US retail ecommerce sales are expected to reach $1.7 trillion by 2026, and an entire industry has appeared to provide online payment processing services. There are many different types of payment service providers, including payment facilitators (payfacs) and payment aggregators. Both payfacs and aggregators offer businesses the convenience of accepting online payments without needing to establish a direct relationship with a bank. But what’s the difference between them?

Choosing between using a payfac or a payment aggregator requires careful consideration and can significantly impact business operations, growth, and success in the digital marketplace. This choice will influence factors such as cost per transaction, customer experience, speed of fund availability, and operational efficiency. Here’s what you need to know about payfacs and payment aggregators, and how to decide which one is the right fit for your business.

What’s in this article?

• What is a payment aggregator?
  
• What is a payment facilitator (payfac)?
  
• What are the differences between payment aggregators and payfacs?
  
• Do I need a payment aggregator or a payfac?
  
• Is Stripe a payment aggregator or a payfac?
  

What is a payment aggregator?

A payment aggregator is a service provider that allows businesses to process card payments and mobile transactions without setting up a merchant account with a bank or card network. Instead, the aggregator manages one merchant account and combines all its clients under this umbrella account.

For businesses that use a payment aggregator, a transaction looks like this: when a customer makes a payment, the money initially goes to the payment aggregator. The aggregator then sends the funds to the business’s business bank account, minus transaction fees. By doing this, payment aggregators make it easier for businesses to accept a wide variety of payments without the hassle and costs associated with establishing and managing their own merchant account.

What is a payment facilitator (payfac)?

A payment facilitator (payfac) is a service provider for businesses that simplifies the merchant-account enrollment process. A payfac is a type of payment aggregator, but it typically provides a more comprehensive suite of services. Payfacs are registered independent sales organizations (ISOs) that have been sponsored by an acquiring bank. They maintain a master merchant account and let submerchants use this account to process transactions.

What are the differences between payment aggregators and payfacs?

Payment aggregators and payfacs both enable businesses to accept payments without an individual merchant account. However, each model provides different levels of service, responsibility, and control. Here’s an overview of the key differences:

• Merchant ID handling
  A merchant ID, also known as a “merchant identification number” or “MID,” is a unique identifier assigned to a business by a payment processor or acquiring bank. It serves as a reference number for tracking and identifying transactions that the business processes. Payment aggregators use their own MIDs to process all transactions. This simplifies setup, but might limit customization and control. Payfacs assign each submerchant a unique MID, which allows for more precise transaction tracking, reporting, and control.

• Scope of services
  Typically a payfac offers a broader suite of services compared to a payment aggregator. While both models allow businesses to accept payments, a payfac might provide additional services such as payment gateway integration, hardware for in-person payments, fraud protection, transaction reporting, and customer support.

• Onboarding process
  With a payment aggregator, the onboarding process is usually quick and straightforward, making it suitable for small businesses or individual sellers. In contrast, payfacs usually have a more detailed onboarding process to assess the risk each submerchant presents. Some payfacs, such as Stripe, have streamlined the onboarding process. But onboarding is still more involved than it would be with a payment aggregator, since there’s more depth and complexity to the relationship between a business and a payfac.

• Risk management
  Payfacs have additional responsibilities related to risk management and compliance because they enroll and underwrite businesses, accepting the risk associated with their transactions. Payment aggregators tend to take a more hands-off approach, which could mean higher fees for businesses.

• Control over funds
  Payfacs have more control over the flow of funds. They manage the entire transaction process, from when a customer makes a payment to when the funds reach the business. Payment aggregators typically only facilitate the payment transaction itself.

• Cost
  The cost model can vary. Payment aggregators may charge a flat fee per transaction, which can be higher than what a payfac might charge. In contrast, many payfacs have a tiered pricing model based on transaction volume. For example, Stripe charges 2.9% + 30¢ per successful card charge for most businesses, but offers custom pricing packages for businesses that have unique business models or work with high transaction volumes.

• Merchant support
  Due to a close relationship with their submerchants, payfacs often provide better support, while payment aggregators might offer a standard level of customer service. For instance, Stripe often provides comprehensive services for businesses’ entire payments ecosystems. It’s important for those businesses to have 24/7 access to support, in order to troubleshoot any issues and prevent undue disruptions for their customers. To that end, Stripe offers round-the-clock support via email, phone, and chat.

Do I need a payment aggregator or a payfac?

Understanding the differences between the types of payment service providers is the first step in deciding whether a payment aggregator or a payfac might be the best fit for your business. You’ll also need to consider several factors, including:

• Business size and transaction volume
  Smaller businesses or startups with lower transaction volumes may find payment aggregators more suitable, since they often have simpler sign-up processes and lower up-front costs. Larger businesses with high transaction volumes might benefit from the more comprehensive services and potentially lower fees of a payfac, thanks to volume-based pricing.

• Business model
  If you are running an online marketplace and have multiple submerchants, becoming a payfac or using a payfac model can be a good choice. This route allows you to simplify the onboarding process for your submerchants and handle payments smoothly. To learn more about how Stripe powers payments for submerchants at scale for marketplaces, go here.

• Risk tolerance
  By underwriting submerchants and handling transaction disputes, payfacs take on more risk. If your business is in a higher-risk industry, it might be harder to find a payfac willing to work with you, or they might charge you higher rates. A payment aggregator, which doesn’t underwrite individual businesses, could be a better fit.

• Customization and control
  Payfacs offer a greater degree of control over the payment process, enabling you to customize the payment experience to fit your business. If control over the customer payment experience and transaction flow is crucial, a payfac might be a better choice.

• Pricing and fees
  Payment aggregators may charge a flat fee per transaction, while payfacs might offer volume-based pricing. If your business processes large volumes of transactions, the payfac model could end up being more cost effective.

• Payout speed
  Depending on the provider, payfacs can offer faster payouts because they manage the entire transaction process.

• Customer support
  Payfacs often provide better support for their submerchants due to their closer relationship and more significant responsibility. If you require on-demand, personalized support, a payfac might be preferable.

Once you decide which category of service provider is the best fit for your business, research specific providers. Take the time to fully understand the terms and conditions associated with each provider before making a decision. This is a good opportunity to consult advisors and trusted peers in your industry.

Is Stripe a payment aggregator or a payfac?

Stripe operates as a payfac, allowing businesses to accept payments without setting up a traditional merchant account on their own. Instead, businesses or individuals can create an account with Stripe, which extends merchant account functionality to them.

Stripe provides a range of services beyond payment processing, such as payment gateway integration, fraud detection, reporting tools, and more. This comprehensive suite of services, combined with Stripe’s responsibilities around compliance and risk management, means Stripe’s model is closer to a payfac than a basic payment aggregator model. This adaptability and broad range of services make Stripe a suitable partner for businesses at any stage of growth and across a wide array of industries and business models. To learn more and get started, go here.