When you make a purchase, money leaves your bank account and lands in the seller’s — a process that seems simple on the surface. But behind the scenes, that transaction sets off a complex chain of verifications, credit checks, risk assessments, and other financial operations.
To make sure these transactions happen quickly and accurately, banks and merchants rely on intermediaries. But as the roles of these intermediaries begin to overlap — or at least seem to — it can become difficult to tell who’s responsible for what. In this article, we’ll break down two key players in the payment ecosystem: payment processors and payment facilitators (PayFacs). We’ll explore what each one does, how they differ, and how they can help support your business.
What is a payment processor?
A payment processor is a third-party business that helps facilitate digital transactions — such as those via credit cards, automated clearing house (ACH), and digital wallets — between the respective banks of merchants and customers. More precisely, they provide the underlying technology (hardware, software, networks) needed to communicate a payment request from a seller to the relevant credit card network or bank, as well as the corresponding authorizations and payment instructions from those institutions.
Some payment processors will offer supplementary services, but the core functions of these businesses cover:
- Authentication: Confirming the accuracy of credit card (or other payment type) details and that sufficient funds are available
- Disbursement: Collecting and transferring funds to the seller’s bank account
- Transaction processing: Providing a payment gateway
- Security: Protecting transactions from fraud and other criminality
For clarity, it’s important that we distinguish the nature of a payment facilitator vs a payment gateway as these terms are often confused. A payment gateway is the piece of financial technology responsible for capturing, encrypting, and transmitting the necessary financial information and related authorizations between all interested parties.
Examples of payment processors
- Apple Pay
- Chase Payment Solutions
- Flywire (our parent company)
- PayPal
- Square
- Stripe
What is a payment facilitator (PayFac)?
While a PayFac offers some of the same intermediary functions as a payment processor, they do so within a much narrower scope. To receive digital payments, your business needs access to a merchant account — a specialized bank account that serves as a temporary holding area for incoming funds before they are released to the seller’s business account.
Obtaining one of these accounts can be a complicated, time-consuming process, and you’ll typically need to establish one with each bank or payment processor you work with. By contrast, a PayFac allows you to leverage the merchant accounts that they’ve already established, while you operate as a sub-merchant within their systems. Under this model, when you submit a payment request, the PayFac routes your transactions to banks and payment processors under their own authority and relationships.
As such, coordinating with a payment facilitator can make it more convenient and timely to work with a payment processor, but it cannot replace the role of payment processors within digital transactions. These two types of organizations, however, can and do work closely with each other, with PayFacs carrying out some operations on behalf of the associated payment processor.
The specific functions fulfilled by a PayFac will vary by company, but they typically include:
- Underwriting: Assessing the financial risk of each sub-merchant
- Disbursement: Collecting and transferring funds to the seller’s bank account
- Transaction processing: Providing a payment gateway
- Compliance: Verifying that payments align with regulatory and industry standards
- Security: Protecting transactions from fraud and other criminality
- Chargeback management: Returning funds to customers due to disputes or other issues
Examples of PayFacs
- Braintree (PayPal)
- Exact Payments
- Square Payments
- Stripe
You likely noticed that some of these businesses are featured on both lists. Commonly, financial service companies will offer both service types.
PayFacs vs payment processors: 6 key differences
With such closely aligned operations, it should come as no surprise that these two types of financial intermediaries are frequently confused. But there are a number of clear distinctions that set them apart.
1. Merchant accounts
As we’ve already noted, one of the clearest differences between the two business types is whether or not you need a merchant account to work with them. To work with payment processors, you will typically need to fill out a fair amount of paperwork and go through various, rather intensive credit checks in order to confirm your financial stability. And once confirmed, you will then be able to obtain your merchant account and corresponding merchant identification (MID) number from the payment processor.
By contrast, PayFacs can routinely have you vetted and approved as a sub-merchant within a handful of hours since they bypass the need for you to have your own merchant account.
2. Cost
Unless you’re exchanging cash in person, there will likely be some manner of fees incorporated into your transaction to support the underlying infrastructure. And when working with a payment processor, you’ll likely need to cover various processing fees, interchange fees, assessment fees, and more, with the actual rates fluctuating, depending on which financial institutions and credit card networks are involved. With a PayFac, you’ll often just pay a flat, per-transaction rate, which may increase your overall costs.
3. Payment timelines
As payment processors interact directly with both the sending and receiving bank, they can typically complete payments and have the relevant funds available by the end of the business day. However, PayFacs often dole out payments to their sub-merchants in weekly batches.
4. Risk
Every credit-based transaction comes with some form of risk. And while a payment processor will confirm account details and the availability of funds before proceeding with a transaction, they do so without undertaking any of that risk. Instead, the relevant merchants, banks, and card networks bear that responsibility.
Under a PayFac model, though, the payment facilitator assumes the risk for a number of activities, such as underwriting the relevant sub-merchant, protecting against fraud, and navigating chargebacks.
5. Compliance
Given that both organization types interact with credit card transactions, they are each expected to comply with the Payment Card Industry Data Security Standard (PCI DSS). However, beyond this industry standard, PayFacs also needs to meet various governmental regulations tied to payment processing and anti-fraud measures, such as know your customer (KYC) systems and anti-money laundering (AML) controls. Payment processors bear no such legal responsibility.
6. Funding flow
When working with a payment processor, the relevant funds of a transaction move directly between the bank accounts of the buyer and seller without any intermediaries. Conversely, with a PayFac, the transferred funds will be staged in the merchant account of the payment facilitator, meaning that the PayFac will temporarily retain control over the money. This control is critical, as it allows the facilitator to withhold funds, delay settlements, or offset risks (e.g., chargebacks, fraud) as needed.
PayFac | A merchant services company that facilitates electronic payments by bypassing the need for a merchant to have their own merchant account with the relevant banks or payment processors |
Payment gateway | A piece of technology that oversees the capture, encryption, and transmission of financial data in a transaction |
Payment processor | A payment processor serves as a digital middleman, transferring funds between the banks of the buyer and seller in a given transaction |
Which one is right for your business?
It depends on what you’re looking for to simplify the handling of electronic payments. If you want a straightforward, no-frills solution, work with a payment processor. These intermediaries are also helpful if you deal with high transaction volumes or want to keep your per-transaction costs as low as possible. Furthermore, payment processors provide users with more individualized control over payment flows, enabling your business to establish customized pricing, risk thresholds, and other payment terms.
On the other hand, if you are a newly-founded company that wants to start making sales immediately and don’t have time to wait for a merchant account — or if you’re struggling to obtain a merchant account on your own — you should reach out to a PayFac.
Payment facilitators are also incredibly helpful if you’re a small business that lacks the surplus resources to dedicate to adequate risk management or compliance efforts. And PayFacs routinely offer centralized customer service if an issue arises, while users of a payment processor may have to interact with different parties depending on whether the problem is originating from the gateway, processor, or acquiring bank.
| Payment processor | PayFac |
Pros: | Keeps per-transaction costs low | Rapid setup (measured in hours) |
| Payments arrive in your account typically by end of day | Assumes risk and compliance burdens |
| Customizable payment flows | Single contact customer support |
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Cons: | Extended setup times (measured in weeks) | Typically costs more than a payment processor |
| Requires you to manage your own risk and compliance | Payments arrive in batches, usually once per week |
| Disjointed customer support | Limited customization options related to risk, pricing |
Modern payment processing, built into Invoiced
Whether you work with a payment processor, PayFac, or some other financial intermediary, our Accounts Receivable Automation platform can help you make your entire payment strategy more manageable. We offer a self-serve customer payment portal that allows buyers to manage subscriptions, submit disputes, and initiate payments — all without direct support from your staff.
At the same time, our solution empowers you to create customized payment schedules with flexible options tied to AutoPay, early payment discounts, taxes, fees, and more. Our CashMatch AI feature helps ensure that incoming capital is showing up in the correct accounts, invoices, and balances.
Even better, Flywire is the main payment provider embedded within Invoiced. Ensuring faster invoicing, payments, and automated reconciliation. Schedule a demo and see how.
