What is a Payment Facilitator (PayFac)?

A Payment Facilitator (PayFac) is an entity that submits transactions and provides acquiring services to its sub-merchants through its relationship with an acquirer, operating under a formally recognised model under card network rules; primarily those of Visa and Mastercard.

A PayFac typically:

This model allows the PayFac to onboard and manage merchants using its own Merchant ID (MID), thus streamlining access to card acceptance. The PayFac takes on liability for the sub-merchants’ transactions, which include responsibilities for underwriting, compliance, and fraud management.

Regulatory frameworks and requirements vary by region (such as licensing, reporting, and liability), which will determine how a PayFac operates.

In addition, a PayFac may sometimes be referred to as a ‘master merchant’, although this term is not officially recognised by the card schemes or regulations.

Visa defines a PayFac as a third-party agent that deposits transactions, receives settlements, or otherwise acts on behalf of a Sponsored Merchant.

Mastercard, meanwhile, sees PayFacs as service providers that acquire or submit transactions and facilitate payment to Sponsored Merchants.

It’s important to note that the operation and definition of PayFacs can differ significantly across jurisdictions.

US PayFacs are often more vertically specialised software providers , including marketplaces, booking engines, commerce platforms, and software providers. However, in Europe, PayFacs must be registered payment institutions, which limits the level of vertical specialisation compared to their US counterparts.

In the EU, the role of a PayFac is functionally similar to that in the US, facilitating merchant onboarding and payment processing, but it does not follow the US-style master-sub-merchant structure, nor is it formally recognised or defined by card networks in the same way.

Payment Facilitators are regulated under various financial regulations, depending on the jurisdiction in which they operate.

In the UK and EU, they must comply with the Payment Services Directive (PSD2), ensuring adherence to strong customer authentication (SCA) and anti-money laundering (AML) requirements. Additionally, PayFacs are subject to data protection laws such as the GDPR and must meet security standards like PCI DSS for handling payment information. PayFacs operating within Europe must be licensed as a Payment Institution (PI) or Electronic Money Institution (EMI) under the EU’s Payment Services Directive (PSD2).

EU PayFacs are required to obtain regulatory authorisation from a national financial regulator, such as the FCA in the UK or BaFin in Germany. The regulatory environment in the EU is more stringent, involving requirements such as capital adequacy, safeguarding of client funds, and compliance with EU-wide anti-money laundering (AML) and know-your-customer (KYC) standards.

In the US, PayFacs are primarily regulated by the Financial Crimes Enforcement Network (FinCEN) as Money Service Businesses (MSBs). They may need to register with FinCEN, implement anti-money laundering (AML) procedures, and comply with the Bank Secrecy Act (BSA). PayFacs are also governed by the Federal Reserve and the Consumer Financial Protection Bureau (CFPB) for payment processing.

PayFacs need to register with card schemes (like Visa and Mastercard) and adhere to the requirements of the acquirer to operate, ensuring compliance and managing risk for their sub-merchants.

They may also need to obtain licenses from additional financial authorities and comply with local rules governing payment processing.

This makes it challenging to pin down a consistent definition of a PayFac’s specific regulatory and compliance responsibilities, as each acquiring bank, card scheme, and jurisdiction imposes its own rules.

Understanding the distinctions between PayFacs, Marketplaces, and Merchants of Record (MoRs) is crucial for businesses navigating payment processing options.

Unlike a Merchant of Record (MoR), which assumes full financial liability, a PayFac facilitates transactions but leaves chargeback and tax responsibilities with the sub-merchant, meaning that sub-merchants handle chargeback disputes directly.

Marketplaces are also similar to PayFacs, but offer a wider range of services in addition to payments, while PayFacs typically specialise in payment processing alone. A marketplace facilitates transactions between multiple buyers and sellers, adhering to Visa’s marketplace rules, which include seller verification, fund flow management, and handling chargebacks and disputes directly, ensuring buyer protection and regulatory compliance.

All of these payment aggregator models offer unique advantages, and the choice depends on the specific needs and risk tolerance of the business.

It’s important not to confuse the PayFac model with the Independent Sales Organisation (ISO) model. In the ISO aggregator model, the ISO may offer a PayFac-like experience, especially in merchant onboarding and front-end services, but structurally, it still relies on the acquiring bank for merchant approval and risk management.

An ISO passes the details of merchants to acquiring banks, who then provide each with a unique merchant ID (MID). ISOs don’t hold funds or assume transactional risk; the acquirer handles compliance and settlement, leading to longer onboarding times but less operational and regulatory responsibility for the ISO.

PayFacs can serve merchants across a broad range of industries; however, many focus on specialised verticals, or work primarily with SMEs, offering them access to the tools they need to manage payments efficiently. However, without direct acquiring capabilities, there are constraints, which are determined by the risk rules and appetites of their sponsor. Additionally, larger merchants, or those that provide regulated services, may not find the PayFac model to be a good fit.

While the PayFac model can work well for businesses looking for a simplified payment solution without the need for a direct merchant account, Ecommpay acts as an acquirer, gateway, processor, and orchestrator, providing another option businesses may want to consider, rather than going down the payment aggregator route.

When working with PayFacs, acquirers must meet specific contractual requirements. These rules determine when a direct agreement with a sponsored merchant is necessary and outline exceptions based on the PF’s relationship and oversight.

An acquirer enters into an agreement with each PayFac. The PayFac, in turn, enters into a (sub) merchant agreement with each of its sponsored merchants. A direct agreement between the acquirer and the sponsored merchant may be required for larger merchants or in specific verticals, subject to the scheme rules of Visa and Mastercard.

In some cases, a direct agreement is not needed if certain conditions are met, such as a two-year relationship between the PayFac and the merchant, regular reporting by the PayFac, and ongoing oversight by the acquirer.

As a direct acquirer and principal member of Visa and Mastercard, Ecommpay provides solutions for both merchants and PayFacs.

With our global reach and advanced reporting capabilities, PayFacs partnering with Ecommpay can offer scalable, secure payment services while focusing on growing their network of sub-merchants.