Maintaining payment environments has become more complex, and it’s especially important for businesses to understand the various types of payment solutions. There are many third-party options for accepting and processing payments, but two types of payments service providers stand out: payment processors and payment facilitators (payfacs).

The choice between a payment processor and a payfac can affect how your business operates, the costs you incur, and how quickly you can accept digital payments. You’ll have to consider factors such as your business's size, transaction volume, and specific needs.

Below, we’ll explain what payment processors and payfacs are, how they differ, and what each can offer businesses.

What’s in this article?

• What is a payment processor?
  
• What is a payment facilitator?
  
• What are the differences between payment processors and payfacs?
  
• Payment processor or payfac: Which is right for your business?
  
• Is Stripe a payment processor or a payfac?
  
• How Stripe Payments can help
  

What is a payment processor?

A payment processor is a third-party company that takes on the responsibility of handling digital transactions—including those that use credit and debit cards, digital wallets, and bank transfers—for businesses. The processor facilitates, at every stage, the movement of funds from the customer who initiates payment to the business’s bank.

When a customer pays for a product or service, the payment processor:

• Authenticates the card details

• Secures the transaction

• Confirms that there are sufficient funds in the customer's account

• Obtains approval for the transaction from the bank

• Notifies the business of the successful transaction

• Transfers the funds to the business’s account

Typically, these steps occur within a matter of seconds. In addition to these responsibilities, payment processors often provide the necessary hardware, such as physical point-of-sale (POS) terminals and card readers, and software to accept card payments. They can also manage issues such as chargebacks, subscriptions, and recurring payments and ensure transactions are secure and efficient.

What is a payment facilitator?

A payment facilitator is a type of merchant service provider that simplifies the payment process for businesses. Instead of requiring each individual business to set up its own merchant account, a process that can be time-consuming, the payfac effectively “rents out” merchant account functionality under its larger master merchant account.

The key advantage of this model is that it significantly speeds up the onboarding process for businesses that want to accept electronic payments. This is especially beneficial for smaller businesses that might not have enough transaction volume to justify opening their own dedicated merchant accounts and for businesses that want to begin accepting payments quickly.

A payfac is also responsible for underwriting and risk assessment, settling funds with submerchants, managing chargebacks and disputes, and ensuring compliance with regulations in the payment industry. This allows the businesses under the payfac’s umbrella to focus on their core operations rather than work through the complexities of the payment process.

What are the differences between payment processors and payfacs?

Payment processors and payfacs both play important roles in the payment ecosystem, but they operate in different ways and serve different needs. Here are some key differences.

Role in the payment flow

Payment processors facilitate communication between the business, issuing bank (customer's bank), and acquiring bank (the business’s bank). They transmit transaction information and ensure that payments are processed correctly. Payfacs, however, simplify the process for businesses by allowing them to operate under the payfac's master merchant account, eliminating the need for each business to secure its own merchant account.

Onboarding and setup

Payment processors require each business to set up its own merchant account, which can take time and often involves a detailed application process and credit checks. With payfacs, the onboarding process is simpler and faster. Since businesses operate as submerchants under the payfac's master account, they can start accepting payments quicker. This is particularly appealing for small businesses, startups, and businesses with lower transaction volumes.

Risk management and compliance

With payment processors, each business is responsible for its own risk management and compliance with payment industry standards and regulations. Payfacs handle underwriting, risk assessment, and compliance. They also manage chargebacks, a service that can prove very convenient for businesses.

Payment processor or payfac: Which is right for your business?

Deciding whether to use a payment processor or a payfac comes down to several factors including a business's size, transaction volume, and specific needs. Here are some considerations that can help a business choose.

Size and transaction volume

If a business is new or small and has a low transaction volume, a payfac might be the best choice. Often, payfacs have simpler pricing models and faster onboarding, which can help the company start accepting card payments almost immediately. For larger businesses or those with high transaction volumes, a dedicated merchant account through a payment processor might be more cost-effective. While the onboarding process can be more complex, the lower transaction fees could make this the better option in the long term.

Time to market

If the business is one that prioritizes quick setup (e.g., a seasonal business, a startup that must start processing payments quickly, an online business that wants to launch fast), a payfac can enable rapid onboarding. For businesses with more time to set up and greater resources to manage a more detailed onboarding process, a payment processor could be a viable option.

Level of control

If a business prefers to have direct control over its payment processing, a merchant account with a payment processor could be the best fit. This option also provides more customization potential. But if a business would rather off-load some of the burden of payment processing, such as risk assessment and compliance, it can rely on a payfac.

Pricing structure

Payfacs usually charge a flat rate for each transaction; this simple structure might ultimately prove more costly than the fees of traditional payment processors. Payment processors often have a more complex pricing structure that could include interchange fees, assessment fees, and a markup. While that can be more complicated, it could be cheaper for businesses with high transaction volumes. That said, payfacs like Stripe offer custom pricing packages for businesses with especially high transaction volumes or complex business models.

For small, fast-moving, or platform-based businesses, a payfac is typically the best fit. For larger, high-volume businesses that prefer direct control, a payment processor with a dedicated merchant account is generally more cost-effective at scale.

Is Stripe a payment processor or a payfac?

Stripe operates as both a payment processor and a payfac.

In its role as a payment processor, Stripe provides the infrastructure that allows businesses to accept and manage online payments. It manages the exchange of information and funds between the customer, the business, and their respective banks.

Simultaneously, Stripe also fits the broad definition of a payfac, offering merchant account functionality to businesses without requiring them to complete the often tedious process of opening their own merchant accounts. This benefit is significant, especially for smaller businesses or startups that want to begin accepting payments without any hassle. That said, Stripe goes beyond a payfac’s conventional parameters—which tend to be associated with smaller businesses—by offering an extensive range of flexible solutions that can be customized for businesses of all sizes and stages.

One of the key advantages of using a comprehensive payments platform like Stripe is all-in-one functionality. Instead of relying on multiple third-party providers to handle different aspects of payment processing—which can lead to compatibility issues, increased complexity, and potential gaps in customer experience—Stripe offers a unified solution.

With Stripe, businesses can manage everything from payment acceptance to subscriptions, mobile payments, and marketplace payments, all within the same suite and all with unified reporting. Stripe Connect and Stripe Radar, for example, are payfac-level services.

How Stripe Payments can help

By combining the roles of a payment processor and a payfac into a single global platform, Stripe Payments provides a unified payment solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world.

You get a single platform where you can manage your entire payment flow, including online payment acceptance, in-person unified commerce, recurring subscription billing, and multivendor marketplace payouts. That ensures unified reporting and a seamless customer experience.Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 125+ payment methods, and Link, a digital wallet built by Stripe.

• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.

• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.

• Improve payment performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.

• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% historical uptime and industry-leading reliability.

Learn more about how Stripe Payments can power your online and in-person payments, or get started today.