In the fast-evolving payments industry, Payment Facilitation has become an essential model. Payfac is a delicate mix of risk management and technology.
Acquirers are constrained by the ever-changing compliance rules from Networks and pressurised by Investors to cut costs on compliance which represents the biggest chunk for a business.
However, Payment facilitators are not mini-acquirers. Even if their roles overlap, Payment Facilitators are here for 3 main missions :
- Accelerate the Onboarding of smaller merchants. The due diligence process of big acquirers is complex and usually not adapted to smaller structures.
- Manage all the Commercial relationships with them. Acquirers reduce salesforce to follow the biggest accounts that brings most of the revenue
- Facilitate the Settlement services between acquirers and the onboarded merchants. Acquirers can have difficulties in managing Settlement movement, and disburse a certain quantity of small amounts.
Consequently, this model is getting traction in the industry. As of today, Visa registered 1712 Payment facilitators worldwide; this number is in constant evolution.
Mastercard and Visa push the bigger Acquirers to onboard Payment Facilitators.
But being Payfac is not just “getting the money, and we are good to go”. PayFacs is Risk Management and Technology. Incumbents must understand both aspects to keep a delicate balance and ensure their success.
The Three Pillars of the PayFac Model
A PayFac operates on three fundamental pillars:
- Risk Management
- Tech Processing
- Hybrid Functions
Each plays a crucial role in maintaining compliance, preventing fraud, ensuring transaction efficiency, and ultimately supporting merchant growth.
1. Risk Management: Keeping Compliance and Fraud in Check
Managing risk is one of the most challenging aspects of payments. PayFacs must ensure that only legitimate and compliant merchants gain access to payment services. Their risk management responsibilities typically include:
- Local License / Scheme Declaration: Navigating regulations and card scheme requirements is a must. PayFacs need the right licenses and must operate within legal frameworks. This framework varies region by region.
- KYC (Know Your Customer) / Onboarding Procedure: A solid onboarding process verifies merchants’ identity, assesses their legitimacy, and mitigates potential risks. Those procedure must comply with local regulations on Anti Money Laundering and Counter-Terrorism Financing (AML-CTF)
- Scheme Monitoring: Ongoing oversight ensures that merchants comply with scheme rules and don’t engage in restricted activities. Therefore, two regulating bodies – most of the time- monitor PayFacs: local regulators and schemes. Both have different sets of rules to comply with.
- Underwriting: This evaluates a merchant’s business model, financial stability, and risk level before they’re allowed to process payments. Payment Facilitators bear the credit risk: if a company goes bust and generates chargebacks, PayFacs must refund all customers. The underwriting process allows Payfacs to assess the financial health of their customers.
By respecting these items, PayFacs not only protect themselves but also contribute to the stability and security of the networks that sponsored them.
2. Technology Processing: Powering Transactions Behind the Scenes
While risk management focuses on compliance and fraud prevention, PayFac’s technology stack ensures that transactions flow smoothly. Core technological components to operate a viable structure include :
- Payment Gateway: Merchants need access to a reliable gateway to accept different payment methods with ease. Gateway connects the PayFacs to a processor linked to the networks. Some PayFacs can choose not to operate gateway services in-house and delegate this to a third-party.
- Merchant Account / MID Architecture: One of the prominent features for PayFac to process a transaction is the existence of a unique merchant ID (MID). Payfacs are considered as a Master merchant for Acquirers, allowing a faster onboarding. Therefore, they need to create an efficient sub-MID architecture to aggregate sub-merchants information while ensuring they collect enough data for scheme monitoring.
- Payment Clearing Management: Ensuring that transactions are processed, settled, and cleared efficiently within the financial ecosystem. The Payfac must be sure they received all the funds beforing paying out (or settling) their sub-merchants.
- Bank Account / Pay-Out: Timely and accurate merchant payouts are crucial, and PayFacs manage this process seamlessly. Most of the time, it involves opening multiple bank accounts to receive funds and disburse them efficiently. Acquirers once they have settled the funds to a given bank account do not follow up if sub-merchants are paid.
With this robust tech foundation, PayFacs can optimize transaction handling, reduce processing delays, and improve overall merchant experience.
3. Hybrid Functions: Risk Management Meets Technology
Some PayFac functions don’t fit neatly into risk management or technology processing—they sit at the crossroads, leveraging both to maintain security and efficiency :
- Reconciliation, Ledger, and Invoicing: Keeping financial records accurate and reconciling transactions ensures transparency and smooth operations. Acquirers or Schemes don’t necessarly look at the reconciliation, but ledger must be accurate in order to prevent any credit risk from PayFac.
- Chargeback Management: Dispute resolution is a critical part of risk mitigation. Managing chargebacks effectively prevents excessive disputes that could lead to merchant account termination. Chargeback management is often overlooked by PayFacs, it is a straining process not always well automatised by Acquirers.
- Acceptance Fraud Tools: Advanced fraud detection mechanisms protect both merchants and consumers from payment fraud. It is basic in Payment. Fraud systems can intervene in different stages of a transaction’s lifecycle.
These hybrid functions strengthen PayFac’s ability to deliver both security and operational efficiency, making them indispensable to the model.
Why the PayFac Model Matters
The PayFac model transforms the payment experience for small and mid-sized merchants by eliminating traditional barriers to payment acceptance. But still, PayFac is Risk management and Technology. Incumbents must consider both aspects. It enables them to :
- Faster merchant onboarding
- Enhanced fraud prevention
- Simplified transaction workflows
- Efficient merchant payouts
As digital commerce expands, PayFacs will continue to play a pivotal role in enabling businesses to accept payments easily while maintaining compliance and mitigating risks.
More on the Payfac model ? You can go to the dedicated section of my Patreon, where I compiled all infographics I did on this topic.
