It can be confusing to a merchant just how all this accepting credit cards and payment processing works let alone understand all the terminology and where all the players involved in accepting credit cards fit into the puzzle.
It’s enough work for a merchant to undertake and understand the inner workings of each aspect of their own business, let alone have to understand how a supporting business that provides them services they need (merchant services) also works! There are many entities involved, so much different terminology in the payments industry, here and internationally, and to make matters worse people in the industry often use many of the terms interchangeably, whether they should be or not.
Most merchants are familiar with the fact that they need to open a merchant account in order to accept any of the various forms of payments, other than cash, that consumers are using today. Merchants main concern is making sure they are able to accept payments from their clients and keep the rates and fees for doing so as low as possible. But how do you know which type of provider to turn to for those services?
Today we are going to explain what a Payments Facilitator is and how the business model differs from traditional (or sometimes called old school) merchant services.
This type of platform is sort of a one size fits all option. Most PayFacs focus is on providing Software as a Service (SaaS) where they often offer their services based mostly on the software for merchants that will also come with the ability to accept and process payments built right in. As opposed to choosing a POS system and then a processor who can integrate with your POS and Gateway to give you a merchant account for accepting payments you are getting and all in one solution with processing and a gateway or software in one complete package. Every merchant who applies gets the same account with the same acquirer for the same price and uses the same software.
A Payment Facilitator (abbreviated as PayFac by the industry) is an entity that partners with and opens what is considered a Master Merchant with an acquiring bank. A merchant who holds a master account creating a payment ecosystem through which sub-merchants are able to facilitate credit and debit card transactions.
A Payment Facilitator opens a master merchant account with an acquirer and receives a Merchant ID, then they are able to sign other merchants under their MID as a sub-merchant and assigns the merchant their own MID. PayPal, Stripe and Square are all good examples of PayFacs.
Rather than waiting for the acquirer to properly underwrite and approve each merchant for a merchant account the payment facilitators are able to allow a merchant to begin processing right away, under the master account which assumes all responsibility, compliance and risk for the account.The PayFac will perform a very limited underwriting process for its sub-merchants. This can greatly simplify the process for those merchants who are not processing large volumes of transactions.
The PayFac will give their sub-merchants a flat rate for credit card processing, regardless of card type or transaction type. This type of rate structure can be ideal for small businesses (SMBs) that process low volume, but because of their higher transaction fees it can sometimes end up being far more expensive than a traditional Interchange Plus rate palan for example. This type of rate plan is also a muchless transparent rate plan because it is difficult to see exactly how much you are paying for each type of transaction.
These types of accounts often also carry processing volume constraints limiting sub-merchants to a maximum sales transaction volume per month. If a business were to need to go over this threshold, they would then be required to acquire a dedicated merchant account.
How does a PayFac differ from a payments aggregator, or an “Agg Account”?
You may think that this sounds a lot like a payments aggregator and that is because it is a lot like that. An payment aggregator is a specialized subset of payment facilitators. There is one significant difference, however. In an aggregate account a sub-merchant would not receive its own MID (merchant ID) but process under the account holders MID, while a PayFac will provide the merchant with it’s own MID.
Either way this type of merchant will effectively share their merchant account with (sometimes) millions of other businesses. Because of this they take on quite a bit of risk. PayFacs essentially take on the risks associated with processing and fraud for all of their sub-merchants as well as any financial losses that could be associated with it.
Choosing a dedicated merchant account over a payments facilitator may be the right choice for your business.
Alternatively when you use a broker to acquire your merchant account they will connect you directly with the acquirer, where you will be approved for a dedicated merchant account and be issued your own MID, or merchant account ID. Acquiring banks, however, generally do not provide any customer service directly to merchants. Your merchant service provider is there to provide you with account support and customer service. They will act as the intermediary between your business and the banks that issue your customers credit cards.
Because they often work with many processors they are able to offer merchants a wider variety of rates and rate plans. They are able to offer a merchant account with the processor that is the best fit for your business type. Also, as your business grows and processing volumes change they are often more willing to negotiate for better rates, which can’t happen under a master account as a sub-merchant.
Often times an Interchange-plus rate plan will greatly benefit a larger business processing higher transaction volumes. An Interchange-plus rate plan will bill the merchant based on the wholesale cost to run transactions (set by Visa/MasterCard) along with a flat markup. The fact that the merchant can clearly see how much he is paying the provider versus the card brand makes this the most transparent rate plan available.
Because the service provider not only deals with multiple merchant types, but also multiple different processors they are more able to find the perfect fit for a low risk merchant as well as a high risk merchant as well as offer the most competitive pricing.
When you have a dedicated merchant account transaction proceeds, your funds, are deposited directly into your business bank account unlike under a Master account where the merchant must wait for the aggregators to transfer funds from the master merchant account to each individual merchants’ bank account. It is also important to keep in mind that a PayFac can potentially withhold funds.
Merchant service providers are also more focused on providing comprehensive merchant account service and high quality customer support. Unlike a PayFac, who often just give the merchants an 800 number a quality merchant service provider whose main goal is supporting their client will often be able to provide their merchants with a dedicated account representative, as well as have U.S. based customer service available 24/7 for phone support after normal business hours.
Both of these avenues for accepting payments have their respective pros and cons. It is all about finding the right fit for your business. At Bankcard Brokers we are dedicated to our clients success by providing them access to the most technologically advanced solutions for payment processing as well as offering advanced business development services while also keeping the most transparent and competitive prices out there. At Bankcard Brokers we work for you. We know how important dependable and affordable merchant solutions are to our merchants. We strive to exceed our clients expectations and do that by making sure we are a trusted resource for the cutting edge solutions our customers are looking for. Give us a call today and see what it feels like to experience the “Bankcard Brokers Difference”.