Payment Facilitator (PayFac)
Summary Definition: A service provider that streamlines business transactions and payment processing between organizations, customers, and financial institutions.
What is a Payment Facilitator?
A payment facilitator (PayFac) is a service provider that streamlines how businesses and virtual marketplaces accept and manage electronic transactions. It does this by establishing itself as a master merchant through which those organizations (a.k.a. sub-merchants) process transactions with each other or customers.
This arrangement simplifies an organization's initial setup and payment processing under a shared infrastructure.
Key Takeaways
- A PayFac simplifies business transactions and payment options by creating a “master merchant account” with a financial institution and allowing businesses to establish themselves as sub-merchants under that account.
- The PayFac model offers faster startup, better control, and embedded payment capabilities, which can benefit finance and spend management teams.
- While PayFacs deliver efficiency and scalability, they can also create brand confusion on invoices and receipts, and sometimes have higher service fees.
What is the Role of a Payment Facilitator?
Typically, new businesses must first obtain a merchant ID from a financial institution, which is often a lengthy and rigorous process requiring substantial paperwork, financial investigations, history checks, etc.
If approved, the business usually needs to set up a payment gateway for online transactions or acquire point of sale equipment for in-person ones, both of which must meet security compliance standards. Separate accounting, invoicing, and reporting programs must also be established to track overall performance and financial activity.
The PayFac model alters this process by instead having a payment facilitator obtain the merchant ID and function as a “master merchant” under which it establishes client businesses as “sub-merchants."
The PayFac can then provide clients with gateway or equipment support and organize all accounting, reporting, or invoicing needs in a unified platform, thereby assuming responsibility for all security compliance standards.
What is the Difference Between a Payment Facilitator and a Payment Processor?
While both are involved in transaction processing, PayFacs and payment processors serve very different functions. A payment facilitator facilitates the business’s interaction with an acquiring bank (i.e., the bank that receives a customer’s payment) whenever a transaction occurs. A payment processor, on the other hand, routes transactions between banks and credit card networks to authorize a customer’s payment.
In other words, payment processors help move the transaction’s money to the acquiring bank, while PayFacs pass that money to the business from said bank.
What’s the Difference Between a PayFac vs. ISO?
A PayFac fully owns the merchant experience by registering as a master merchant and onboarding sub-merchants under its account. This gives the payment facilitator complete control over key functions like underwriting and onboarding new sub-merchants, allowing for a faster, more streamlined startup experience for businesses.
An independent sales organization (ISO) instead serves as a sales and referral partner for financial institutions (i.e., acquiring banks) that want to attract new merchants. ISOs, therefore, help businesses apply for a merchant ID, but the acquiring bank still handles the underwriting, approvals, and transaction processing. This means less regulatory liability for the ISO, but also less control over the enrollment experience.
| Entity Type | Description | Primary Client |
| PayFac | Establishes sub-merchants and directly manages their transactions and payments with the acquiring bank | Businesses, marketplaces, SaaS platforms |
| ISO | Refers businesses to financial institutions by reselling the institution’s services. | Financial institutions |
| Payment Processor | Moves payment data securely between banks and card networks | Financial institutions, credit card networks, payment networks |
Payment Facilitation Industries and Examples
Payment facilitators are versatile and flexible enough to function across various industries, including:
- E-commerce (Shopify)
- Retail (Square)
- Restaurant/Food Service (Toast)
- Wellness/Fitness (Mindbody)
- Education (Kajabi)
By enabling client platforms to embed payments directly into their digital environments, PayFac-as-a-service isn’t limited to one market, industry, or business type. Instead, it applies to all digital payments and transactions that the affected financial institutions or payment processors accept.
Payment Facilitator Advantages and Disadvantages
Working with PayFac companies offers the advantages of quicker startup, simplified compliance, and integrated payment solutions, which are especially valuable for SaaS platforms, marketplaces, and startups.
Businesses can scale faster, reduce the burden of regulatory requirements, and even share in payment revenues without building a full payments infrastructure.
However, these benefits come with trade-offs: PayFacs sometimes charge higher fees than an acquiring bank might, limit control over payment terms, and may freeze funds if they detect risk. Sub-merchants also face potential brand confusion on billing statements, and dependence on the PayFac platform, making it costly and complicated if the business eventually wants to switch providers.
