The Pros and Cons of Becoming a PayFac

Easy merchant onboarding is a plus, but PayFac requirements and responsibility may be more than you’re willing to take on as an ISV.


As a software provider, you’ve steadily created a great reputation that makes businesses search out your software solution. You’ve partnered with a payments provider to offer clients the ability to process transactions and have drastically grown your payments program — Are you ready to take the leap to becoming a PayFac (payment facilitator)?

The PayFac model, also known as merchant aggregator model, has increased popularity in recent years with the advent of marketplaces such as Uber and VRBO. Some large merchant processors have tried to expand the model beyond marketplaces to, among others, ISVs. Does this model fit in other environments?

What Is a PayFac

Payment facilitators (PayFac) have emerged as a byproduct of market evolution, technological advancements and innovative business models. A good way to make sense of the Payfac model is to look at its two main parts—boarding of merchant accounts and settlement of funds.

The PayFac model allows a single entity to become the “merchant of record” and board sub-merchants with fewer data requirements and scrutiny. Take Uber as an example. Uber corporate is the merchant of record. The business has gone through the traditional setup of a merchant account in its name and is registered as a Merchant Aggregator. Uber drivers are sub-merchants under Uber, boarded with just a few data elements (typically less than five) that are referred to as soft descriptors by the card companies. All sales (rides) are processed through the Uber merchant account with all merchant settlement funds going to Uber, which in turn is responsible for settling with (paying) the drivers.

It is clear to see that this model fits this business structure perfectly. It would have been very difficult and time consuming for thousands of drivers to apply for and obtain a traditional merchant account. However, does this model fit most traditional merchant businesses? The answer, in our opinion, is it does NOT in the true sense of the model.

The notion of quick (even in some cases instant) and frictionless boarding of merchant accounts is a benefit to all merchants. As such, this part of the PayFac model, is and should be, attractive to ISVs. The burden of receiving a single settlement amount and being responsible for accurate and timely distribution of funds to multiple merchants is not.

In addition, there are other several other obstacles and considerations that software providers should know before committing to the PayFac path.

  • Capitol and Cash Reserves: PayFacs need to staff full-time employees to manage ongoing payment infrastructure support. This is because PayFacs take on responsibilities traditionally handled by payment processors including contracts, reporting and customer service for sub merchants as well as risk and underwriting (as well as funding as previously discussed).
  • Sponsorship and PCI Compliance: As a PayFac, software providers must obtain financial institution sponsorship and undergo a rigorous PCI audit as the business must be fully compliant.
  • Visa and MasterCard Registration: PayFacs are required to pay registration and annual renewal fees of $5,000 each to Visa and MasterCard.
  • Underwriting and Risk Management: PayFacs are 100 percent liable for their merchant portfolio. As a PayFac, the software provider will need to develop credit underwriting guidelines and set up merchant risk analysis processes and procedures.

An Alternative

As integrated payment processing has grown and evolved over the past decade, the demand from software providers to have more control over the customer experience has increased as well, creating appeal for payment facilitation and other PayFac-like programs. For ISVs that are looking for the upside of PayFac without the cons, hybrid options can meet those needs. 

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Roy Bricker

Roy Bricker is CEO of Paragon Payment Solutions. Contact Paragon Payment Solutions for more information on its Hybrid PayFac program.