What is the Payfac Model
Written by Shannon LeDuff, in Category Latest Articles
Payment processing services traditionally require businesses to create merchant accounts with an independent sales organization (ISO) that works on behalf of the bank that ultimately serves the accounts.
This can be an onerous approval process, particularly for higher risk merchants. To create a more streamlined processing option for businesses, the payment facilitator, or payfac, model has emerged. This allows software companies to provide processing services built into their products, giving an experience closer to seamless processing for companies that need to accept these payments.
The acquirer is the financial institution that provides the basic payment processing structure for businesses. In a traditional ISO model, the acquirer would sign merchant accounts directly with the businesses for which they are processing payments.
For payfacs, though, the acquirer assists with setup and monitors compliance, while shifting most of the risk for chargebacks and other problems over to the payfac itself. This allows facilitators to work more directly with the businesses in servicing their accounts.
The submerchant is the business that contracts with a payfac. A submerchant account allows these companies to work closely with the processing provider, as opposed to working with an acquirer through an ISO.
This particularly helps businesses that do not yet have a large volume of payments to process, or want a more direct relationship with the entity actually servicing the payment account.
The Payment Facilitator
The payfac itself is usually a software provider that builds payment processing into the product it provides for customers. In doing so, it adds an ongoing revenue stream for its business by generating fees for every transaction processed.
In addition, it allows the submerchant to conduct and stay in business, and allows it to do so without the ISO barrier between the it and the service provider.
On the other hand, the payfac does assume a higher risk load than an ISO would. When an ISO signs contracts, the reason the process becomes so extensive is that the acquirer carries the risk of chargebacks and default.
It thus must assess those risks for each new merchant account and monitor each merchant for compliance with various financial laws, rules, regulations, and industry standards.
Much of this onus falls on the facilitator in the payfac model. Because it is contracting directly with the submerchant, it does the legwork to assess risk and determine whether the submerchant account poses an unacceptable level of risk. If an account loses money, the cost ultimately falls on the facilitator rather than on the acquirer.
Managing Risk Under the Model
Two factors help mitigate some of the risks payfacs assume. First, they generally charge higher processing fees than does an acquirer through an ISO. For successful accounts, this creates a higher profit margin that allows them to take on more risk to their business.
And when they do have chargebacks on accounts, they charge higher fees on this to further balance the risk and revenue.
Second, payfacs benefit from the streamlined processing that their software provides. These instantaneous payments allow them to process more transactions per day with busy submerchant accounts, thus building in volume to hedge against the risks those accounts bring.
A payfac provides convenient, streamlined payment processing services to submerchants that either have difficulty signing up for processing through an ISO or prefer the more direct relationship with the party servicing their accounts.
While they assume more risk than an ISO does, the payfac model provides levels of service and convenience that should only continue to drive it toward future growth.