Maintaining payment ecosystems has become more complex, and it’s especially important for businesses to understand the various types of payment solutions. Businesses need to choose the right mechanism for accepting and processing these payments, tasks for which there are many third-party options. Two types of payment providers stand out: payment processors and payment facilitators (payfacs). Before businesses can decide which type of provider is the best fit, they first need to understand the distinctions between them.

The choice between a payment processor and a payfac can significantly impact your bottom line because it affects how your business operates, the costs you incur, and how quickly you can accept digital payments. It’s important to consider factors such as your business’s size, transaction volume, and specific needs. Below are insights into payment processors and payfacs, including what they are, how they differ, and what each can offer businesses. Here’s what you need to know.

What’s in this article?

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

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’s role is to facilitate, at every stage, the process between the customer who makes a payment and the business’s bank that receives the funds.

When a customer pays for a product or service, the payment processor’s responsibilities are to:

• Authenticate the details of the card
  
• Secure the transaction
  
• Confirm that there are sufficient funds in the customer’s account
  
• Obtain approval for the transaction from the bank
  
• Notify the business of the successful transaction
  
• Transfer the funds to the business’s account
  

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

What is a payment facilitator (payfac)?

A payment facilitator (payfac) is a type of merchant services provider that simplifies the payment process for businesses. Instead of each individual business needing 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 may not have the transaction volume to justify opening their own dedicated merchant account and for businesses that want to begin accepting payments quickly.

A payfac is also responsible for underwriting and risk assessment, settling funds with submerchants, dealing with 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 deal with 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, on the other hand, 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 their own risk management and compliance with payment industry standards and regulations. Payfacs handle underwriting, risk assessment, and ensure that all submerchants are compliant. They also manage chargebacks, a service that can be a significant convenience for businesses.

Do I need a payment processor or a payfac?

Deciding whether to use a payment processor or a payfac depends on several factors, including a business’s size, transaction volume, and specific needs. Here are some considerations that can help a business make the decision:

• Size and transaction volume of the business
  If a business is new or small, with low transaction volumes, a payfac might be the best choice. Often, payfacs have simpler pricing models and faster onboarding, which can help a small or new business start accepting card payments almost immediately. For larger businesses or those with high transaction volumes, a dedicated merchant account through a payment processor may 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 run. This, of course, depends on which provider you’re considering. Some payfacs, like Stripe, are designed to be tailored to businesses of all sizes, from independent businesses to global platforms.

• Time to market
  If quick setup is a priority—for a seasonal business, a startup that needs to start processing payments quickly, or an online business looking to launch fast, for example—a payfac can provide 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. On the other hand, if a business would rather offload some of the complexities of payment processing, like risk assessment and compliance, a payfac can take care of these aspects.

• Pricing structure
  Payfacs usually charge a flat rate for each transaction, a simple structure which might, ultimately, prove higher than the rates from traditional payment processors. Payment processors often have a more complex pricing structure that could include interchange fees, assessment fees, and a markup. While this structure 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.

• Customer support and additional services
  Consider the level of customer support you need. Do you prefer 24/7 phone support, or is email support sufficient? Stripe offers 24/7 support via email, chat, and phone. Also, think about if you need additional services such as payment gateway services, POS systems, and mobile payment options. Some payment processors and payfacs provide these as part of their packages.

In short, there’s no one-size-fits-all answer, and the decision should be based on the specific needs and circumstances of the business. Identify your exact needs and goals, both now and in the future, consider potential growth trajectories and their associated requirements from a payment processing standpoint, and vet potential providers against all of this important information. Finding the right provider—whether that’s a payment processor or a payfac—is key to optimizing your payment system, so it’s worth taking your time to decide.

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 backbone that allows businesses to accept and manage online payments, managing 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 go through the often-tedious process of opening their own merchant accounts. This benefit is significant, especially for smaller businesses or startups that need to begin accepting payments without any hassle. That said, Stripe goes beyond the conventional parameters of a payfac—which tend to be associated with smaller businesses—by offering an extensive range of scalable solutions that can be tailored 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, to mobile payments, to marketplace payments, all within the same ecosystem and all with unified reporting. This results in a streamlined process for businesses and a seamless experience for customers. By combining the roles of payment processor and payfac, Stripe provides a versatile and powerful solution that caters to a wide range of business needs.

To learn more about how Stripe can support your business’s payment processing needs, get started here.