Payment Facilitator 101

Payment Facilitator 101
Understand what a payment facilitator means and how PayFacs work. Find out what payment facilitators do with Square today.
by Square Nov 23, 2021 — 4 min read
Payment Facilitator 101

If there is one key thing that has changed how businesses operate over any other it’s technology. From online shopping to card payments and software platforms, it has never been easier for businesses to connect with sellers. As technology continues to advance, businesses create new shopping and purchasing experiences, with new payment methods and beyond.

We are going to explore payment facilitators here, also better known as PayFac or simply PF. We will address the considerations behind using PayFac, the different types of PayFac options, and identify the best way for you to move forward in the marketplace.

What Is A Payment Facilitator

There are a wide variety of platforms available today that are designed around helping businesses accept payments. They offer online services to companies of all sizes. For these online platforms, payment functionality has become an integral part of their business. It is fast becoming an important way to differentiate their products and services from the competition.

More importantly, merchants that use those platforms do not need a direct relationship with a payment gateway or the acquiring bank. To put it simply, a PayFac is a service provider specifically for merchants.

Let’s discuss the most common marketplaces and platforms.


Square Online and Wix are all good examples of platforms that help you sell physical goods online.


A marketplace such as Tradesy, Poshmark, and Crossroads help individuals who are trying to sell to other individuals.


There is a wide range of services that fall under the on-demand umbrella. On-demand services include restaurant delivery, ride-sharing, and professional services such as TaskRabbit.


Booking platforms make appointment scheduling easy, and there are plenty to choose from whether you prefer HotelRunner, SimplyBook or MindBody.


Airbnb and Ticketmaster are perhaps the two biggest marketplaces that spring to mind when we think of travelling and ticketing. Both were created to connect people to the relevant accommodation or experience.


Square, Xero, QuickBooks, and FreshBooks are all platforms for businesses in need of client invoicing services.


Kindrid, Bloomerang, Blackbaud, and Enthuse are platforms that assist charities and nonprofits in their donation collection and fundraising.

There are constantly new platforms emerging, whether they are hybrids of existing platforms or brand new ideas like the ones offering pet rentals, pharmacy delivery, online health, or other supporting services.

All platforms are different. However, many have made payment facilitation a key part of the experience they offer customers. More and more, platforms use payment capabilities to set themselves apart from the competition.

How Do PayFacs Work?

Payment facilitation solutions grew in popularity in the 1990s. It was a means for small and medium-sized businesses to easily accept online payments. The onboarding requirements from banks historically cater to large businesses. Those larger businesses could easily manage the expensive, complex, time-consuming process. While large businesses were experts in payment facilitation, smaller enterprises were being left behind. With PayFac, emerging companies no longer need to be experts in payments to handle payments. This allows the business to focus on its core purpose.

Your PayFac of choice takes control of both setting up and managing the systems and relationships, ones a merchant would need to otherwise establish with individual parties and then maintain.

Who Is Involved In the Payment Facilitator Ecosystem?

There are several key players involved in the payment facilitation ecosystem. Each player has a unique role to play.

The Acquiring Bank

A merchant account is necessary to hold deposits, and to supply those accounts, an acquiring bank is involved. The acquiring bank also takes liability for processed transactions via its PayFac customers. This is why the acquiring bank enforces the most rigorous requirements for PayFacs to follow.

The Payment Processors

A payment processor is the function that authorises transactions and sends the signal to the correct card network. Additionally, they settle funds used in transactions. For efficiency, the payment processor and the PayFac must be integrated. If they are not, then transactions will not be properly routed.

The Sponsors

The sponsor is responsible for combining the functions of the processor and the acquirer into one holy union.

The Sub-merchants

Finally, you have your sub-merchants which are the payment facilitator’s customers. Transactions are routed via a merchant account owned by PayFac.

What Do Payment Facilitators Do?

PayFacs have a lot of activities to perform so they need to have a variety of capabilities. There are four key capabilities a PayFac must support.

Underwriting & Onboarding

Due diligence is required and the PayFac is answerable for this in terms of sub-merchants, as well as the onboarding process. The PayFac must properly follow KYC practices and correctly assess the sub-merchants as all transactions can be aggregated under a single merchant ID.

Transaction Monitoring

Once a sub-merchant has been through the onboarding process it is down to the PayFac to control payments adhering to the rules. It also must be able to track and quickly identify any suspicious activity regarding transactions. This isn’t a one-off task. It’s an ongoing aspect of payment facilitation. Moreover, there is a limit to the annual turnover sub-merchants can make. If they exceed this limit, the PayFac is required to shift to a direct merchant agreement. Thresholds vary depending on your region.

Chargeback Management

Chargeback management also falls under the purview of the PayFac. The PayFac, along with the acquiring bank, manages the chargeback management process, including document support. Additionally, PayFacs are required to put processes in place to prevent excessive chargeback ratios from causing loss.

Merchant Funding

A PayFac must be Payment Card Industry compliant, and they need to have processes in place to prevent fraud, and so on. Credit risks, money laundering, fraudulent activity should all be addressed with risk management processes.

Acquiring sponsorship can take as long as six months. It can take up to four months to negotiate and integrate payment gateways. PCI compliance can take five months and establishing a merchant management system can take a year. That’s the time it takes, that doesn’t even touch the costs.

When you factor in licensing and registration, as well as underwriting policies and compliances programs, the time and money stack up. This is why PayFacs are so important for small to medium-sized businesses. Choosing the right PayFac can help you set yourself apart and improve the customer experience.

The Bottom Line is brought to you by a global team of collaborators who believe that anyone should be able to participate and thrive in the economy.


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