PayFacs - payment facilitators

Businesses of all sizes across the globe are shifting online, which also means that payment facilitators (PayFacs) are becoming increasingly critical in the economy. A Payfac is a third-party merchant service provider that sets up electronic payment and processing services for business owners, so they can accept payments online or in-person.

By using sub-accounts of the PayFac merchant account, businesses don’t need to go through rigorous onboarding and operational processes. The PayFac handles complexities such as:

  • Getting a merchant account
  • Setting up a payment gateway
  • Providing credit and debit card acceptance
  • Handling security requirements such as Payment Card Industry compliance, tokenization and fraud prevention
  • Dealing with payment routing, declines, chargebacks, subscriptions and transfers

As most businesses have little to no experience or expertise in any of these topics, PayFacs enable them to sell online easily and successfully. For this reason, PayFacs are well-positioned for substantial growth with the significant trend toward digital channels. Payment volumes are projected to increase over 100% globally from 2022 to 2025 to over $4 trillion.

While the payment landscape has numerous players and interrelationships that developed over time, the history of the PayFac model is often described as having started in 2009 when both Stripe and Square (now Block), some of the most prominent players in the sector, formed. The next generation of capabilities to simplify, add value and integrate payments even further is starting to emerge, and these will drive further growth and capabilities for PayFacs.

Generating more transactions

Every payment represents a new product or service sold, so maximizing the number of transactions means more sales and profit for PayFacs and the businesses they serve. PayFacs that continually improve optimization of every step in the process and create faster and more seamless experiences will win market share.

Quicker business onboarding

The quicker a business can start transacting on a PayFac, the quicker online revenue starts flowing. While getting a full merchant account can take months, the better PayFacs can often get an account going in minutes.

While the business applying for a new payment account might only need to complete an online form, there are numerous checks the PayFac needs to run. A business verification check provides registration information about the business and starts the due diligence process for compliance purposes. Is the business legitimate? And what risks are posed by doing business with them?

The ability to quickly gather business data, such as operating details and ownership information, helps a PayFac make quick and informed decisions.

Increasing transaction speed

According to a 2021 Baymard Institute report on reasons for abandonments during cart and checkout, 18% of people mention a checkout process that is too long or complicated. Customers don’t want a slow and cumbersome ordering process, and PayFacs that provide speed and security will deliver happier customer outcomes. For businesses scaling up, the difference in transaction rates is a differentiator for choosing a PayFac, so close attention to real-world results is critical.

Ramping up global business

The ability to sell globally is perhaps the most significant advantage of online channels. But, accepting transactions across borders in multiple markets is complicated and takes local expertise. There are jurisdictional compliance requirements, existing payment infrastructure and standards and social customs and conventions around money to consider.

PayFacs that want to scale should have a robust plan to enable and optimize global payments.

Decreasing fraud

It’s not simply a matter of speeding up good transactions. The risk of fraud and how to manage it is a crucial consideration. Whether it’s chargebacks, payment fraud or missed revenue opportunities from overstrict rejections, miscalculating the risks and potential costs of fraud is a significant peril for PayFacs.

Balancing and adapting risk tolerances on a country, industry, payment type, account and transactional level helps deliver the right degree of friction for the scenario.

Payment analytics and intelligence

The opportunities for PayFacs are enormous. As the flow of payment data increases, AI and other big data tools improve the ability to analyze and interpret information. The results are more efficient payment channels and lower costs, delivering more added-value services to increase profitability and providing more usefulness for PayFacs customers.

To better understand where the PayFacs industry is going, consider the ISO 20022 standard, which offers greater ease and better availability of data to facilitate financial transactions; the key point is payments are simply a type of data transmission. PayFacs that can best gain insights from these data streams are more able to determine and provide compelling services and optimize performance.

One example is embedded finance, which empowers non-financial organizations to quickly and seamlessly integrate financial service features into their products and services, has a total addressable market estimated at over $7 trillion in this decade. PayFacs can use the model to deploy their services to a whole new range of business and payment situations never possible before.

Other examples include:

  • Innovations in real-time payments (RTP) promise instant settlement and built-in end-to-end channels to improve clarity and transparency for payment communications.
  • New denominations of value, including cryptocurrency and reward points, might take off as payment methods, and ways to manage and safeguard all the different transactions are necessary.

PayFacs that effectively gather, analyze and interpret data have the tools to improve their operations and profitability. From better understanding risk to better understanding behavior, PayFacs that excel at analytics will be well positioned to detect fraud patterns, see new opportunities and add value for all their business partners.