss a brief history of payment facilitator, the role of a payment facilitator, and the list of popular payment facilitators available in the market today.
The Evolution of Online Payment Processing: The Emergence of Payment Facilitators
Online merchant services have significantly evolved over the years, and we can generally discuss the ‘evolution’ in three main phases:
1. Processor-merchant direct partnership
In the earliest days of online transactions, payment processors and merchants have direct partnerships. The payment processors sold custom-tailored solutions based on the merchant’s needs and convenience. The merchant has their own merchant accounts and so each transaction was handled directly from the customer’s credit card (or bank account) into the merchant’s bank account. Many businesses today still use this model, and typically the merchant would only need to pay a one-time fee to the payment processor.
2. Revenue sharing+integrations
As online transactions grow to be more complex, many businesses are now combining online and physical business to be a single, comprehensive process. So, integrating online payment with other services and solutions is now a necessity.
With this phenomenon, many payment processors now form partnerships with services commonly used by business owners like POS, accounting software, inventory management system, CMS, and so on. The common practice is to refer merchants to these service partners, and the payment processor will receive a percentage of the revenue from the deal.
3. Payment facilitators
In recent years, more and more payment facilitators have entered the scene. The payment facilitator model allows merchants an easier time to get approved by an acquirer, and by providing the merchant with more convenience and versatility, the payment facilitators can also charge a higher cost (or a larger portion of the processing revenue). We will discuss the benefit of the payment facilitator model below.
The Role of a Payment Facilitator
Typically, a payment facilitator would act as a single point of contact for the merchants that are responsible for:
- Merchant onboarding (the process of signing up a brand-new merchant until they are ready to accept online/credit card payment)
- Validation and settlement of funds to the merchant account
- Legal agreements (if required) like contractual agreements, due diligence, KYC (know your customer), and so on.
- The sales process, like a custom payment gateway or point of sale (POS) interface
- Customer support (some provide 24/7 customer service).
So, the payment facilitator usually has a contractual agreement with the acquirer and separate contractual agreements with their multiple merchants.
What Do Payment Facilitators Provide?
Funding
Not always, but many payment facilitators are responsible for funding, that is, paying out the money their sub-merchants (members) are owed. Providing this service would mean the payment facilitator is taking on more risks for fraud, but in such cases, the facilitator can also provide a more controlled experience for their customers (which often translates to the ability to charge a higher premium or larger revenue share rate).
A payment facilitator, for example, can provide optional but faster access to funds for their customers (in exchange for a certain fee or interest), which can be a significant benefit for smaller businesses.
Onboarding and Underwriting
As discussed, in the traditional model a merchant must first be approved before they can begin accepting payments. The same principle still applies in the payment facilitation model: the payment facilitators are responsible for screening their members (technically, their sub-merchants) to avoid allowing scammers or unhealthy businesses under their responsibility. This process is known as underwriting.
While the underwriting process can be quite technical and complex, payment facilitators often utilize technology to streamline the process, allowing a faster and easier process for a sub-merchant until they can accept payments.
Remittance/Chargeback Management
A chargeback occurs when a customer disputes charges on his or her account and then receives a refund from the issuing bank. In such cases, the issuing bank will then pass the dispute through MasterCard/Visa network to the acquirer’s bank, which will then attempt to recover the funds from the disputed merchant.
When there’s a payment facilitator, it must also manage the chargeback process along with the acquirer, and it is liable for the amount of refund if it can’t recover it from the merchant.
Monitoring Merchants
The payment facilitator is responsible for monitoring its sub-merchants’ activities, ensuring all payments are legitimate and compliant with the rules and regulations of the government and/or the card network. Payment facilitators might also employ automation technology in this process.
List of Popular Payment Facilitators
Here, we will discuss some of the most well-known payment facilitators in the industry:
1. PayPal
Obviously, PayPal needs no introduction, as it has been the leading payment facilitators for decades (since 1998). Paypal basically allows merchants (and also individual sellers/buyers) to create a PayPal account that is connected to the user’s bank account and/or credit card. After validation, a PayPal member can now send or receive payments from other PayPal accounts.
Today, PayPal also offers a variety of related services like credit card readers and even lines of credit. Famous for being very secure and reliable throughout the years.
2. Stripe
Was originally designed for online developers, so it’s easy to integrate various online payment plugins and tools through API. Stripe charges a specific, flat-rate fee per transaction and you wouldn’t need to pay any monthly subscription fees.
Unlike PayPal that is often used for in-person payments, Stripe is primarily used for online transactions. Relatively expensive with a higher cost per transaction at the moment.
3. Square
Square is a payment facilitator solution founded by Jack Dorsey, Twitter’s CEO. It began as a mobile payment processor, allowing a way to accept credit and debit cards safely on-the-go (with a square-shaped swiping device that can be attached to a mobile phone). Similar to Stripe. Square also charges a flat-rate processing fee without any monthly subscription.
However, it has evolved to be a full-fledged payment facilitator and is widely used by both online and physical businesses. It has since added new features like inventory management solution, appointment management, invoicing, analytics, gift cards, and so on.
End Words
Becoming a payment facilitator can be an interesting opportunity to explore, and payment project consultants like RPY innovation can help you meet the required compliance and become a payment facilitator with a high success rate.
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