Payments Facilitators PayFacs are one of the hottest things in payments. NMI CEO Roy Banks gives Karen Webster the inside skinny on a model that gave birth to a new way to innovate payments, at the same time how it is likely to destroy one of bastions of the merchant services business.
The survival of the fittest is a well-known concept: the strong survive and the weak disappear. In the world of payments and technology, strong is often associated with longevity given the complexities of launching and igniting new payments technologies.Become a Payment Facilitator (Payfac) in 6 Easy Steps with GlobalOnePay
Innovators using new technologies, however, have challenged that conventional wisdom — and many of the players who occupy what were once considered unassailable positions of strength in payments now find themselves fighting for their own survival.
A payment facilitator is a merchant service provider that simplifies the merchant account enrollment process. Payments Facilitators PayFacs have emerged to become one of those technology capabilities that have challenged the balance of power in the merchant services space. As the CEO of NMI, Banks has mashed up the notion of a payments gateway with the notion of merchant aggregation to create a platform that powers this whole new category of player.
RB: A payments facilitator or PayFac allows anyone who wants to offer merchant services on a sub-merchant platform. This allows merchant services to be offered in a very elegant and very efficient manner.
The PayFac does not have to underwrite all merchants upfront — they are instead, underwriting the merchants essentially as they continue to process transactions for them on an ongoing basis.
Are those more or less the poster children of PayFac? RB: Precisely. Everyone knows what Square is and they know what Stripe is. And yes, basically a PayFac wants to operate like a Square or a Stripe: a merchant aggregator processing transactions under a sub-merchant platform. What we do is we enable innovators, through technology, to become their own Square or their own Stripe — so that they have options to provide these services independent of those platforms.
Why is being a PayFac such a great business proposition then? Because there is risk, PayFacs are held to the financial losses associated with any processing risks and fraud for any of the sub-merchants they process for.
Well, the benefit — and the reason that anyone gets into the PayFac business — is that they are able to deliver a merchant services solution that is also highly integrated with some other offering — and they can do it quickly. A PayFac can remove the long, arduous underwriting process and get merchants up and running quickly — in a matter of minutes versus a few days or even weeks.
The risk is, whether they can deliver and have the infrastructure in place to manage the risk. But there are a lot of other things that go along with getting a merchant up and running — and thinking cross-border — that makes sure that the merchant and their customers have a good experience.Throughout the history of payments processing distribution was a critical part of the game. When a merchant opened up shop, how would they find a payments provider to ream them? The ISO, or independent sales organization, became the workhorse of payments distribution.
The benefits of doing so are lower upfront costs and faster speed to market. The downside is a lack of flexibility over customer experience, and depending whom you ask, a limit on the economic upside. Wholesale ISOs were more costly to stand up but they had the benefit of customizing the merchant experience and could dictate better economics from their partner-acquirer in exchange for shouldering more of the merchant risk.
Yet there were groups of people who thought the ISO model was still too limiting. Instead, the processing agreement must have the sponsoring bank on the paperwork. This slows down merchant onboarding dramatically — a traditional ISO might take days to onboard a merchant, which is particularly painful for online merchants who demand speed.
The funding goes from the acquiring bank to the merchant, not through the ISO. The downside here is that the ISO is limited in what it can do. At a high level the PayFac exists to simplify the onboarding of merchants and the movement of funds.
In the early days this was an issue as the nuance of card network rules and state finance laws made the simplicity of a PayFac quite difficult to execute in practicality. The card networks, namely Mastercard and Visa, created specific rules for PayFacs inadding a great deal of clarity to the model. As a result, they began determining that many PayFacs were money transmitters, which requires a unique license in 47 states. Acquirers like Vantiv would create bank accounts for their PayFac partners and keep the funds on their balance sheets.
This often provided PayFacs the legal coverage they needed to get around limiting regulations. The downside of this speed is the risk exposure in a breach; if a retail ISO is breached the acquirer steps in and shoulders most of the load. PayFacs and some types of wholesale ISOs, meanwhile, choose onboarding speed and flexibility, and higher processing economics.
In doing so these entities are responsible for building and supporting their own technologies. Thus any breach invites a too-bad, so-sad situation.
When do the economics for a PayFac make sense? PayFacs earn an average processing margin of basis points, excluding restaurant and retail PayFacs. Confused yet? What exactly is in the payments stack? If you just want to make money referring payments then the retail ISO model is the fastest and easiest way to get started. But ISOs without any proprietary technology eventually die as the days of integrated payments come to a close — i.
The distinction between wholesale ISO and PayFac is thusly less critical than the distinction between being a technology company and being a troglodyte. These are much harder than labeling yourself as an entrepreneur and reselling payments.
You must be logged in to post a comment. Government interference is killing a lot of jobs. We estimate that quarantines perpetuate at the federal level through June, with state and regional quarantines well into July and August, or perhaps longer. None of this ReformingRetail is continuing with a payments statement obfuscation series. We aim to publish an article in the series twice per month, but China shuttered the city of Wuhan in the Hubei province on January 23rd.Key regulations control the operation of any payment facilitator payfac.
Since e-commerce and software-as-a-service SaaS firms often contract with payfacs, it is important that they understand how these organizations are allowed to legally operate — the nuts and bolts of payment processing compliance that apply.
Consider the case of Allied Wallet. The payment facilitator and processor, along with three of its corporate officers, was charged with knowingly processing or assisting fraudulent payments for its clients.
To know that your payfac relationship is completely above-board, first know what a payment facilitator is and the issues related to money transmission. A payment facilitator is a company that offers an alternative to contracting with a traditional payment organization by assuming responsibility for the flow of funds in a buyer-seller relationship. Key similarities and differences between the operations of a payment facilitator and traditional acquirer are the following:.
One primary reason that many merchants are choosing to work with payment facilitators is that the payment facilitator possesses and manages the master account, thus assuming substantial risk. Merchants will also choose a payment facilitator due the simplicity of setting up an account, typically occurring through a short application and underwriting evaluation.
Profit that a payment facilitator is able to achieve stems from lower costs for transaction processing. The payment facilitator takes care of initial underwriting, bear risks of underwriting, and sometimes facilitate merchant funding. They also handle customer service of their submerchants. In exchange for handling these aspects of the process and for purchasing acquirer services in volume, they are able to score lower-priced transaction processing.
A number of different federal and state regulations have been applicable to electronic payment businesses and their customers since President Jimmy Carter signed the Electronic Fund Transfer Act in The type of transaction and applicable amount of risk will determine how broadly an organization is subjected to regulations. There are regulations that control the transaction with the customer, as well as ones that apply to the sending of funds to merchants.
When the goods or services that are being purchased are regulated, or when the merchants are in other nations, there are more extensive regulatory concerns.
Money transmission is when an organization that accepts funds that are denominated in currency, or currency itself, transmits the funds, currency, or their value, through an electronic funds transfer network, a financial institution, or the Federal Reserve system. A money transmitter license is required for any money transmission company by the federal government, along with 47 states and the District of Columbia. A money transmitter — whether a payment facilitator, third-party payment processor, or other organization — is a type of Money Services Business MSB under federal law.
The requirements for a state money transmitter license differ from one state to another. In fact, the exact definition of money transmission varies between different states. Minimum net worth, financial statements, and surety bonds are often needed in order for a third-party payment processor or payment facilitator to get licensed as a money transmitter.
If a money transmitter operates without a license, they may be ordered to stop operating or could incur hefty fines. Providers must figure out if they are conducting money transmission so they can potentially adjust their operations and mitigate risk. Regulatory risks can often be reduced through operational restructuring. Licensed money transmitters can be used as agents in order to access regulatory exemptions.
The nature of the transaction flow will ultimately determine what makes sense for an individual provider.
PayFac vs ISO: When Does One Make Sense over The Other?
As noted above, money transmission definitions vary state by state. However, it typically involves receiving funds so that they can be transmitted to some other individual or organization. When funds are received from or sent to any company or person within a state, a license is usually required for that state.
Typically money transmission is involved with payment facilitators because the processor or acquirer will send them funds to send on to submerchants.Many software companies are choosing to enable their merchant customers to accept payments through their platform.
Traditionally, businesses that wished to accept electronic payments from their customers were required to get their own merchant accounts with banks or payment processors that enabled access to the payments system.
These companies enable payments for companies of all sizes, so their application and onboarding processes were built for larger businesses that handled significant transaction volume.
So, for small and micromerchants, applying for merchant accounts was often very resource-intensive and time-consuming. The applications were long and many of the questions were irrelevant. It could take weeks to complete the process and begin accepting payments. They then would have to take on the expense of obtaining point-of-sale equipment or, if they were online businesses, developing technology connections to their payment providers.
Payment facilitators have emerged as a path to reach these underserved businesses and streamline the merchant onboarding process.
Understanding the PayFac (Payment Facilitators) model
Payment facilitators allow merchants to accept payments using their infrastructure. They have removed the friction in the application and onboarding process by simplifying it and tailoring it to the businesses they serve, enabling those businesses to begin accepting card payments more quickly. Underwriting and onboarding. Payment facilitators are responsible for screening submerchant applicants to avoid allowing bad actors into the system, a process known as underwriting.
Underwriting involves following Know Your Customer KYC requirements to verify that the businesses are who they say they are. Software is available to help automate database checks and flag suspicious findings for further examination by a human. This is known as frictionless underwriting.
Once their submerchants are onboarded and accepting payments, payment facilitators are then responsible for providing any needed customer service. Transaction monitoring. After a submerchant is onboarded, the payment facilitator remains responsible for making sure its payments are legitimate and adhere to card network and government rules and regulations.
So, the payment facilitator monitors the transactions that pass through its system for suspicious activity.
Similar to underwriting, payment facilitators are able to use technology to watch for anomalies and flag them for risk management personnel. Many payment facilitators take on the responsibility of funding — paying out the money their submerchants are owed.
While doing so means taking on more liability for fraud and risk mitigation, it is worth that for some, because it helps them manage the experience they are providing for their customers. Because they have more control over when the funding takes place, they may choose to provide quicker access to funds for their customers, a significant benefit particularly for smaller businesses. Chargeback management. Chargebacks occur when customers dispute charges on their accounts and receive their money back from their issuing banks.
The issuing bank will then pass the dispute through the card network to the acquiring bank, which manages the process of recovering the funds from the merchant. When a payment facilitator is involved, it manages the chargeback process along with the acquirer. Today, B2B software companies are increasingly becoming a part of the payments ecosystem.We are finding many Revenue Cycle Management RCM companies who have been given terrible information about how to collect and process patient payments from their existing credit card vendor.
PayFacs are allowed to collect payments directly from a patient and then forward those payments over to the their clients. Companies such as Square are classified as a PayFac but are required to meet very stricture rules set up by the PCI industry as well as meet money transmitters rules that are regulated by state banking commissioners.
As you will see below just to be approved to become a PayFac by a credit card processor the process is arduous and expensive. If you are an RCM company who is currently collecting payments from patients with those funds being deposited into your bank account and then forwarding these funds over to your medical groups or hospitals you are a Payment Facilitator or PayFac.
Below are the requirements to become a PayFac from one of the largest credit card processor in the country:. Business Financial Background. If audited are not available, then statements prepared in accordance with GAAP. Current Merchant Processing Statements previous 3 months. Business Operations. Document the Process, Policies, and Procedures on the following:. Payment Gateways, etc. Marketing materials, sales brochures, solicitation forms, websites URL used to solicit Sub-merchants. Registration Templates for MasterCard and Visa.
Solutions For. June 23, Below are the requirements to become a PayFac from one of the largest credit card processor in the country: Business Financial Background 1.
Two 2 years Corporate Tax Returns 6. Current Merchant Processing Statements previous 3 months Business Operations Business Continuity Plan Marketing materials, sales brochures, solicitation forms, websites URL used to solicit Sub-merchants Sample of Sub-Merchant Application Signed Contract with the PFac In other other words, are you going to stick with the traditional merchant account service provided by an independent sales organization ISO or embrace the newer, and more promising, sub-merchant account — which is also known as a payment facilitator.
A Payment Facilitator, PayFac for short, is simply a sub-merchant account for a merchant service provider in order to provide payment processing services to their own merchant clients. The PayFac does not have to underwrite all merchants upfront — they are instead, underwriting the merchants essentially as they continue to process transactions for them on an ongoing basis. In contrast to other intermediaries, such as ISOs, payment facilitators handle merchant underwriting process, relieving acquirers from the need to perform related administrative procedures.
Other PayFacs operate within a spectrum of horizontal marketplace models. PayFacs facilitate the movement of funds on behalf of their sponsored merchants. The PayFac is liable for processing the accounts of their sponsored merchants and often offer additional features like transaction processing support, new account underwriting review, transaction monitoring, merchant invoicingand other non-processing business services or solutions.
Ultimately, a PayFac simplifies the merchant account process. A merchant applies for a merchant account and enters key data points. Also, unlike an ISO, the PayFac provides the processing services, settlement of funds, and billing to the merchant. Even better? This means that the technology infrastructure required would be PCI Level 1 compliantwhich in turn means that the burden on the PayFac to handle chargebacks and fraud.
One of the key advantages of the PayFac model is that it speeds-up the onboarding process. For example, you can purchase a Square reader at your local Walgreens, have your account set-up within 30 minutes, and start accepting payments. Other advantages include a flat fee structure and the ability to earn more money from network and transactional fees, and potentially float a much larger amount of payments for a much longer time — helping the merchant with cashflow.Mastercard defines a payment facilitator as a service provider that is registered by an acquirer to facilitate transactions on behalf of submerchants.
Please see Rule 7. An acquirer must register a service provider as a payment facilitator with Mastercard. Above is a list of payment facilitators registered with Mastercard.
This list is provided as a courtesy for the convenience of any entity that may be interested in working with a payment facilitator. Skip to Content Find a payment facilitator. Appnit Technologies India www. Bill Buddy Australia www. Globe Telecom Philippines www. Gomaji Corp Ltd. Innoviti Embedded Solutions Pvt.
IP Payments Australia www. Ipay88 Philippines Inc. Taiwan www. Bhd MPY Malaysia www. Billerzone India www. Pchome Online, Inc Taiwan shopping. Phonepe India www. Quickpay Australia www. Reasoning Global eApplications Pvt. Ltd India www. Revenue Solutions Sdn. Malaysia www. Signet Pay India www. Square Japan www. Ltd Taiwan Mobile Co. Ltd Taiwan www.