What is a PayFac? Payment facilitator 101

Fintech professionals use a lot of different terms when talking about their work, and it can be hard to know which language to use in each specific instance. One of the terms, PayFac, is a clever abbreviation that represents the future of modern payments.  

Any company that offers payment or payout services should want to know about PayFac. Its secure and seamless features allow businesses to integrate payment functionality into their products without the need to develop their own payment infrastructure. It also offers a growing opportunity for new revenue streams from existing customers.

Learn how a PayFac works, why it’s different from a standard payment gateway and why partnering with one can meet the changing needs of your end user (and your cost of doing business.)

What is a PayFac?

A payment facilitator, more simply known as PayFac, provides merchants with the ability to process debit card, credit card and other payment transactions. It is a type of merchant service provider (MSP) that has its own merchant payment processing account with a bank but shares access with businesses under it. The PayFacs acts as an intermediary between the bank and the PayFac’s customers, reducing the hoops a company must go through to access modern payment features, such as instant payments.

Many modern PayFacs, including Astra, provide Application Programming Interfaces (APIs) that can be customized to look and feel like the business’s own software or app. A PayFac’s embedded technology prevents end users from needing to leave the app or site to initiate a payment or transfer funds. It all happens within the same digital environment. End users then interact with the business’s app or website to perform a payment transaction, but the PayFac is doing all the work in the background. 

For example, a company’s app for independent trucking owner-operators could offer a debit card, as well as quick, instant payouts for loads delivered. Rather than directing the trucker to visit an external bank app to initiate the deposit, the app could prompt them to provide their debit card and initiate a transfer from within the trucking app itself. It’s fewer steps for the trucker with one consistent brand experience.

PayFacs offers services using a software-as-a-service (SaaS) model, often bundling payment processing with other features like security enhancements, data insights or customized reports. 

How the PayFac model works

PayFac vs. payment gateway vs. payment processor

The payment space is very crowded, with entities other than the PayFac vying for a company’s payment processing business. Here’s how each of the players operates.

 

Category	PayFac  (Payment Facilitator)	Payment Gateway	Payment Processor
Definition	Aggregator that allows businesses to accept payments without their own merchant account.	Technology that captures and transfers payment data between the merchant and processor.	Entity that executes the transaction by communicating with card networks and banks.
Merchant Account	Sub-merchants operate under the PayFac’s master merchant account.	Requires a dedicated merchant account for each business.	Requires a dedicated merchant account for each business.
Onboarding	Simplified onboarding with quick approval for sub-merchants.	Merchants need to go through a full underwriting process.	Full underwriting process for each merchant.
Compliance & Risk	PayFac takes on more compliance, regulatory, and risk management responsibilities.	Merchant is responsible for their own PCI compliance and risk.	Processor assists but merchant is responsible for compliance and risk.
Transaction Control	High level of control over sub-merchant payments, including instant payouts.	Limited control; mainly a pass-through for payment data.	Controls transaction processing and communication with card networks.
Settlement Time	Typically quicker settlements, especially for small businesses and startups.	Dependent on the processor and banks involved.	Settlement times depend on the bank and processor.
Revenue Opportunities	PayFacs can generate revenue through transaction fees and additional services like instant payouts.	Revenue generation through transaction fees, but less control over pricing.	Revenue generated through transaction fees but fewer add-on services.
Cost Structure	Very low upfront costs with simplified pricing.	High associated costs (licensing, registrations, etc.) plus per transaction fees.	Often the lowest per-transaction fees but requires integration with a gateway and high associated costs.
Customer Experience	Simplified experience for merchants due to easy onboarding and bundled services.	Relies on merchant’s chosen payment processor for overall experience.	Provides essential transaction handling but requires third-party integration for full service.
Use Cases	Best for platforms, marketplaces, and businesses onboarding payments quickly without a full payment operations team.	Ideal for businesses with a lot of experience in payments and with a full payment operations and development team.	Suitable for businesses that want direct control over their payment processing infrastructure.

Payment processors

As their name implies, payment processors own and operate the technology for processing payments between merchants and customers. They focus on this specialty alone and offer it as a standalone business, although they can also sell payment terminals. 

PayFacs

PayFacs use their own merchant accounts and relationship with the payment processor (or the banks, if acting as a payment processor.) They send payment information on behalf of their merchant customers and don’t require them to create their own merchant accounts or use a third-party payment gateway.

PayFacs can offer payment processing as part of a larger business suite of services, including tokenization or advanced control over monitoring transactions. 

Payment gateways

A payment gateway acts as a point of sale (POS) terminal, but it’s completely virtual. It captures and transfers the payment data between a merchant and its chosen payment processor. While it can offer some revenue generation opportunities, the cost of licensing, registrations, and underwriting can be a burden.

It also requires a dedicated merchant account and leaves the merchant responsible for all associated risks, so it’s best for larger companies with a dedicated payment operations team. Payment gateways are not considered beginner-friendly or adaptable to the needs of a smaller, nimble startup. 

Benefits of working with a PayFac

PayFacs simplify payment processing for businesses without forcing them to give up all control over how payments are handled; they have earned a place in the fintech space by doing what other solutions have failed to do previously. 

Companies of all sizes find PayFacs useful for these reasons.

Quick and easy onboarding

PayFacs have established a payment processing infrastructure, which their business clients can access through APIs and other simplified integrations. A company doesn’t need to find a sponsoring bank or complete onerous applications to get accepted for a merchant account. If a company wants to fully customize a payment experience, working with a PayFac saves time and the burden of building a payment processor from scratch. With embedded technology, PayFacs are a plug-and-play option that enables payment functionality while preserving the company’s branding and customer experience. 

It’s not just quick onboarding for the business, however. Customers who buy from the business (usually an app or site user) and use the embedded PayFac solution can get started sending or receiving payments quickly. For fintech companies offering payment services within their apps, it may only take 15 minutes to onboard a new end user. Then, they can load a debit card to pay a friend in another state, often within seconds.  

Variety of payment options

PayFacs support all major credit and debit card networks, as well as payment rails like ACH transfer and FedNow, giving businesses a range of payment choices for their customers without having to forge or maintain new relationships with each of the payment processors. 

Payment variety is table stakes these days — most end users also want a range in speeds and fee structures. Some may be willing to pay more for instant payments, while others may happily wait days to avoid extra costs. Giving both customers the experience they need ensures you capture more of the available market share.

Reduced risk and administrative headaches

Digital payments are easy targets for cybercriminals. PayFacs manage issues related to regulations, underwriting and ongoing compliance, so you don’t have to keep up with fraud trends or regulatory changes. The more comprehensive PayFacs include monitoring and personalization tools to reduce chargebacks and fraudulent charges, saving you money and unnecessary damage to your reputation. 

For example, Astra offers Webhooks for specific data events, so that you are always in the loop about each payment transaction. Set them up ahead of time and get a data trail based on user, card payment, chargeback or other factors. Astra also offers a robust dashboard to watch for transactional trends that may alert you to coordinated fraud or other concerning events. 

Increased revenue and profit potential

The right PayFac can reduce certain administrative costs for your payment program by handling expensive compliance and underwriting duties. For small teams with only a small budget for compliance, underwriting or legal teams, this game-changer frees up teams for revenue-generating activities such as sales or marketing. 

It also provides the chance to charge add-on convenience fees to your end user, typically when they use instant payout or funding features. If you haven’t made money with your payment services before, partnering with a PayFac makes it much easier to create this value-add offering and scale it to become a profitable piece of your business. 

An example of a PayFac in action

Imagine an owner-operating who chooses to download Truck Smarter, a fintech app designed for truckers, and uses it to find cheap fuel, manage invoices and handle factoring. When a trucker drops off their load, they can get paid instantly by using their connected TruckSmarter debit card to receive the payment. Instead of waiting days for traditional payments, the driver can access funds immediately for fuel, maintenance and repairs or other services to get them back on the road and earning again. 

Since TruckSmarter runs on Astra instant payment technology, the app also offers faster payouts for factored loads. By having more of their financial needs met in one app, truckers don’t need to visit traditional banks or look to outside services for fast access to their own earnings. This creates trust for TruckSmarter within the transportation economy. 

TruckSmarter meets the changing needs of owner-operators easily without having to build from scratch. The embedded Astra technology embeds into the TruckSmarter app and works on the backend to process payments. Astra also handles the underwriting, compliance and security details so TruckSmarter can focus on its end user. 

If TruckSmarter were to have worked with a traditional payment processor, it would have had to build its own app features, form bank partnerships, and deal with all the chargebacks and fraud investigations. However, with Astra as its PayFac, it not only gets support in all these areas, but it can personalize its user payment experience and scale quickly as it grows. 

The PayFac partnership reduces the administration, cost, and infrastructure TruckSmarter needs to delight its end users without compromising on security or compliance. 

How to get started with a PayFac

Since one of the main advantages of using a PayFac is the streamlined onboarding, you won’t have to do as much work on the front end compared to using a traditional payment processor. However, the first step will be the same: research. 

You’ll want to make a list of all the features you want in a PayFac and the type of partnership you hope to have with them. Not all companies offer the same level of assistance in embedding the technology in your app, and others may promise personalization while falling short of true white labeling needs. 

With your must-haves in mind, set up demos of the technology you like best. Astra, for example, offers an in-depth look at its technology and can show use cases similar to how you’d use the API in your own app environments.

Ask lots of questions, and don’t hold back with your concerns about security, privacy or compliance. Your user data is precious, and the right partner will treat it as such.

Why use Astra for your PayFac?

Working with a payment facilitator like Astra lets businesses of all sizes get into payments without having to take on the full risk or cost of developing or integrating a payment gateway. Astra’s embedded financial technology offers secure payment options and can even create a new source of revenue through fees charged for instant payment processing.

Companies that embrace PayFac with Astra can keep their core competencies in focus and leave the processing details to a business that knows it best. Even better, adding instant payout fees as a new revenue stream may even future-proof a business that needs a quick, plug-and-play option to scale, differentiate in a crowded market or simply deliver on something that users already want. 

Ready to start your seamless payment experience? Contact Astra for a demo.