What is a Payment Facilitator (PayFac)? Definition & How It Works

A payment facilitator (PayFac) is an intermediary service that lets businesses accept electronic payments under a master merchant account within 1-3 days, without waiting weeks for traditional merchant accounts. The PayFac handles underwriting, compliance, and risk management while businesses operate as sub-merchants under their umbrella. This guide covers how PayFacs work, their actual costs including hidden fees, and when traditional merchant accounts make more sense.

What is a payment facilitator (PayFac)?

A payment facilitator is an intermediary service that allows merchants to accept payments without becoming regulated payment companies themselves. The PayFac holds a master merchant account with an acquiring bank, and individual businesses operate underneath this umbrella as sub-merchants. When you sign up with Stripe, Square, or PayPal and start accepting payments within a day, you've used a PayFac.

PayFacs work differently than traditional merchant accounts in account structure. With a PayFac, you don't get your own merchant account with a bank. Instead, you become a sub-merchant under the PayFac's master merchant account. The PayFac takes on all liability for chargebacks, data breaches, and fraud, which explains why they set up conservative risk controls including fund holds, rolling reserves, and potential account terminations.

How does a payment facilitator work?

Payment operation runs on three core pillars: boarding and underwriting, transaction monitoring, and funding and reconciliation. The model works because the PayFac has already established a master merchant account with an acquiring bank and registered with card networks.

The PayFac's master merchant account aggregates transactions from thousands of sub-merchants. When you sign up, you operate under this umbrella structure rather than holding your own individual account. The PayFac assumes liability for fraud and chargebacks while controlling how and when funds get distributed to sub-merchants through reserve accounts and customized payout schedules.

The PayFac payment flow: step-by-step

When a customer completes a purchase, the transaction receives authorization from the cardholder's issuing bank within 2-3 seconds. After capture, funds transfer through the card network to the acquiring bank that holds the PayFac's master account.

Once funds reach the PayFac's account, they control distribution to sub-merchants through reserve accounts and payout schedules. For cash flow planning, this means the PayFac's policies determine when you get paid, not standard card network settlement timing.

Sub-merchant onboarding and underwriting

PayFac onboarding compresses traditional merchant account setup to 1-3 days for low-risk businesses through automated risk assessment. The PayFac conducts Know Your Customer verification, business structure validation, and risk categorization to determine transaction limits. Complex situations involving high-risk industries or complicated ownership structures take 2-6 weeks.

The PayFac maintains continuous transaction monitoring to catch fraud attempts, unusual activity spikes, and compliance violations before they escalate.

How payment facilitators make money

PayFacs generate revenue through transaction-based fees charged to sub-merchants. The core model is built on the spread between wholesale interchange rates (1.5-2.0% plus network fees) and what they charge sub-merchants (2.6-3.5% plus per-transaction fees). The standard rate of 2.9% plus $0.30 per transaction has become commonplace, though companies processing higher volumes can negotiate interchange-plus pricing.

Beyond transaction fees, PayFacs charge for chargebacks and disputes (typically $15-$25), add percentages for international transactions, and set up rolling reserves that hold 5-15% of transaction volume for 90-180 days.

Payment facilitator vs other payment models

The payment processing landscape includes several models that sound similar but work differently in practice.

Payment facilitator vs payment processor

A payment facilitator lets merchants accept payments under a master merchant account, with the PayFac handling underwriting, compliance, and liability. Traditional payment processors issue individual merchant accounts directly with acquiring banks, giving businesses direct banking relationships and negotiable terms. PayFacs offer speed and simplicity with standardized pricing, while traditional processors offer control and customization.

Payment facilitator vs ISO (Independent Sales Organization)

An Independent Sales Organization refers businesses to payment service providers and helps establish individual merchant accounts with acquiring banks. PayFacs maintain master merchant accounts and onboard businesses as sub-merchants. ISOs offer greater flexibility over which processors and banks to partner with, while PayFacs provide faster standardized onboarding.

Benefits of payment facilitators

We've seen PayFacs solve real operational problems for businesses at certain stages, particularly around speed and simplicity:

• Fast merchant onboarding: PayFac programs compress merchant approval to 1-3 days for low-risk businesses through automated checks. For marketplace platforms onboarding hundreds of sellers or SaaS platforms where delayed payment acceptance means lost revenue, this speed advantage is material compared to traditional accounts requiring 2-6 weeks.
• Simplified compliance: The PayFac handles initial underwriting and compliance requirements, including Level 1 PCI DSS certification and card network registration. You're not dealing with auditors or filing registrations yourself.
• Transparent pricing: PayFacs offer flat-rate pricing like 2.9% plus $0.30 per transaction, so you know exactly what you'll pay before processing the first transaction. Traditional merchant accounts can hit you with unexpected fees and rate hikes.
• Built-in fraud prevention: PayFacs invest in sophisticated monitoring that catches patterns and anomalies individual businesses might miss. You benefit from enterprise-grade fraud detection without building it yourself.

These benefits matter most when processing under $50,000 monthly and needing to start accepting payments within days. Beyond that threshold, the cost advantages start reversing.

Costs and risks you should know

The quoted transaction fee is the smallest cost. We've watched businesses learn this the hard way: reserves, holds, and account freezes create the real cash flow impact.

Cash flow disruption from fund holds

PayFacs set up fund holds and account freezes to protect themselves against merchant bust-out schemes where merchants process large volumes then disappear, leaving the PayFac liable for refunds and chargebacks. This creates an inherently adversarial relationship during risk events. PayFacs will aggressively freeze accounts based on algorithmic risk monitoring, often without human review and regardless of individual circumstances.

A 15% rolling reserve during peak season could tie up $22,500 in working capital when you need it most for payroll or inventory if you're processing $150,000 monthly. Build cash reserves for potential holds (typically 5-10% of monthly processing volume), maintain detailed documentation of business operations and expense tracking, and diversify payment processing across multiple providers to avoid single-point-of-failure scenarios.

Cost scaling problems

PayFac pricing structures that appear simple and attractive for small businesses become increasingly expensive as transaction volumes scale. Companies consistently processing high volumes of credit card sales can save significantly by switching to interchange-plus pricing through traditional merchant accounts. Businesses processing $150K monthly with Square's flat rate instead of switching to interchange-plus could pay $18,000 more over two years.

Regulatory and PCI DSS requirements

While PayFacs handle primary PCI DSS compliance and card network registration, sub-merchants retain ongoing compliance obligations including annual PCI DSS validation questionnaires, Know Your Customer documentation updates, and business model change notifications. Designate a compliance point person responsible for timely PayFac request responses. Maintain independent PCI compliance documentation and budget for annual compliance costs including PCI validation and potential audit expenses.

PayFac compliance and requirements

PayFac compliance creates specific ongoing obligations that operations leaders should anticipate, particularly around where problems typically emerge.

PCI DSS Level 1 compliance standards

Payment facilitators must maintain PCI DSS compliance and obtain validation from a Qualified Security Assessor before processing their first transactions. Many acquirers won't sign a payment facilitator without this certification because PayFacs handle cardholder data at scale across thousands of sub-merchants.

Card network and risk requirements

PayFacs pay registration fees to Visa and Mastercard for card brand registration, plus money transfer licenses in each operating state. High-risk merchant types require additional registration: cryptocurrency merchants, non-face-to-face gambling, pharmaceutical merchants, and dating or escort services. These categories trigger enhanced scrutiny due to historically higher fraud rates and chargeback ratios.

Common payment facilitator examples

The PayFac market consists of distinct segments serving different business types. Understanding which PayFac fits your business model helps avoid mismatches that lead to account restrictions or unexpected costs.

Stripe targets high-growth tech companies, SaaS businesses, and e-commerce enterprises. Charges 2.9% plus $0.30 per online transaction, with 2.7% plus $0.05 for in-person transactions using Stripe Terminal. Ideal for global e-commerce platforms, subscription SaaS companies, and marketplace platforms that need developer-friendly APIs and extensive customization options.

Square serves local retailers, service businesses, and in-person merchants. Charges 2.6% plus $0.10 per in-person transaction and 2.9% plus $0.30 for online payments. Best suited for brick-and-mortar retail, restaurants, and local service providers who need integrated point-of-sale hardware and simple setup.

PayPal focuses on freelancers, small businesses, and e-commerce merchants seeking quick setup. Charges 2.9% plus $0.30 for standard online transactions with no monthly fees for basic processing. Recommended for freelancers and small e-commerce businesses that benefit from buyer trust in the PayPal brand.

When your company should use a payment facilitator

The decision comes down to transaction volume, business maturity, and whether convenience or control matters more. We've seen clear patterns in when PayFacs make sense versus when they start costing more than they're worth.

Best use cases for PayFac model

PayFacs make sense when processing under $50,000 monthly, needing to start accepting payments within days, operating with simple payment flows, or preferring to outsource compliance complexity. For companies in this position, PayFac models remove friction and let you focus on core operations rather than payment infrastructure setup.

For SaaS companies and marketplace platforms onboarding hundreds of sellers monthly, completing setup in 1-3 days versus 2-6 weeks directly improves merchant satisfaction and platform velocity.

When to avoid PayFacs

Traditional merchant accounts are preferable when consistently processing over $100,000 monthly, operating with 50+ employees, requiring customized payment flows or settlement schedules, or spending over $500,000 annually on payment processing. Companies at this scale benefit from the control, cost savings, and customization that direct banking relationships provide.

The breakeven point typically hits around $50,000 in monthly processing volume. At $100,000+ monthly, traditional merchant accounts deliver substantial annual savings compared to standard PayFac rates.

Key questions to ask before choosing a PayFac partner

Before committing to a PayFac, evaluate total cost of ownership including transaction fees, chargeback fees, reserve requirements, and working capital tied up. Review the PayFac's fund hold policies and account freeze triggers to understand exactly what circumstances could lock up your cash.

Examine integration requirements with your existing accounting software and ensure the PayFac supports the payment methods your customers actually use. Ask about rate escalation clauses and what happens to your funds if the PayFac terminates your account.

Frequently asked questions

What's the difference between a payment facilitator and a merchant account?

A merchant account is a direct banking relationship where the bank underwrites your business specifically and you own that account. A payment facilitator gives you access through their master merchant account as a sub-merchant, which means faster setup but less control over rates and terms.

How much does it cost to use a payment facilitator?

Most PayFacs charge 2.6-3.5% plus $0.30-$0.49 per transaction with no monthly fees for basic services. You'll also pay chargeback fees around $15-$25 and potentially have 5-15% of monthly volume tied up in rolling reserves. For companies outgrowing PayFac models, corporate card platforms like Ramp offer an alternative for business expenses—zero processing fees on operational spending like software subscriptions and vendor payments, versus paying 2.6-3.5% on every transaction through a PayFac.

When should I switch from a PayFac to a traditional merchant account?

Consider switching when you consistently process over $50,000 monthly. The cost savings from negotiated interchange-plus pricing typically offset the setup complexity at that volume, and you gain more control over settlement timing and fund access.

Can a payment facilitator freeze my account?

Yes, PayFacs can freeze accounts based on algorithmic risk monitoring, often without warning or human review. This typically happens when transaction patterns change suddenly, high-risk product categories appear, or chargeback rates spike above their thresholds.