Payment Facilitators (Pay Facs): What They Are and Should You Use One?

28 October 2024

Written by Libby James

Libby James is co-founder, director and an expert in all things merchant services. Libby is the go-to specialist for business with more complex requirements or businesses that are struggling to find a provider that will accept them. Libby is regularly cited in trade, national and international media.

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Your guide to understanding key differences

A payment facilitator, or Pay Fac, allows businesses to accept debit and credit card payments without needing their own dedicated merchant account to handle transaction funds. While they bring certain advantages, they’re not always the best choice for most UK small businesses.

In fact, the Payment Systems Regulator (PSR) found that about 25% of small merchants with annual turnovers up to £380,000 use a payment facilitator as their main card-acquiring provider. For businesses with turnovers above £380,000, however, this figure drops to just 2%.

What is a Payment Facilitator (Pay Fac)?

When setting up an account to accept card payments from customers, businesses have two main options:

Merchant Account – Set up through a card acquirer or Independent Sales Organisation (ISO), this provides a dedicated account and unique Merchant Identification Number for each business.
Payment Facilitator – Also known as a Pay Fac or Payment Service Provider (PSP), this option handles payments on behalf of the business, aggregating accounts and onboarding each business as a sub-merchant under a shared master account. This can streamline the setup process, making it faster and more affordable for businesses to start accepting payments without the usual lengthy application process.

A Brief History of Pay Facs

The Pay Fac model emerged in the late 1990s to support small and medium-sized businesses in accepting online payments more easily. Before then, traditional bank onboarding was complex, costly, and primarily designed for larger businesses. Payment facilitators stepped in to simplify the setup process, offering a way for smaller companies to handle payments without needing in-depth expertise in payment systems.

For customers, the payment process remains seamless, while businesses benefit from flat-rate fees, quick account activation, and flexible contract options.

Examples of Popular Payment Facilitators

Some well-known payment facilitators include:

Square
SumUp
Zettle (owned by PayPal)
Lopay
PayPal
Stripe Payments

How Do Payment Facilitators Work?

An account with a payment facilitator operates much like a traditional merchant account but with differences in how it’s managed. Payment facilitators handle relationships with card acquirers and process payments through a master merchant account, aggregating funds from all transactions before distributing them to businesses (sub-merchants) after deducting processing fees.

By pooling transactions, Pay Facs receive bulk processing discounts from their merchant banks, which allows them to pass on savings to their customers.

Main tasks of Payment Facilitators:

Underwriting: Ensuring sub-merchants are legitimate businesses, following Know Your Customer (KYC) guidelines.
Payment Distribution: Paying out funds to sub-merchants while following legal guidelines.
Monitoring: Reviewing transactions for suspicious activity, following card scheme and regulatory guidelines.
Chargeback Management: Handling disputes and chargebacks on behalf of sub-merchants, alongside acquiring banks.

Pay Facs vs. Merchant Account Providers: Key Differences

Feature	Merchant Account Providers	Pay Facs
Approval Process	Can take days or weeks	Typically instant
Fees	Vary based on sales volume, often lower for larger businesses	Flat-rate pricing, some offer lower rates at certain volumes
Fund Management	Dedicated account for each merchant	Shared master account for all sub-merchants
Account Risks	Generally stable with fewer disruptions	Higher risk of account freezes or holds
Hardware & Software	Variety of options available through third-party providers	Limited to PayFac’s own offerings

Advantages of Using a Pay Fac

Quick & Easy Setup: Pay Fac accounts can be set up online with minimal wait times.
Flexible Contracts: Generally, no long-term contracts, offering flexibility.
Transparent Pricing: Flat-rate fees that are easy to understand and compare.
Integrated Services: Many Pay Facs provide a centralised solution for payment processing, monitoring, and reporting.
Technology-Driven Solutions: Pay Facs are often on the cutting edge of payment technology, which can simplify and enhance the payment process.

Disadvantages of Using a Pay Fac

Higher Transaction Fees: Pay Facs tend to have higher fees compared to merchant accounts.
Bias in Disputes: Many Pay Facs lean toward the customer’s side in disputes or chargebacks.
Processing Delays: Funds may take longer to reach the merchant.
Limited Support: Beyond the basics, some Pay Facs lack comprehensive customer support.
Account Stability: Pay Fac accounts can face sudden holds or even terminations.
Restricted Hardware Choices: Payment terminals and software may be limited to the Pay Fac’s offerings.

When Might a Pay Fac Be Right for You?

Pay Facs can be a helpful option for new businesses or those with lower turnover, as they are quick, simple, and affordable to set up. However, they may not be as suitable for businesses with high card turnover, as Pay Fac fees tend to be higher. Additionally, they limit some control over branding, security, and compliance.

Generally, businesses with annual card turnover under £25,000 may find Pay Facs a convenient option. For larger businesses, a traditional merchant account is likely more cost-effective.

Traditional Acquiring vs. Payment Facilitation

The traditional acquiring model, suited for established businesses with a stable customer base, differs from payment facilitation in several ways. Traditional acquirers offer dedicated accounts, providing better control over transaction monitoring and brand consistency, but are often less agile and may not fit the fast-paced online economy.

Payment facilitators, by contrast, were designed with online businesses and marketplaces in mind. They allow for quick onboarding and convenient payment processing for new or smaller businesses, making them an appealing choice for those prioritising ease of use and speed over customisation and stability.

In summary, choosing between a Pay Fac and a traditional merchant account depends on your business’s needs. For new or small businesses looking to simplify payment processing, a Pay Fac may be ideal. For larger, more established businesses, a traditional account could offer better control and cost savings as your business grows.

FAQs

What is a payment facilitator (Pay Fac)?

A payment facilitator, or Pay Fac, enables businesses to accept credit and debit card payments without needing their own dedicated merchant account. Pay Facs manage the payment process on behalf of businesses, allowing quick and easy onboarding as sub-merchants under a shared master account.

How is a Pay Fac different from a traditional merchant account?

With a Pay Fac, businesses operate as sub-merchants under a master account, which is shared with other businesses. Traditional merchant accounts, by contrast, are individualised, offering each business its own account and often lower fees for high turnover. Pay Facs are generally faster to set up but may come with higher transaction fees and less account stability.

Are Pay Facs suitable for all businesses?

Pay Facs are ideal for new or smaller businesses with an annual card turnover below £25,000. However, larger businesses with higher turnovers may benefit from a traditional merchant account, as it typically offers lower fees and greater control over transaction monitoring and branding.

What are the advantages of using a Pay Fac?

Pay Facs offer several advantages, including quick setup, flexible contracts, predictable flat-rate fees, and a centralised service that handles payment processing and monitoring. They also focus on technology-driven solutions, making them a convenient choice for businesses that prioritise simplicity and ease of use.

What are the disadvantages of using a Pay Fac?

Pay Facs often come with higher transaction fees, may lean towards customers in disputes, and can sometimes delay payment processing. They also provide limited customer support and carry a higher risk of sudden account holds or freezes, which may impact business operations.

Which businesses commonly use Pay Facs?

Many small businesses, e-commerce platforms, invoicing software providers, and service-based marketplaces use Pay Facs. Pay Facs are also popular in sectors like online fundraising, booking, travel, retail marketplaces, and on-demand services (e.g., ride-sharing, food delivery).

What are the fees associated with PayF acs compared to traditional merchant accounts?

Pay Facs typically charge flat-rate fees, which can be convenient for smaller businesses but may be higher than the fees offered by merchant accounts with larger transaction volumes. Traditional merchant accounts often provide fee structures that scale with volume, making them more economical for high-turnover businesses.

How do I decide if a Pay Fac is right for my business?

Consider factors such as your business size, transaction volume, and need for flexibility versus control. A Pay Fac may be suitable if you want quick setup and simple fees. For businesses with larger transaction volumes or higher compliance needs, a traditional merchant account may be a better choice.