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What is a payment facilitator model? 

A payment facilitator (or Payfac) has created technology that enables an individual or business to trade without establishing a traditional merchant account. The technology business, partners with an acquiring bank to provide payment services to customers who use their technology platform. In this way, the technology company is acting as the “master” merchant account provider and their customers are “sub-merchants”.  

Within the Payfac model, there are three main parties involved. The acquiring bank, the Payfac payment facilitator, and the sub-merchant. The acquiring bank provides the structure for the financial transaction. The Payfac’s role is to act as the middleman between the acquiring bank and the sub-merchant. Importantly, the sub-merchant has no relationship with the acquiring bank, because they operate under the Payfac. 

The acquiring bank, however, is still responsible for ensuring that the Payfac follows their regulations and rules, in line with their operational procedures. And, because risk management is part of their job, it is the acquiring bank who is required to perform due diligence when the Payfac onboards sub-merchants. 

The two types of payment facilitator  

There are two main ways in which a Payfac can work:

1. The first is the most common and popular because it can be done quickly and easily. In this scenario, the Payfac acts as a middleman between its customer (an individual or business) and the customer’s bank. The Payfac will process payments for its customer who can access these funds from their own bank account. This is how Payfacs like Shopify or Airbnb operate. 
2. The other way that Payfacs can work is by acting as a merchant account provider. This means that the Payfac will provide its customer with a merchant account so that the customer can process payments through that merchant account. 

What are the benefits of becoming a Payfac? 

Why are there so many examples of Payfacs operating across such a wide array of industries? Well, technology has made it easier than ever for software providers to explore new opportunities and expand their offerings.  

Uber, for example, are a Payfac that describes itself as a “Tech company that connects the physical and digital worlds to help make movement happen at the tap of a button.” Interesting, isn’t it? Uber doesn’t see itself as a taxi business. No. Its vision is more ambitious. Uber is a technology company that facilitates transportation. Similar to Deliveroo, who use technology to facilitate home deliveries.  

Let’s examine the benefits of the Payfac model for software providers: 

• Own the user experience – Most Payfac solutions have made the user experience their own. They have designed it. And they can evolve it at their whim. This is a fantastic benefit, because it means that they can continue to change the user experience to fit their business model or improve the customer’s user experience.  

• Onboard sub-merchants at volume - Once they have developed the software, it is relatively easy for a Payfac to begin onboarding sub-merchants at volume. This is because a Payfac will have a partnership in place with an acquiring bank, and the freedom to accept more customers (sub-merchants) on its terms.  

• Set up sub-merchants quickly – The Payfac model means that its customers can quickly start taking payments and generating income without the hassle of forming a relationship with an acquirer themselves. This makes being a sub-merchant very appealing. It can, for example take just 3–4 days for a Shopify customer to have their own online business up and running.  

• Control the payment process – By handling payments directly within their own software, a Payfac can enjoy substantial control over the payment process. This means that a Payfac can choose when to pay out to merchants and what fees to charge them for their service.  

• Enjoy fee flexibility – Payfacs can create a pricing and payment structure that reflects the nature of their customer portfolio. Some sub-merchants will operate at a high volume and may need to be paid more frequently than those who trade less frequently. Other sub-merchants may be riskier, and Payfac can therefore choose to distribute their funds less frequently to limit their exposure to this risk. 

• Expand by exploring new revenue streams – Once a Payfac has developed its software and built up a sub-merchant customer base, it can expand its marketplace across other countries or sectors. Just look at how Uber have expanded their global reach and moved from taxing people to a transportation business that can deliver groceries and people. This flexibility can open up new revenue streams and fuel rapid expansion into new sectors and locations. 

• Avoid payment processing fees – Because the Payfacs software acts as a payment processor, there is no need for a Payfac to work with one.  

Payfac vs Marketplace  

A Payfac is similar to a marketplace. What distinguishes them is the number of businesses a customer can transact with through that platform. Payfacs connect one customer to one business. A marketplace connects one customer to many businesses. Let’s look at some examples.  

Airbnb is a Payfac rather than a marketplace because its customers can only make one accommodation booking at a time, even though Airbnb offers a large range of accommodation providers on its platform. This is true of Uber, which is a Payfac and not a marketplace, because Uber customers can only book and pay for one Uber service at a time from one supplier, who in this case is a taxi driver.   

Marketplaces connect one customer to many businesses. For example, customers of Amazon can make purchases from multiple suppliers in a single transaction because Amazon operates as a marketplace. Etsy or Not On The High Street are also examples of marketplaces. They also offer goods or services from a range of suppliers and enable the customer to purchase more than one of these goods or services from multiple suppliers at one checkout.  

The term ‘marketplace’ can be confusing because we are talking about a digital marketplace. When the supplier trades at a physical marketplace, they operate one stall within the market, so the customer makes one transaction at a time with each trader. Just remember that with Payfacs, although there are multiple traders on a single platform, it is not an online marketplace if the customer can only purchase from one trader or service provider at a time.  

From a trader’s perspective, there are distinct advantages and disadvantages to choosing a Payfac or a marketplace. For example, when using a marketplace, the customer will normally only interact with the platform (think Amazon) rather than the actual seller. If you want to build a brand, it may be advantageous to work with a Payfac like Shopify than trade via a marketplace such as Amazon, Etsy or Not On The High Street because you can build a direct relationship with your customer. 

However, marketplaces are a great opportunity for traders to test product demand or sell their products at volume. And traders can learn a lot by directly competing against other traders in that marketplace, because the marketplace is able to give a wide variety of metrics to help them understand their competitive position.