Understanding different payment aggregators
Payment aggregators provide businesses with the ability to accept payments without requiring each merchant to establish a direct relationship with an acquiring bank. These models are widely used in e-commerce, software services, and digital marketplaces, making transactions smoother for both businesses and consumers alike. Each model has its own structure, risk profile, and use cases, and is leveraged by different types of companies. The four primary payment aggregator models are:
- Merchant of Record (MoR) – The aggregator itself is the official seller, assuming liability for transactions and managing disputes directly. It purchases products/services from third parties before reselling them to customers.
- Payment Facilitator (PF/PayFac) – The aggregator provides a payment infrastructure for a group of sub-merchants, processing transactions through its merchant account but allowing individual businesses to operate independently.
- Marketplace (Visa rules) – A platform that connects buyers and sellers, processing payments on behalf of the sellers and distributing funds accordingly. The platform manages disputes and compliance obligations.
- Staged Digital Wallet Operator (SDWO) – A system where users fund a digital wallet via a card, and the wallet then makes payments to merchants. The original card details do not appear in the final transaction, creating additional regulatory and operational considerations.
Each model has distinct advantages and risks, particularly regarding compliance, liability, and settlement structures. Businesses choose a model based on their operational needs, risk tolerance, and regulatory requirements.
In this post, we will explore the different payment aggregator models, who they are suitable for, and why.
1. Merchant of Record (MoR)
What it is
A Merchant of Record (MoR) is an entity that acts as the official seller in a transaction. The MoR takes full responsibility for collecting payments, handling disputes, and ensuring compliance with payment regulations. This means the MoR is legally accountable for chargebacks, fraud, and tax obligations.
How it works
- Reduces complexity for businesses selling through the MoR’s platform.
- Provides customers with a unified buying experience.
- The MoR takes on full liability for disputes and chargebacks.
- The MoR purchases goods or services from vendors before reselling them to customers.
- The customer sees the MoR’s name on their bank statement, not the original seller.
- The MoR is responsible for handling refunds, chargebacks, and tax compliance, which simplifies tax and compliance issues for vendors.
2. Payment Facilitator (PF/PayFac)
What it is
A Payment Facilitator (PF), or PayFac, allows businesses to process transactions under a single master merchant account while enabling sub-merchants (individual businesses) to use the infrastructure without setting up their own accounts.
How it works
- Quick and easy onboarding for merchants.
- Reduces compliance burden for small businesses.
- Ideal for software-as-a-service (SaaS) platforms that want to integrate payments.
- The PayFac owns the primary merchant account and onboards sub-merchants under its umbrella.
- Transactions are processed through the PacFac’s account, but sub-merchants receive payouts individually.
- PayFacs perform risk assessment and fraud monitoring for sub-merchants.
- The PayFac is liable for sub-merchants’ compliance and fraud risks.
- Subject to strict regulations from Visa, Mastercard, and other payment networks.
3. Marketplace (Visa rules)
What it is
A Marketplace operates an online platform where buyers and sellers interact, and it facilitates payments between them. The platform processes payments on behalf of sellers and distributes funds accordingly.
How it works
- Customers pay the marketplace, not the individual seller.
- The marketplace holds funds and then distributes them to sellers after deducting fees.
- Resolves disputes between cardholders and retailers.
- Simplifies payment handling for sellers.
- Helps marketplaces enforce policies and provide buyer protection.
- Allows multiple sellers to operate under one system.
- Visa imposes specific rules and compliance obligations on Marketplaces.
4. Staged Digital Wallet Operator (SDWO)
What it is
A Staged Digital Wallet Operator (SDWO) is a payment system where customers load funds into a digital wallet, which they then use to make payments. The key feature of SDWOs is that the initial funding transaction is separate from the final purchase transaction, meaning the cardholder's bank does not have visibility into the merchant being paid. SDWOs operate in a two-stage model where the funding of the wallet and subsequent merchant payments are distinct.
How it works
- The user adds funds to their digital wallet using a card or bank transfer.
- The card issuer does not see the final merchant details, only that funds were added to the wallet.
- Increased security since card details are not shared with merchants.
- Allows users to manage stored funds separately from bank accounts.
- When making a purchase, the wallet provider pays the merchant directly from the stored balance.
- Useful for cross-border transactions and peer-to-peer payments.
- High regulatory scrutiny due to potential money laundering risks.
- Merchants must agree to accept payments from the wallet provider.
- Consumers may experience friction when adding funds or withdrawing money.
Choosing the right model depends on a company’s operational structure, risk tolerance, and regulatory obligations. Businesses often work with payment consultants and legal specialists to determine the most suitable approach.
For some businesses, a payment aggregator model is the best fit for their needs. However, payment service providers, such as Ecommpay, can offer a direct connection for payment processing, acting as the acquirer, gateway, and processor, as well as value-added services, including award winning risk and fraud tools, payment orchestration, and authorisation optimisation.
