It’s becoming more and more common for customers to pay with card or digital wallets compared to cash. Of course, you can also consider the huge ecommerce market too, making electronic and digital payments almost the norm. However, some businesses face hurdles in setting up the infrastructure and payment processing accounts required.
There are many challenges involved in high-risk payment processing, especially for businesses with that high-risk label, yet this doesn’t have to be an insurmountable issue. To help, PayFacs have become a common solution. These are payment facilitators that allow mostly small and medium sized businesses to process payments as sub-merchants.
Of course, PayFacs are only one option; let’s dig deeper into this subject and understand how they, and PayCompass, can help you.
TL;DR
- Payment facilitation (PayFac) has evolved from a niche model to a mainstream solution, transforming how small to medium-sized businesses accept and manage payments.
- The PayFac ecosystem extends beyond processing, integrating compliance, risk management, onboarding, and value-added services into a unified experience.
- Successfully implementing a PayFac strategy requires careful planning, including technology selection, compliance readiness, and scalable infrastructure.
- PayFacs create new revenue streams by enabling platforms to monetize payments, offer financial services, and improve customer stickiness.
- Globally, PayFac innovation is driving financial inclusion, enabling faster cross-border commerce, and supporting the growth of digital economies.
- Traditional financial institutions face disruption but also partnership opportunities as PayFac models reshape the payment landscape.
- PayCompass offers high-risk merchant accounts to businesses struggling to access regular payment processing services.
The Evolution of Payment Facilitation
The first question is no doubt ‘what is a PayFac’? We’ve given you a brief rundown, but in this section, let’s talk about what this is and where it came from.
PayFacs, short for payment facilitators, use API integration to make merchant onboarding smoother and faster, offering easier transaction processing for mostly small to medium-sized businesses under one sub-merchant umbrella. Generally, PayFacs use a flat-free or percentage-based pricing model and merchants don’t have their own specific account.
Before choosing whether a PayFac is a good choice for your business, it’s important to assess all options and understand the different types of payment gateways available. At PayCompass, we have designed our merchant accounts to suit your specific type of business and challenges you face, including chargeback prevention.
From ISO to PayFac: A Paradigm Shift
Payment facilitation has come a long way from its basic roots as ISOs, or Independent Sales Organizations. These are third-party companies that banks or payment processes authorized to sell and manage company merchant accounts. To break this down further, a merchant’s account is what a business needs to accept payments via both credit and debit card.
Over time, PayFacs became the norm, making it easier and smoother for businesses, with flexible pricing and higher levels of control. While ISOs acted as sales agents for the banks, PayFacs are more customer-based and have a key role in the entire payment processing arena. So, when considering PayFac vs ISO, it’s important to understand the differences and the benefits versus challenges they may cause.
PayFac's Disruptive Potential
PayFacs quickly disrupted the norm at the time, changing the entire payment landscape by offering faster, agile, and technology-driven answers to merchant acquisition. This approach has become commonplace as businesses look toward PayFacs and other companies such as PayCompass for their high-risk merchant account needs.
One of the reasons why PayFacs quickly became a more common option is because they can onboard merchants in minutes using automated processes, including underwriting and KYC (Know Your Customer). They can easily integrate payments into other software platforms thanks to APIs, and offer more detailed data insights to merchants. For these reasons, it’s easy to understand why the PayFacs vs ISO decision tends to be more toward the PayFac side.
Regulatory Landscape and Compliance Challenges
Of course, with anything payment-related, there are many compliance issues and legal challenges. PayFacs have complex regulatory requirements, including KYC, data protection laws, and AML (anti-money laundering) regulations to deal with. Compliance is critical while ensuring efficiency.
The table below gives some insights into regulations and the PayFac vs ISO models.
Regulatory Aspect | Traditional ISO | PayFac Model |
KYC Responsibility | Acquiring Bank | PayFac |
Underwriting | Manual, Lengthy | Automated, Quick |
Liability | Limited | Increased |
Data Protection | Bank-Managed | PayFac-Managed |
Transaction Monitoring | Bank-Led | PayFac-Led |
Data Protection in a Shared Responsibility Model
One of the biggest challenges for PayFacs is ensuring data protection due to their shared responsibility model. In this case, the responsibility falls both on the payment facilitator themselves and the sub-merchants.
To overcome these issues PayFacs use end-to-end encryption for data transactions between payment processors and sub-merchants, ensuring security every step of the way. Another option is tokenization, which is often used to protect sensitive card data during a transaction itself.
The PayFac Ecosystem: Beyond Payment Processing
PayFacs go beyond basic payment processing options; they offer services that can boost revenue over time.
Source: unsplash.com
PayFacs offer a range of services that go beyond basic processing, including a range of partnerships, services, and solutions for industry-specific problems.
This is perhaps unsurprising given that research suggests there will be more than 4,200 payment facilitators globally by 2025, making it vital to understand the different payment methods that can be integrated into PayFac platforms.
Vertical-Specific PayFac Solutions
Recent PayFacs have started to adapt their services to unique challenges associated with industries. This type of specialization allows companies to overcome common hurdles and ensure they follow specific regulations.
For instance, PayFacs focused on healthcare businesses can often integrate with electronic health record systems, and educational PayFacs can handle complex fee structures.
Healthcare Payment Innovation
There are many payment processing challenges for healthcare businesses, including detailed billing structures and regulatory compliance. To help overcome these issues PayFacs often utilize ICD-10 code validation that helps with billing accuracy. Of course, we can’t avoid mentioning HIPAA, a regulation that is critically important in this sector. Robust data encryption and access controls are critical features here when dealing with HIPAA-compliant credit card processing.
EdTech and the PayFac Advantage
Now let’s talk about education. Again, there are payment challenges here, often related to diverse payment requirements, such as campus services and tuition fees. A PayFac can help in this regard, seamlessly integrating with student information for easy data exchange and allowing for multi-currency support.
At PayCompass, our merchant accounts offer this support, streamlining multiple currency transactions.
The Future of PayFac: Trends and Predictions
Now you know what a payment facilitator is and a little about what they do, what does the future look like? With technological advancements and constantly evolving demands in the market, there is likely to be a wave of new innovations and disruptions as time goes on.
Artificial intelligence (AI) and machine learning look set to play crucial roles in assessing risk and assisting in merchant fraud protection. Additionally, open banking initiatives may mean increasingly integrated services within PayFac platforms, while there are many questions around cryptocurrency options.
Blockchain and PayFacs
You’ve no doubt heard about blockchain technology – it’s a buzz word these days. This type of technology has huge potential in terms of boosting security and enhancing technology for PayFacs.
Smart contracts can be utilized here, automating complex payment flows and triggering escrow services. We can also talk about distributed ledger technology and how it has the power to enhance how transactions can be audited across the network. From a compliance point of view, blockchain-based identity verification can add another layer of defence to KYC processes.
Cross-Border PayFac Expansion
Many businesses operate beyond borders, and it’s becoming increasingly common in ecommerce in particular. Within this, PayFacs have had to expand and allow merchants to offer payments in DCC (Dynamic Currency Conversion), boosting the overall customer experience, even if it does increase payment processing costs a little.
PayFacs must also adhere to AML regulations, which is complicated by cross-border transactions. Finally, some are creating partnerships with local payment methods to boost their acceptance in emerging markets.
Implementing a PayFac Strategy: A Roadmap for Success
If you’re considering the PayFac route, it’s important to consider a careful implementation strategy. This means being sure of your readiness and the associated financial implications, and your ability to make strong decisions about technology implementation. Spending time on careful planning at this stage can boost the benefits and help you overcome potential risks. The table below gives some key stages within the implementation phase, along with the actions to take and overall considerations.
Implementation Phase | Key Activities | Considerations |
Assessment | Market analysis, Financial modeling | Regulatory landscape, Competition |
Planning | Technology selection, Compliance strategy | Integration complexity, Resource allocation |
Development | Platform build/integration, Testing | Scalability, Security measures |
Launch | Pilot program, Gradual rollout | User feedback, Performance monitoring |
Optimization | Analytics review, Feature enhancement | Market trends, Technological advancements |
Assessing PayFac Readiness
The first step is understanding whether your business is ready for PayFac implementation.This means assessing whether your overall approach aligns with the PayFac model, analyzing your current payment processes, and understanding the regulatory landscape. This planning stage helps you understand in detail how a PayFac may impact your business operations.
Financial Modeling for PayFac Transition
Moving to a PayFac model requires careful financial planning from the start. It’s important to look at your projected revenue streams, understand overall cost structures, and estimate how much you will need to pay for technology and compliance. Accurate numbers will help you make strong decisions about implementing a PayFac.
Building vs. Buying PayFac Technology
The next decision is whether you should develop your own proprietary technology or forge a partnership with an estimated provider. There are pros and cons to each option, so be sure to spend time exploring them in alignment with your business.
For instance, building your own in-house technology requires significant technological expertise and a deep understanding of payment processing and overall security. However, if you partner with an established provider, you will usually access faster speeds and built-in compliance features. In general, a custom-built solution gives you more flexibility but will require more updates and maintenance, which is a large investment.
Risk Management Strategies for PayFacs
PayFacs have a diverse range of sub-merchants, so robust risk management is vital.
Source: pexels.com
PayFacs operate within an increased liability picture due to the diverse makeup of their sub-merchant portfolio. Due to this, robust risk management strategies are vital to help detect potential fraud and protect customers. Machine learning algorithms are often used to track real-time risks, while multi-layered fraud detection systems are commonplace, which combine both AI and rule-based approaches.
Sub-merchant Monitoring and Fraud Detection
It’s critical for a PayFac to be extremely vigilant over what their sub-merchant network does to help prevent any potentially fraudulent activities. This includes having a sophisticated and highly robust monitoring system, along with protocols for fast action whenever any suspicious activity is flagged.
Real-time transaction monitoring systems are key here, helping to spot any anomalies through behavioral analytics. Additionally, device fingerprinting may also be used to enhance fraud detection, while automated alerts and reporting systems are key when spotting different types of credit card fraud.
Chargeback Management in a PayFac Environment
Chargebacks are a huge problem for high-risk merchants and this is something we’re extremely aware of at PayCompass. Earlier, we mentioned how all of our merchant accounts have chargeback protection, helping to reduce costly issues and assisting with dispute management.
However, it’s vital for all PayFacs to have chargeback notification systems in place to speed up the resolution process. Many use advanced analytics to help spot patterns and flag any potential chargebacks before they happen.
The PayFac Advantage: Unlocking New Revenue Streams
Choosing a payment facilitator has many advantages beyond streamlining payment processes, including monetization opportunities. Let’s explore how.
Value-Added Services for Sub-merchants
To help them stand out from the crowd, many PayFacs are starting to offer different services to their sub-merchants. The aim is to create a stronger working relationship with sub-merchants but also creates additional revenue streams.
Some PayFacs allow integration with accounting software, while others have loyalty programs for high-value sub-merchants. Premium services by some PayFacs include advanced reporting and analytical tools, allowing sub-merchants to unlock vital information to help inform their growth strategy over time.
Working Capital Solutions
Some PayFac businesses offer tailored financing options, including working capital solutions. This helps businesses to grow over time, accident funds and boosting liquidity. In this case, AI-driven credit scoring models can be used to assess whether a sub-merchant is eligible for financing, while other PayFacs also use revenue-based financing. This means that repayments are tied to the sub-merchant’s future transaction volumes.
Analytics and Business Intelligence Offerings
We mentioned analytics, and another service offered by many PayFacs includes advanced analytics and business intelligence. This information is valuable as it provides key insights that can be used to open up new revenue streams and make better business decisions.
Many PayFacs use big data technology to assist in processing and analyzing huge amounts of transaction data extremely quickly. Within this, predictive analytics models can help customers forecast their sales and therefore optimize their inventory accordingly. Some PayFacs also offer benchmarking tools, which enable their customers to look at their performance and compare it against their competitors.
The Global Impact of PayFac Innovation
PayFacs offer services to businesses globally, creating challenges and opportunities.
Source: pexels.com
The rise of PayFac businesses has affected payment systems worldwide, driving financial inclusion in new markets and changing the face of the gig economy. Let’s delve into this fascinating subject.
Emerging Markets and PayFac Adoption
Emerging markets can gain great benefit from PayFacs, which have a clear role in boosting financial inclusion and helping to process digital payments. In most cases, PayFacs provide payment solutions in markets that are currently underserved, creating a bridge between modern and traditional financial services.
Within emerging markets, PayFacs can integrate with local payment methods, alongside mobile money systems. The other benefit is simplified KYC processes in many emerging markets which can help boost inclusion. Some PayFacs also offer offline payment capabilities, which are ideal for areas where connectivity may be limited or lacking entirely.
Mobile-First PayFac Solutions
Mobile devices are often the only way of accessing financial services in many emerging markets. To tap into that, many PayFacs are developing mobile-first options that can help in these situations, allowing micro-transactions and offering services to businesses without a bank.
In these cases, USSD technology is used to help with phone capability, while QR code payments are widely used. Additionally, some platforms use biometric authentication to ensure the strongest level of security possible in these situations.
Regulatory Arbitrage in Cross-Border PayFac Operations
There are often highly complex and even contradictory regulatory pictures across countries. As more businesses trade across borders, the question of how to handle this emerges. Many PayFacs use geofencing to ensure regulatory compliance related to specific localities. Multi-jurisdictional licensing and regulations are also common features for many PayFac businesses.
PayFacs and the Gig Economy
As the gig economy has become more popular, new challenges have emerged in terms of flexible instant payment solutions. PayFacs have created ways to enable fast payouts within a range of options, ideal for independent contractors and freelancers.
Multi-currency wallets are utilized quite commonly here, offering support to international freelancers, while some PayFac businesses help with tax reporting and generation of invoices.
The PayFac Effect on Traditional Financial Institutions
By this point, it’s probably quite unsurprising that PayFacs have caused disruption in the traditional banking picture, and in the payment processing arena. The main effect is reviewing strategies and the potential for new collaborative routes. For instance, many banks are developing APIs to help integrate with PayFac platforms. Some are also creating separate digital options that can compete with high-profile PayFacs.
Bank-PayFac Partnerships: A New Paradigm
New relationships between PayFacs and banks are starting to take shape, creating a sophisticated payment ecosystem. This type of collaboration allows banks to use PayFac technology. On the other hand, PayFacs can also access established financial infrastructure.
In these situations, partnerships utilize shared risk management frameworks, while some have co-branded payment solutions. However, data sharing agreements are key within the collaborations, along with robust protocols for exchanging information.
The Role of Open Banking in PayFac Evolution
Open banking initiatives are also affecting the collaboration and relationships between traditional banks and PayFac businesses. These are regulatory changes that help to foster greater innovation and allow for seamless integration of services.
In fact, many PayFacs have standardized APIs that easily follow open banking regulations. Account aggregation services are also common, while advanced authentication protocols are often used in open-banking systems.
Learning Recap
PayFacs, or payment facilitators have certainly transformed the payment processing world, offering an easier onboarding process and new solutions that can help with a range of problems. Offering merchant services to businesses without needing to have their own account, PayFacs have sub-merchants, which creates both opportunities and challenges on both sides. However, it’s a popular and useful model in industries such as education and healthcare in particular.
As PayFac businesses have become more popular, they’ve started to form partnerships with traditional banks, creating new outlooks and a larger range of financial services. However, there are downsides too, with robust regulatory challenges, particularly around data protection, fraud prevention, and KYC processes.
When choosing your payment processing route, it’s vital to look at all options; after all, there is no ‘one size fits all’ answer here.
At PayCompass, we’ve designed our merchant accounts to deal with the common challenges that high-risk businesses face. Whether you’re looking for a new POS system or you’re keen to learn more about merchant account limits and how to overcome them, we’ve got you covered.
To take the first step toward a smoother and more streamlined payment processing journey, simply reach out to us today. One of our experts will be in touch to show you exactly what we can do for you.
