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Payment facilitators (Payfacs): What are they are should you use one?

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?

What is a payment facilitator (Payfac)?

When it comes to setting up an account to take card payments from your customers, you have two options:

Sign up with a card acquirer or an Independent Sales Organisation (ISO) for your own dedicated merchant account with a unique Merchant Identification Number.
Use a payment facilitator, also referred to as a PayFac, Payment Service Provider (PSP) or third-party payment processor to handle payments on your behalf.

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:

Square
SumUp
Zettle (now owned by Paypal)
PayPal
Stripe Payments

How do payment facilitators work?

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:

Underwriting. As all their customers become sub-merchants under their merchant account, it is crucial that they are legitimate businesses. PayFacs follow Know Your Customer (KYC) identification and verification guidelines to ensure that customers are what they claim and are not involved in crime or terrorism. Payment facilitators automate these checks so that they can flag suspicious activity while reducing the time it takes to complete the underwriting process.
Distributing payments. As they pay out the money their sub-merchants receive, PayFacs need to follow legal and fraud protection guidelines. And as they have control over the funds, they can ensure merchants receive a good customer experience.
Monitoring.Payment facilitators are responsible for monitoring all transactions and flagging suspicious payments. They need to ensure that all payments passing through their merchant account meet card schemes’ guidelines and government regulations.
Chargeback management. PayFacs handle consumer chargebacks of card payments along with acquiring banks. They are responsible for providing legal documents for investigations to ensure that chargebacks are valid.

The differences between merchant account providers and Payfacs

	Merchant Account Providers	PayFacs
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

Advantages of PayFacs

Payment facilitators can offer significant advantages for your business compared with having your own merchant account:

Quick & easy set up. You can apply for an account online, and will typically receive much faster approval from a PayFac than going through underwriting process with a merchant acquirer or ISO.
No monthly contract. PayFac accounts require less commitment than a merchant account contract.
Predictable flat-rate pricing. PayFacs publish their fee structures online. They are typically split out by card-present and cardholder-not-present (CNP) transactions. With CNP / online transactions EA and UK card transactions will be cheaper thsan non non-EEA/non-UK card transactions.
Flexibility. PayFacs tend to offer simple, flexible contract terms such as early account termination.
Centralised service. You can use a single solution to meet all your payment processing and transaction monitoring needs.
Technology-driven. PayFacs tend to focus on using advanced technological solutions to automate and enhance services more than traditional merchant account providers.

Disadvantages of PayFacs

While using a PayFac can be a convenient option, you should be aware of the downsides:

Fees. Payment facilitators often have much higher transaction fees than those offered by merchant acquirers or ISOs.
Customer Bias. PayFacs tend to settle on the customer’s side in chargebacks and other disputes.
Transaction processing time. There is a longer waiting period for merchants to receive funds through PayFacs than merchant accounts.
Lack of customer support. Service beyond the basics can be lacking, depending on the provider.
Account stability issues. PayFac accounts can have a higher risk of sudden account holds, freezes, or termination than merchant accounts.
Lack of specified limits. Merchant acquirers are transparent with any limits on transaction sizes and monthly processing volumes with their contracts, while some PayFacs don’t specify these limits in advance.
Lack of hardware and software options. Merchants can be limited to using the payment terminals, card readers and payment gateways the PayFac offers and have less integration flexibility.
Limited security flexibility. Using a third-party system limits merchants’ ability to control their cybersecurity and PCI compliance.
Lack of branding control. A lack of white labelling can mean a merchant’s branding is not consistent throughout the transaction process.

What to look for in a PayFac

If you decide to use a payment facilitator, there are several factors you should consider to find the best fit for your business:

Brand recognition
Integrations
Costs and fees
Customer support
Accepted payments
International support and currency conversion

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.

Should I use a PayFac?

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.

Merchant Savvy can help reduce your payment processing fees

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.