High Risk Merchant Handbook

Payment facilitator vs merchant account

A PayFac signs you up under its own contract. A merchant account is yours. Here is how the two models differ, in Visa's own words.

When you take cards, you sign up under one of two models. You can get your own merchant account from an acquirer. Or you can sign up under a payment facilitator. The choice changes who holds your contract, who settles your money, and who answers for you if something goes wrong. This page explains both, using Visa's own published PayFac framework for the definitions.

What a merchant account is

A merchant account is a contract between you and an acquirer. The acquirer is the bank side of the deal. You are its merchant, and it answers to Visa for what you do.

Visa's guide says an acquirer's responsibilities stay the same whether merchants are signed directly or through third party agents. With a direct merchant account, no one sits between you and the acquirer.

What a payment facilitator is

A payment facilitator is a business that signs up merchants under its own contract. Visa's guide says a payment facilitator is also known as a PayFac or merchant aggregator.

The model has a purpose. Visa's guide says the Payment Facilitator Model helps increase electronic payment acceptance for merchants without a traditional acquiring relationship. In plain words, a PayFac is a middle layer. It sits between sellers and an acquirer.

How the payment facilitator model works

Visa's guide says the key participants in the model are the acquirer, payment facilitator and sponsored merchant. Each one stands in a fixed spot.

The acquirer sits at the top. It submits the sales for the PayFac. The PayFac sits in the middle. Visa's guide says payment facilitators enter into payment services contracts with sponsored merchants in order to provide payment services. So your contract is with the PayFac, not with the acquirer.

You sit at the bottom as a sponsored merchant. Visa's guide says a sponsored merchant is a merchant whose payment services are provided by a payment facilitator. That is the whole definition. You sell, the PayFac processes, and the acquirer submits.

Payment facilitator vs acquirer: who does what

These two roles are easy to mix up. The acquirer is on the bank side. The PayFac is its agent. Visa's guide says payment facilitators and marketplaces are third party agents that require sponsorship and registration by an acquirer.

The acquirer keeps the oversight. Visa's guide says an acquirer's primary role with payment facilitators and marketplaces is to keep complete oversight over those it sponsors. It also says acquirers are responsible for the acts of both payment facilitators and sponsored merchants.

The PayFac does the day to day work. It signs you, screens you, and watches your sales. But it does not stand alone. Visa's guide says Visa treats a payment facilitator's sponsored merchant as a merchant of the payment facilitator's acquirer. From Visa's seat, you still belong to the bank at the top.

Payment facilitator vs merchant account: the practical differences

The two models feel similar at the till. The differences show up in the paperwork and the money.

Who holds the contract. With a merchant account, you contract with the acquirer. Under a PayFac, your contract is with the PayFac. Visa's guide says a payment facilitator can own the merchant relationship directly without an acquirer being party to the contract.

Who settles the funds. With a merchant account, the acquirer settles to you. Under a PayFac, the money moves in two steps. Visa's guide says an acquirer deposits settlement funds directly to the payment facilitator, which then settles those funds to its sponsored merchants. So the money passes through the PayFac before it reaches you.

Who carries the risk. Visa's guide says payment facilitators and marketplaces are responsible for fraudulent or unauthenticated transactions submitted by their sponsored merchants and retailers. It also says acquirers are obligated to pay the settlement obligations of their merchants and third party agents on a timely basis. Risk rolls up the chain, and your sales are part of it.

Reserves. Visa's guide says reserve funds belong to the sponsored merchant and must be held and controlled by the acquirer. It also says payment facilitators may use merchant reserves as a way to reduce loss exposure. So a PayFac can ask for a reserve, but the acquirer must hold it.

What Visa's rules require of PayFacs and sponsored merchants

The rules that bind you do not go away under a PayFac. Visa's guide says all Visa merchant requirements apply equally to a sponsored merchant. You still follow the same Visa Rules you would follow with your own account.

The PayFac has its own list of duties. Visa's guide says payment facilitators and marketplaces act as gatekeepers to the payment system and must ensure only qualified and responsible sellers get access. It says they must collect public and non-public information to validate and authenticate a prospective seller. And it says they must render an underwriting decision to approve, conditionally approve, or decline a new seller application.

Some sellers are off limits. Visa's guide says payment facilitators are prohibited from providing payment services to outbound telemarketers, other payment facilitators, and marketplaces. If you make outbound sales calls, that rule matters, and so does getting billing authorization right on phone sales.

Why banks and regulators watch payment processors

Regulators have warned banks about payment processors. FinCEN's advisory says payment processors use their own deposit accounts at a financial institution to process transactions. It also says payment processors can be used by criminals to mask illegal or suspicious transactions and launder proceeds of crime.

So banks are told to check processors with care. FinCEN's advisory says financial institutions should determine during due diligence whether payment processors have obtained all necessary state licenses, registrations, and approvals. The FDIC adds its own warnings. FDIC guidance says payment processors pose greater money laundering and fraud risk if they cannot effectively verify their merchant clients' identities and business practices.

This attention reaches you. A PayFac that screens you is doing what Visa's guide requires. For more on that pressure, see why banks watch payment processors.

Which businesses each model tends to suit

Neither model is a fit for everyone. A merchant account with an acquirer suits a business that wants a direct contract and direct settlement.

The PayFac model suits sellers who want to sign up under an existing framework. Visa's guide says the model exists for merchants without a traditional acquiring relationship. The trade is that you sit under a gatekeeper that screens you, watches your sales, and can act on what it sees.

Ask any provider you consider which side of the model you would stand on. Then read the contract to see who settles your money and who holds it on the way.

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