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A payment facilitator enables businesses to accept debit and credit card payments without needing their own merchant account to hold money received from transactions.
They offer plenty of benefits but they aren’t the best choice for for most UK small businesses.
The Payment Systems Regulator (PSR) found that 25% of the smallest merchants with annual turnover of up to £380,000 use a payment facilitator as their main provider of card-acquiring services, but just 2% of merchants with turnover above £380,000 use them.
What are payment facilitators and the pros and cons of taking this option?
When it comes to setting up an account to take card payments from your customers, you have two options:
Payment facilitators aggregate merchant accounts, so that businesses are onboarded as sub-merchants under their own shared master account (they won’t get their own dedicated merchant account). This reduces costs and streamlines security requirements. It also enables businesses to accept payments quickly as they don’t need to go through the usual (lengthy) application process.
There is no difference for the consumers making card payments, but businesses can benefit from simple flat-rate fees, fast account opening, and more flexible contracts.
Some of the most well-known payment facilitators include:
An account with a payment facilitator works in a similar way to an individual merchant account. The difference is in the way the account is managed.
Payment facilitators take on the responsibility of setting up and managing relationships with different acquirers and merchants. Rather than sending the funds from card transactions to a business’ merchant account, they send the money to their own merchant account, where it is aggregated with other customers’ payments for processing and then sent to the business’ bank account with processing fees deducted.
By combining the payments from all their customers into a single large merchant account, PayFacs receive discounted rates from their merchant bank for processing high volumes. This allows them to offer lower rates to customers.
Payment facilitators carry out several important tasks to enable efficient merchant onboarding and payment processing:
| || |
|Approval process||Verification process can take a few days and occasionally several weeks||Instant|
|Cancellation Fees||Lower risk of unexpected holds and account freezes with quicker resolutions.||Greater risk of accounts being put on hold and frozen funds. The resolution process may take more time and effort.|
|Fees||Various fee structures with better rates available with higher sales volume. Most businesses will be offered better rates than those offered by Payfacs.||Fees are fixed for card-presnet and card-not-present transactions. Some may offer slightly lower fees once a certain threshold of card-turnover is exceeded.|
|Card Machines & EPOS systems||Leased from 3rd party suppliers (e.g. Ingenico, PAX, verifone).||Own brand low cost card reader and countertop POS systems provided.|
|Payment Gateways||Option to integrate 3rd party payment gateway (may involve additional coding and cost) or use in-house gateway (no to mimimal work required).||Integegrated with no coding required.|
|Fund management||Dedicated individual account for each merchant.||Merchant customers (sub-merchants) share a single account. Funds from hundreds or thousands of merchants are processed, using tags to identify funds|
|Scalability||Cost-effective as business grows||More affordable than merchant accounts for micro businesses (less than £25,000 annual card turnover)|
|Processing volume||Fewer limits on transaction size and volume. Less risk of spikes in daily volume casuing issues.||Some have limits on transaction size and volume (e.g. All Square merchants have a per transaction limit of £25,000)|
|Account risks||Stable, low risk of disruptions||Higher risk of sudden account freezes, holds or termination|
Payment facilitators can offer significant advantages for your business compared with having your own merchant account:
While using a PayFac can be a convenient option, you should be aware of the downsides:
If you decide to use a payment facilitator, there are several factors you should consider to find the best fit for your business:
Your choice will depend on what you need from a payment processing provider and the service that offers the best combination of features to meet those needs.
PayFacs offer useful advantages, particularly for new businesses starting out or those with low turnover. PayFac accounts are simple, fast and cheap to set up, and offer more flexibility than direct merchant accounts.
But PayFac accounts tend not to scale well as a business’ transaction volume grows, as they typically charge higher transaction fees than merchant accounts. They also limit a merchant’s control over its security, compliance and branding.
In general, we usually only recommend PayFacs to small businesses that don’t expect to have card turnover in excess of £25,000 per year. Larger businesses with higher turnover are likely to secure lower transaction fees from a traditional merchant acquirer.
Small businesses or those with small online transaction volumes may find that setting up a merchant account is more expensive than using a PayFac and the underwriting process could prove prohibitive.
But PayFacs are less suitable for businesses with high payment card turnover as their higher transaction fees quickly add up.
If your business takes in more than £25,000 per year from card payments, Merchant Savvy can help you to secure much cheaper rates. Fill in our short form to find out how much money your business can save.
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