Considering how many small businesses are out there, you might feel overwhelmed by all the competition. Fortunately, with the right business solutions, you can feel less stressed when running your business. One of the best solutions for businesses is a PayFac. In this article, we’ll review what this business solution is and how it works. Finally, you can use a PayFac and streamline your business, making it easier to run. Read on to learn more.
Did you know that the number of small businesses in the US, as of October 2022, was greater than 33.2 million? Additionally, the percentage of businesses in the US that are small businesses is 99.9%. Also, every month in the US, the number of businesses that are launched is 543,000.
What is a PayFac
To answer the question, “What is a PayFac?” we first have to provide some context. These days, many marketplaces and platforms help the merchants that sell on them with the process of accepting payments. They offer this assistance as services online to companies that are a variety of sizes.
For these platforms and marketplaces, payment functionality has now become integral. This makes it possible for them to create stickiness and differentiate their product.
Additionally, it means that the merchants who are selling them won’t have to establish relationships that are direct with payment gateways or acquiring banks anymore.
A PayFac, also known as a “payment facilitator,” is the solution that these marketplaces and platforms provide. There are a variety of goals they often have when providing payment capabilities.
Through these, these marketplaces and platforms can do several things. They can monetize the transactions that occur on their platform and strengthen the relationships they have with customers.
They can also differentiate their brand and offering.
In the late 90s, traditional PayFac solutions became popular as a solution that made it easier for medium- and small-sized businesses to accept payments made online more easily. Historically, the onboarding requirements of banks catered to businesses that were larger.
These larger businesses had the capacity to manage the time-consuming, costly, and complex legacy setup process. In essence, these companies had built their core product and business while becoming experts in payments.
The PayFac model came about so that companies specializing in payments could have the ability to lessen the complexity of the process of getting started when it came to online payments.
These companies offered services to a greater array of businesses. This allowed these businesses to concentrate on their essential competencies.
PayFac Solution Types
When you’re using PayFac as a service, there are two different solution types available. The first is the traditional PayFac solution. This solution involves you partnering with either (1) an acquiring bank or (2) an acquirer and a payment facilitator vendor.
When you enter this partnership, you’ll be building out systems. These systems will be for risk, onboarding, processing, and more.
Typically, it’s necessary to carry all this out on a basis that’s country-by-country. This solution will make it possible for the platform to offer its sub-merchants online card payments.
The second solution type is a PayFac solution that’s more modern and technology-first. With this solution, it’s possible to white-label. It’s also possible to embed financial services and payments in software directly.
In this case, the platform or marketplace owns the solution. They’re responsible for building out the experience of the sub-merchants.
There are several questions you should ask yourself to decide which solution you want to use for bringing payments in-house.
When It Comes to Bringing Payments In-House, What Is My Goal?
Do I want to deepen customer relationships or improve the experience customers have, which will require me to add value to my software? Do I want to increase my valuation and introduce new revenue lines, or do I want to make expansion to new geographies or segments faster?
By asking these questions, you’ll be able to know whether getting a PayFac solution is right for you. You’ll also have a better idea as to what features you would need.
Ideal Payment Solutions
Does my ideal solution for payments include international payments, such as BECS Direct Debit, Alipay, or iDEAL? Does it include point-of-sale payments that are in-person? Are online card payments included?
Would I like to provide my customers with financial services such as card programs, fraud prevention services, and lending? These questions will help you determine what features you’d need in a PayFac solution.
What’s My Timeline, and How Much Do I Want to Invest in My Core Business vs. Payments?
How much do I want to dedicate my operations teams’, legal team’s, and developers’ resources? Do I have the preparation necessary to build new teams that will manage payout systems and payout, compliance systems, and merchant onboarding processes?
If you can afford to expand any of the above, a more simple solution might be acceptable. However, if you prefer to streamline your processes and not invest in these areas, a modern PayFac solution is a better idea.
Traditional PayFac Solutions
When a platform opens up a traditional PayFac solution, they start the process by opening a merchant bank account. Then, they’ll receive a MID, or merchant ID, so that they can acquire and then aggregate the payments. They’ll aggregate these payments for a group made up of smaller merchants.
These smaller merchants, typically, are called sub-merchants.
Traditional PayFacs’ payment systems are embedded. They’ll register, with an acquiring bank, their master MID.
On the other hand, sub-merchants don’t have to go through the process of registering their unique MIDs. Instead, these transactions will be aggregated. This will occur under the master MID of the PayFac.
The idea behind this is that it lessens the complexity the sub-merchants would otherwise have to face if they were setting their online payments up on their own.
This solution eliminates sub-merchants having to establish relationships with a payment gateway, an acquiring bank, and additional service providers. It also means they won’t have to maintain these relationships.
With a traditional PayFac solution, the platform will be responsible for several things. These include controlling who’s on the platform, as well as meeting OFAC, AML, and KYC compliance requirements.
They’re also responsible for auditing the account activity that occurs on the platform and maintaining PCI compliance.
If you’ve decided that you want to use a traditional PayFac for the facilitation of payments, there’s a lot you have to do. You’ll be required to build and invest in a variety of systems for payouts, risk management, sub-merchant onboarding, payment processing, and more.
Also, platforms have some responsibilities when they use a traditional PayFac. They have to maintain their credit requirements and good standing with card networks and acquiring banks.
For this reason, the ETA, or Electronic Transactions Association, strongly recommends that people who are thinking of using a traditional PayFac engage with legal counsel and industry experts before getting started.
Setting up Payments Systems
To complete the first step of setting up payments systems, you have to first identify an acquiring bank. Once you’ve done this, you’ll integrate payment gateways. Then, you’ll have to obtain the Level 1 Payment Card Industry Data Security Standard certification.
Finally, you’ll build merchant management. This includes dispute management systems (for handling chargebacks), payout systems, and merchant dashboards.
Setting up Merchant Onboarding (And Compliance Systems)
In this step, you’ll create underwriting systems and policies. This is to ensure that only lawful businesses (that comply with acquirer and card network rules) are onboarded. This requires a variety of steps, which include but are not limited to identifying suspicious activities and checking MATCH and OFAC lists.
Managing Ongoing Systems and Processes
You’ll also have to manage ongoing systems and processes. This includes things such as underwriting and onboarding each merchant, monitoring risk and updating risk systems, preventing and blocking fraud, paying out funds to your sub-merchants, and reporting and reconciliation.
It also includes maintaining PCI DSS compliance and renewing PayFac licenses and registration.
Are you planning on having your platform operate internationally? Do you hope to support sub-merchants who are in other regions? In this case, you’ll have to think about what’s required for global expansion and build a system (from scratch) that supports your global expansion needs.
Additionally, be aware of the requirements regulators and governments impose. These can vary depending on geography.
Adapting to Changing Landscapes
The PayFac facilitator definition is still evolving, as is its role. There are regulations and requirements which have been set out in the ETA’s September 2018 report. According to it, you’ll have to do updates over time for any investments made.
Need More Information?
Now that you’ve learned about what a PayFac is, you might want more information. Maybe you want to learn about PayFac vs. ISO, so you can choose one of the two, or you’re looking for a PayFac solution for your business.
Whatever information you need, we can help. At Payline, we’re experts when it comes to payment processing solutions.
We also offer a variety of solutions, including shopping cart integrations, point of sale, countertop terminals, and more. To use our services, sign up today.