Owning and customizing embedded payments and financial services within your product can help differentiate your business and be a strategic lever for growth, giving you the power to drive revenue, turn payments into a profit center, and expand the scope of value and functionality you deliver to customers.

More enterprises are adopting embedded payments technology. Global transaction value from embedded payments is expected to increase 134% by 2028. In a 2024 survey, 81% of small and mid-sized businesses said they’re open to adopting integrated payments.

We’ll cover what payment facilitation (payfac) and payfac as a service are, how they work, and how they can benefit your business.

What’s in this article?

• What is a payment facilitator (payfac)?
  
• What is payfac as a service?
  
• How do payfacs work?
  
• How to become a payfac
  
• Payfac as a service vs. becoming a payfac
  
• Benefits of using a payfac as a service provider
  
• What to look for in a payfac as a service provider
  
• How Stripe Connect can help
  

What is a payment facilitator (payfac)?

A payment facilitator (payfac) is a type of service provider that enables businesses to accept different forms of electronic payments, such as credit and debit cards, Automated Clearing House (ACH), and e-checks. These payments are transacted under the payfac’s master merchant accounts, which means businesses can avoid complex individual setup processes.

Payment facilitation refers to the process of making transactions or payments easier, faster, and more convenient for all parties. It encompasses a range of activities, including setting up and managing payment methods, processing payments, reconciling transactions, and protecting against fraud. The goal of payment facilitation is to simplify the payment process for individuals and businesses and ensure that payments are secure, efficient, and accessible.

What is payfac as a service?

Payfac as a service is a payment facilitation model in which an external third-party company provides businesses with the necessary tools and infrastructure to accept electronic payments, such as credit and debit cards, ACH, and e-checks.

Payfac as a service enables businesses to outsource their payment processing, rather than constructing and maintaining their own infrastructure, which requires a fraction of the resources necessary to build and manage a traditional payfac.

Payfac vs ISO

Some businesses use independent sales organizations (ISOs) instead of payfacs. An ISO is a third-party company that extends card processing services to businesses. ISOs act as an intermediary on behalf of card networks and banks to set up merchant accounts. They often provide several services, such as leasing point-of-sale (POS) terminals, customer service, and transaction processing.

Unlike payfacs, ISOs create individual merchant accounts for businesses, which can involve a long and complex setup process. ISOs are generally a better fit for larger companies with high transaction volumes.

Payfac vs payment aggregator

Payfacs and payment aggregators both simplify payments (in fact, a payfac is a type of payment aggregator), but the difference is in their account structure. Payment aggregators pool all merchants under a single merchant ID (MID) with no individual identifiers, while payfacs onboard merchants as sub-merchants with unique sub-merchant IDs. This gives businesses more visibility and control at the individual merchant level while still operating under the payfac's master MID.

How do payfacs work?

Traditional payfacs enable businesses to accept various forms of electronic payments by providing them with a payment gateway and merchant account required to accept and process electronic payments.

Increasingly, additional features and services are offered, such as underwriting, compliance, fraud detection and prevention, chargeback management, and reporting and analytics.

Here’s a rundown of the basic functionality and support that most payfacs provide:

• Payment gateway: Payfacs provide a payment gateway, a software that acts as an intermediary between a business's website and the payment processor. The payment gateway facilitates the secure transmission of customer payment information, such as credit card numbers, from the business's website to the payment processor for validation and processing.

• Merchant account: Payfacs also provide a merchant account, a type of bank account that allows businesses to accept and process electronic payments. The merchant account is linked to the payment gateway and is used to deposit funds from successful transactions into the business's bank account.

• Underwriting: Payfacs perform underwriting, which is the process of evaluating a business's ability to process payments, typically by checking the business’s credit, financials, and ownership. This process ensures that businesses are financially stable and able to manage the funds they receive.

• Compliance: Payfacs also handle compliance with regulatory requirements, such as Payment Card Industry Data Security Standard (PCI-DSS), Anti-Money Laundering (AML), and Know Your Customers (KYC). These security standards ensure the safe handling of sensitive customer information, combat money laundering, and verify customers’ identities.

• Risk management: Payfacs also handle risk management, which is the process of identifying, assessing, and prioritizing potential risks to the business and its customers. This can include fraud detection and prevention and chargebacks, among other potential risks.

• Reporting: Payfacs offer reporting features that allow businesses to track their transactions, view account balances, and monitor payments.

How to become a payfac

Becoming a payfac requires many steps, but the basics of the process involve opening a merchant account, obtaining an MID, and getting PCI-DSS certification. The platform must meet security and compliance requirements, register with card networks, and build and maintain the operational infrastructure necessary to facilitate all of the functions provided to sub-merchants.

For a deep dive into what it takes for a platform to become a payfac, see our guide on payfacs, which covers implementation, time and cost investments, and compliance and maintenance considerations.

There’s substantial risk exposure involved when platforms take on traditional payment facilitation in house, since they become responsible for writing and implementing compliance policies.

Instead of using a third-party payfac provider, some businesses choose to bring their payments in house by becoming a payfac themselves. For platforms and marketplaces whose users are sub-merchants, becoming a payfac eliminates much of the complexity of a sub-merchant setting up their own online payments. Operating on a platform that acts as a payfac means there’s no need to work with an acquiring bank, payment gateway, and other service providers.

Payfac as a service vs. becoming a payfac

Payfac and payfac as a service are related but distinct concepts. Both offer ways for businesses to bring payments in house, but the similarities end there. For businesses, the difference between using payfac as a service compared to becoming a payfac comes down to time, cost, and risk—in short, payfac as a service requires considerably less of all three.

A payfac is a company that provides payment processing services to other businesses, acting as an intermediary between the business and the acquiring bank and handling the payment processing on behalf of the business. A business can become a payfac, but it involves significant effort and regulatory complexity.

Payfac as a service is a business model where a company provides payfac services to other businesses on a fee-for-service basis. This means that the business outsources its payment processing to a third-party provider, who is responsible for managing the payment processing on its behalf. The payfac as a service provider charges a fee for its services, which often includes a percentage of each transaction processed or a flat fee per transaction.

In a payfac model, the business owns the payment processing systems and has direct control, but the business must assume a complex operational burden. In a payfac as a service model, the third-party provider owns and manages the payment processing systems on behalf of the business, which means minimal operational effort is required from the business. Payfac as a service features, such as those offered by Stripe, provide white label solutions that mitigate the downsides of outsourcing payment facilitation for platforms.

Benefits of using a payfac as a service provider

There are several benefits to using a payfac as a service provider:

• Monetizable payments
  
• Ability to accept payments in minutes
  
• Customizable solutions
  
• Less complexity
  
• Reduced time and resource investment
  
• Less risk
  
• Minimal maintenance
  
• Access to expert tech and support around payments
  

Payfac as a service offers a convenient and cost-effective payment processing solution for businesses—especially small and medium-sized enterprises—that allows them to focus on their primary business operations instead of managing payments inhouse. The benefits of this approach, listed below, carry an even greater impact for platforms whose core expertise lies outside the scope of financial services.

Create a new revenue stream from payments

Embedding financial services can grow revenue per customer 2x–5x more than the traditional model. Using a payfac can also boost customer satisfaction, expand market reach, and improve data insights, all of which can help to monetize payments and drive growth for the platform. In terms of monetizing payments, bringing payments in-house by using a payfac provider gives platforms the ability to create a new revenue stream from transaction fees.

The revenue gains associated with embedded finance expand as platforms offer a wider range of services to their submerchants. The Stripe payfac solution, for example, helps platforms drive revenue from other financial services such as loans, issuing card programs, point-of-sale payments, and faster payouts. Traditional payfac solutions are limited to online card payments only.

Strong payment security with faster processing

By using a payfac as a service provider, businesses can benefit from increased security measures that protect against fraud and data breaches. Typically, providers implement advanced security measures, such as encryption, tokenization, and multifactor authentication, to ensure the security of customer data.

Payfac as a service can also improve the efficiency of payment processing for businesses by automating many of the manual tasks associated with payment processing, resulting in faster transaction processing times, reduced errors, and more nuanced, actionable reporting.

Less expertise, operational burden, and maintenance

Many tech-forward platforms decline to bring their payments in house because it’s simply not their area of expertise. Payfac as a service gives platforms all the benefits of being a payfac—like customizable processes and access to external, best-in-class payments technology and fraud protection, plus concierge-level support from financial services experts who are perpetually iterating, refining, and evolving the payfac solution—without needing additional expertise.

What to look for in a payfac as a service provider

Finding the ideal payfac as a service provider best suited to the needs of your business and the submerchants you support requires evaluating numerous points of functionality and support:

• Compliance and security: Ensure that the payfac is compliant with regulatory requirements, such as PCI-DSS, and is able to provide a secure environment for processing electronic payments. It's important to look for a payfac that has a strong track record of security and compliance and has implemented measures such as tokenization, encryption, and fraud detection and prevention.

• Payment processing capabilities: Look for a payfac that offers a wide range of payment processing options, including credit and debit cards, ACH, and e-checks. Consider the types of payments that your business currently accepts, as well as those you plan to accept in the future.

• Customizable integrations: Some payfacs offer customizable integrations that allow businesses to easily merge the payfac's services with their existing systems. This can save time and reduce the complexity of the integration process.

• Fees and pricing: Compare the fees and pricing of different payfacs to ensure that you’re getting the best value for your money. Payfac pricing models vary. Depending on the payfac and the nature of its customer base, the payfac might implement flat-rate pricing per transaction, a flat-rate subscription fee that includes payment processing up to a certain volume with overage charges beyond that amount, or interchange-plus pricing (in which the merchant pays the card issuer’s interchange fee plus a fixed markup on top). Look for payfacs that offer transparent pricing and a clear understanding of the fees associated with their services.

• Customer support: The financial functions that a payfac handles are critical to a business’s operations, so it’s important to find one that offers exemplary customer support. This can include phone and email support at all hours, as well as online resources like FAQs and guides.

• Scalability: Ensure that the payfac can scale to meet the changing needs of your business. This can include support for increasing numbers of transactions, new payment methods, and integration with new systems.

• Reporting and analytics: Some payfacs offer reporting and analytics features that allow businesses to track their transactions, view their account balances, and monitor their payments. Having embedded payments and other financial services will yield a tremendous amount of data about your customers. Ideally, you want to find a payfac that has built-in mechanisms for synthesizing and applying data.

How Stripe Connect can help

Stripe Connect orchestrates money movement across multiple parties for software platforms and marketplaces. It offers quick onboarding, embedded components, global payouts, and more.

Connect can help you:

• Launch in weeks: Use Stripe-hosted or embedded functionality to go live faster, and avoid the up-front costs and development time usually required for payment facilitation.

• Manage payments at scale: Use tooling and services from Stripe so you don’t have to dedicate extra resources to margin reporting, tax forms, risk, global payment methods, or onboarding compliance.

• Grow globally: Help your users reach more customers worldwide with local payment methods and the ability to easily calculate sales tax, VAT, and GST.

• Build new lines of revenue: Optimize payment revenue by collecting fees on each transaction. Monetize Stripe’s capabilities by enabling in-person payments, instant payouts, sales tax collection, financing, expense cards, and more on your platform.

Learn more about Stripe Connect, or get started today.