How Do Payment Facilitators Work? What You Need to Know in the Age of Innovation

The payments industry is both vast and complex. When you think of search engine technology, one rises above the rest: Google. While companies like Square and Stripe have become major players among payment facilitators, the payments industry has yet to see its “Google” — one company that totally dominates the market. Today’s merchants instead use a smorgasbord of many different payment facilitators, independent sales organizations (ISOs), and other payment processors to assist in processing electronic transactions.

Those companies that are successful in the payments industry share one aspect that should be kept top-of-mind: creating an effortless and quick merchant onboarding process is vital to expediting business growth and development. No matter the end goal, these payment processors have to be accurate in assessing potential merchants for risk to avoid undertaking too many negative financial decisions. However, this is a Catch-22: the faster these companies onboard, the less thorough and accurate these risk assessments can be. 

That being said, let us explore what a payment facilitator is, what they need to prioritize when onboarding merchants, and what factors to consider when innovating their onboarding and underwriting process. 

So What is a Payment Facilitator, or a “PayFac”?

A payment facilitator, or “PayFac”, is a company that enables merchants and vendors to accept electronic payments for goods or services. Before the advent of third-party payment processing such as a PayFac, businesses had to open up their own merchant accounts with a bank to process electronic payments. This can be an arduous process for many companies without a lot of time and resources, so with this disparity between need and service came the inception of a “payment facilitator”. 

In short, PayFacs are firms that open up one big merchant account with a bank and allow approved merchants to use that one account instead of going through the strenuous process of getting approved for their own accounts.

PayFacs provide all levels of payment processing services to merchants looking to accept electronic payments, but in doing so they take on a lot of risk. The process of a payment facilitator taking on a client is called merchant onboarding. An accurate and quick merchant onboarding process is essential to the health and success of a PayFac.

Here are a few examples of a PayFac: PayPal, Square, Stripe, Uber, Lyft, Etsy, Airbnb… the list goes on. These are all businesses that have established their own ways of accepting payments through individual marketplaces to avoid opening individual seller accounts.

Payment Facilitators Take on Significant Risk During Merchant Onboarding 

As effective and helpful as PayFacs are to merchants, they do have some shortcomings. When it comes to accepting a merchant as a client, a PayFac must determine if they are too risky to take on. This risk assessment process is deemed underwriting. It involves an analysis to determine if the merchant is who they say they are (Know Your Customer (KYC) Requirements), looking into their financial history, and deciding their creditworthiness.  This is an extremely important process, as it can make the difference between yielding a profit or a loss. If a payment facilitator mistakenly takes on too many risky merchants, they’ll find themselves paying for fraudulent charges and managing chargebacks, much to the chagrin of their pocketbook.  

Movers and shakers in the payments processing industry like Stripe have the overhead needed to afford that kind of risk, and therefore exchange the adoption of higher risk for payment processing that goes through in less than one day. But it is rare for companies to have anything close to Stripe-like merchant onboarding processes due to size and resource constraints.  

The PayFac Catch-22 Solution: Merchant ScanXpress

Software programs are revolutionizing many industries, and one of their next champions is the merchant onboarding process for payment facilitators and other payment processing firms. Scoring high in both efficiency and efficacy, this new technology provides an automated and customizable onboarding process for PayFacs and other payment processors alike.  

Agreement Express’s Merchant ScanXpress is a technology solution that avoids making companies choose between speed and accuracy.  It is a unique and highly configurable software with all the tools necessary to onboard merchants in minutes while also helping a payment facilitator avoid as much risk as possible. Merchant ScanXpress streamlines and optimizes the merchant experience with Stripe-like onboarding capabilities, an easy-to-use interface, and customizable features. With each merchant assessment, our software gives a “risk score” based on data that gives payment processors extremely valuable insight so that they are able to reject or accept merchants with a high level of accuracy and efficiency.

With Agreement Express, payment facilitators and other payment processors don’t have to choose between efficiency and risk avoidance. Want to see how much unnecessary risk your company could be avoiding? Sign up for a demo today to find out how much faster you can onboard your merchants.