Technology is everywhere, and it has changed how we socialise, network, and, most recently, conduct business. With all the technology around us, we’re always looking for ways to bridge gaps between sellers, buyers, and markets—a trend that made online platforms a reality.
This article examines payment facilitators and payment processors as major disruptors of the online marketplace. We examine how they work, their differences, and their functionalities as vital components of the new market ecosystem.
What is a payment facilitator?
A payment facilitator, also known as "Payfac" or "PF," refers to a company that creates or supports the infrastructure that merchants need to accept credit card payments. For ‘sub merchants’ who start to receive credit card payments, payment facilitators offer technology that can support electronic payments. In this scenario, the submerchant refers to the party relying on the payment facilitator’s services.
Payment facilitators play a vital role in ensuring that businesses that need to accept online payments do so safely and securely. Payfacs are responsible for checking the legitimacy of submerchants before onboarding them onto their infrastructure. In the online market space, a business that can receive online payments relies on the services of a payment facilitator.
What are the functions of a payment facilitator?
Payment facilitators are vital to the online market because they offer small players valuable access to financial services. By simplifying the processes of applying for and supporting payments, they empower customers and businesses to utilise credit cards for payments.
1. Underwriting and onboarding
Payment facilitators are important actors in the financial ecosystem and, thus, play a huge role in screening sub merchants. The screening process, also referred to as ‘underwriting’ verifies the business, examining whether there are any connections to fraudulent or outlawed entities.
Unlike banks that require paperwork to facilitate onboarding processes, Payfacs reduces time limits by using the software. Suspicious findings are often flagged, and human actors are involved in conducting further analysis.
2. Monitoring
Payment facilitators conduct an oversight role once they have approved a sub merchant. Payfac conducts oversight on all the transactions on its platform to ensure that all payments operate under legal and network regulations. The monitoring process ensures that there are no anomalies and in cases of unlawful activities, suspensions are placed.
3. Funding
Payment facilitators also undertake the role of funding payouts, a role that helps them to build a favourable reputation. While Payfacs facilitate electronic payment for sub merchants, some situations can create lapses that can make transactions slower and less efficient for customers. Yet, while funding makes the payment facilitator’s infrastructure efficient, it also exposes them to risks of liability and fraud.
4. Chargeback management
Payment facilitators act as intermediaries between banks or card companies when customers have disputes. Chargebacks are issued to customers when they raise disputes and when this happens, the Payfacs take charge of documentation and referrals. So, when payments require investigations and related examinations, the payment facilitator is a great liaison for all parties involved.
What is a payment processor?
As the name suggests, a payment processor is a business or entity that manages the logistics involved in card payments. Payment processors became popular with online shopping, playing the essential role of learning credit card details from the customer’s end and transferring it to the relevant financial institutions.
The payment processor plays a vital role in securing online payments because they handle customer details with care, securing them from abuse. When in operation, the payment processor gains access to multiple data points, including card readers in the customer’s phone to their bank balances. The payment processor ensures that payments are only completed when the customer has sufficient funds or access to credit.
How do payment processors work?
To understand how a payment processor works, it’s important to note that its activities are usually super-fast. The ordinary customer is unaware of the actions of the payment processor because it’s designed to facilitate fast, secure, and efficient transactions.
Yet, the working of the payment processor can be narrowed down to three major steps. Once the user offers the credit card information, the payment processor:
1. Accesses buyer card information. This is the first step for a payment processor that gains access to buyer card data, whether through the physical card, web-payment page, or existing mobile hardware.2. Initiates payment. The next step is the formal transaction where the processor takes customer data from the credit card, mobile hardware, or payment portal. The information is sent to the facilitator such as the bank or credit card company (Visa or Mastercard) to check whether payment is authorised or declined. Feedback from this process updates the customer that the payment is successful or whether it is declined. In the latter case, the customer might be required to try alternative payment options.
3. Transfers funds. The final step is when the customer’s credit card company or bank completes the payment by sending it to the merchant’s bank. In this case, the customer’s bank is considered the ‘issuing bank’ while the merchant or recipient is the ‘acquiring bank.’ The fund's transfer process can happen simultaneously or take several business days to complete.
Payment facilitator vs. payment processor: what’s the difference?
Payment facilitators and payment processors might facilitate online payments, but they share some stark differences.
1. Underwriting process
The major difference between payment facilitators and payment processors is the underwriting process. Underwriting is the ‘screening’ phase where businesses are examined to determine their authenticity, and in online payments, it involves determining whether there are connections to fraud. Payfacs differ from payment processors because their underwriting is continuous, protecting with each transaction. However, for payment processors, the underwriting process for sub merchants is conducted upfront, which means more enhanced security features.
2. Payment processes
Payment facilitators offer a straightforward onboarding process, which simplifies the payment process. Unlike banks that require paperwork to facilitate onboarding processes, Payfacs reduces time limits by using software programs and a human element where conflicts emerge.
On the other hand, payment processors work closely with independent sales organisations (ISOs) such as banks and credit card companies. This means that, with payment processors, the onboarding process can be more extensive.
3. Timelines and costs
Payment facilitators are fast to set up because the infrastructure created by the provider matches the needs of the business. With a Payfac, it is easy for the merchant to get niche treatment because the software determines the structure, eliminating the need for laborious documentation.
Equally, payment processors, especially those liaising with banks, can introduce high transaction and set-up costs. If you're unaware of current market rates, costs can be unpredictable when banks or credit card companies are involved.
What’s the bottom line?
From the comparisons between payment facilitators and payment processors, there’s little doubt that both have incredible benefits and costs for end users. On the one hand, payment facilitators are efficient because, as an online vendor, it’s possible to avoid lengthy initial overwriting.
With a Payfac service such as PayPal, you don’t have to worry about having all the details to set up your online payment options. You can get started and process payments before you are asked to verify your credentials a few weeks down the line.
On the other hand, payment facilitators like PayPal don’t fit users in all industries, which makes them a high-risk option. In this case, a payment processor such as Stripe facilitates online payment processing for your business.
Essentially, if your business accepts card payments, you really can't do without a payment processor. The payment processor ensures that you access safe and efficient transfers, especially because all entities are initially screened. Other considerations include options for payment automation, with providers like Chaser offering flexible documentation available at any time and in any format. In fact, one of Chaser's customers, TaxAssist Norwich, got £20,000 of the client's debt paid in just 20 minutes by using Chaser's automated payment reminders and including a link to a payment portal where their client's customers could pay their outstanding invoices. Truly demonstrating the importance of payment automation.
So, if you’re new to online payment processing, start by examining your core strengths, customer preferences, and support needs. Choose the option that can support your business growth most appropriately, especially when you consider chargebacks and the flexibility of payments.
