Put simply, a payment facilitator is a third-party business that helps sellers process incoming electronic payments from buyers more easily.
For these transactions, multiple parties — including merchants, their banks, customers, customers’ banks, and sometimes payment processors — all need to establish clear lines of communication and trusted relationships to coordinate the secure transfer of funds. And a PayFac makes it easier and less time-consuming for individual sellers to navigate these relationships by serving as an intermediary.
In this article, we’ll examine the role that PayFacs can play in electronic transactions in more detail, particularly highlighting the benefits they can deliver to merchants.
What is a PayFac model?
Traditionally, your business would need to set up its merchant account and acquire an individual merchant identification (MID) number from your bank or a payment processor before you could begin receiving non-cash payments (e.g., credit card transactions, real-time bank transfers) from your customers. And depending on the institutions involved, these efforts could take days or even weeks to complete, as they typically require extensive paperwork and exhaustive credit checks.
Larger organizations typically have the capital, credit ratings, and resources to navigate these complex processes and establish their merchant accounts relatively quickly. Smaller and mid-sized businesses do not.
Under a PayFac model, however, sellers — regardless of size — don’t have to go through these headaches. Instead, only the payment facilitator needs to obtain the requisite accounts and IDs; then, other organizations, referred to as sub-merchants, can coordinate with the payment facilitator to leverage these established accounts for their own sales and transactions.
Furthermore, with PayFac assuming the underwriting risk and other liabilities, it can begin to facilitate transactions for sub-merchant accounts in hours rather than weeks.
Why payment facilitation matters
Many banks and payment providers do not work directly with small to medium-sized merchants, given their limited transaction volumes. But by coordinating with a PayFac, even smaller organizations can gain full access to complex payment services.
In addition, while the speed and flexibility that a PayFac model offers can benefit a broad cross-section of business types, payment facilitators are particularly useful in creating digital marketplaces and facilitating online transactions.
For example, most single proprietors or similarly-sized organizations won’t have the resources to set up their e-commerce site, let alone establish an individual merchant account with a major bank. However, by working with a PayFac — particularly one that offers an online storefront — these small organizations can begin making sales quickly and better stabilize their cash flow.
How do payment facilitators work?
Typically, PayFacs provide specialized software or an e-commerce platform that manages transaction processing on behalf of sub-merchants. Some standard solutions you may have heard of are Flywire (our parent company), Stripe, PayPal, or Square.
Of course, the specific functions covered by a facilitator will vary by offering, but they usually include:
- Underwriting: Assessing the associated financial risks tied to each potential sub-merchant before allowing them to use the platform
- Disbursement: Collecting funds and transferring them (minus relevant fees) to the appropriate seller account
- Transaction processing: Providing the underlying payment gateway, which coordinates the distribution of relevant financial data amongst stakeholders
- Compliance: Monitoring and verifying that each payment aligns with relevant regulatory and industry standards
- Security: Protecting sensitive information and funds from fraud, data breaches, and other criminal malfeasance
- Chargeback management: Routing funds back to customers in the event of a payment dispute or other complication
Benefits of using a PayFac
Ultimately, payment facilitators exist to make life easier for merchants, allowing them to offload various responsibilities, among others. This shift empowers you to operate more efficiently and focus on growth opportunities beyond simply handling transactions. And these benefits can extend across various aspects of your organization, from customer experience to financial management.
Simpler onboarding
One of the most immediate benefits of working with a PayFac is the ease and speed with which initial payment processes can be set up and running. Payment facilitators can often onboard new sub-merchants within hours, eliminating the need for extensive paperwork and lengthy approval processes. This quick turnaround gives sellers greater flexibility and control, making it easier to switch if their current provider or solution no longer meets their needs.
More payment types
As we’ve already established, building the infrastructure for non-cash transactions can be complex. And each payment method — whether it’s credit cards, automated clearing house (ACH) transfers, digital wallets, or cryptocurrencies — comes with its own set of rules, technical requirements, and legal considerations. Partnering with a PayFac enables sellers to offer a broader range of payment options to consumers, thereby expanding their potential market without the burden of managing multiple systems individually.
Streamlined compliance
Most regional governments, banks, and payment processors require various anti-fraud measures, such as Know Your Customer (KYC) systems or Anti-Money Laundering (AML) controls, to be in place before they will authorize a merchant to begin receiving payments. With a PayFac, however, the responsibility for supporting these activities and systems is shifted away from the seller, freeing up staff to focus on more strategic and profitable endeavors.
Improved budgeting
Payment facilitators operate according to a transparent and predictable fee structure, making it easier to anticipate and plan for the costs associated with processing payments. This is a distinct advantage over more traditional models, which can sometimes include complex, tiered pricing schemes and hidden surcharges.
PayFac vs. ISO: What’s the difference?
Independent sales organizations (ISOs) are often confused with payment facilitators (PayFacs), as these companies also serve as intermediaries between financial institutions and merchants. However, while a PayFac allows other businesses to utilize the merchant accounts it has already established, an ISO instead aims to facilitate the setup of merchant accounts for sellers.
In particular, ISOs coordinate with acquiring banks and payment processors, running sales and marketing campaigns to attract the interest of merchants. And once that interest is piqued, ISOs help guide these merchants through the account application process by gathering the necessary information and filling in the appropriate documents. Depending on the ISO, it may even provide preliminary underwriting support, but all account-related decisions ultimately lie in the hands of the bank or payment processor.
| PayFac | ISO |
Applications | Supports the entire application and onboarding process, commonly completed in hours | Collects the initial details for the application, which may take days or weeks to finalize |
Fees | Can typically leverage transaction volumes to negotiate lower fees | The financial institution determines the cost |
Payments | Bears responsibility for settling payments with sub-merchants, delivering cash quickly | Doesn’t interact with payments; settlement timelines are dependent on the relevant bank or payment processor |
Risk | Assumes risk for certain payment activities, such as chargebacks and fraud | Assumes no risk |
Technology | Provides an infrastructure for payment processing to sub-merchants | Relies on systems from the acquiring bank or payment processor |
Streamline payments with Invoiced and Flywire’s PayFac capabilities
Whether you’re a growing business or an established enterprise, working with a PayFac can simplify how you accept and manage payments. At Invoiced, our Accounts Receivable Automation platform is built to help you accelerate cash flow and reduce manual effort, without sacrificing control.
With features such as centralized invoicing workflows, automated payment reminders, and a self-service customer portal, we empower your team to get paid faster while enhancing the overall customer experience. Buyers can easily manage subscriptions, make payments, and update billing details — all without the need for direct staff intervention.
As part of Flywire, Invoiced customers also gain access to global payment capabilities. Flywire acts as a PayFac and merchant of record, enabling fast, secure, and cost-effective transactions in over 140 currencies worldwide — all at competitive exchange rates.
Ready to simplify your payment operations? Connect with our team to learn more or schedule a demo today.
