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.
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. So the exact responsibilities for a PayFac will vary depending on the acquirer they partner with.
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 more simple and streamlined way to accept payments without having to set up and manage separate accounts with multiple parties.
Learn more: What is an ISO?
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. While 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 payment functionality from scratch. However, marketplaces can provide a broader range of services beyond payments, such as marketing, customer service, and fulfilment, while a PayFac usually focuses exclusively on payment processing.
Learn more: Marketplace vs platform: What's the difference?
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 it’s important that they 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.
Massive technological leaps have made it easier than ever for software providers to explore new opportunities and expand their offering, such as becoming a PayFac as a service. Below we break down the key benefits of the PayFac model for software providers:
Want to supercharge your payments offering? Checkout.com offers solutions for PayFacs, integrated platforms, and marketplace businesses.
Our Integrated Platforms solution makes it easier than ever to leverage the payment facilitator model. It’s fully customisable, highly scalable, and comes with built in compliance tools to cover every necessary regulation.
With Checkout.com, you can: