Key Terminology in the Payment Facilitation Model

The payment industry has witnessed significant evolution with the advent of the Payment Facilitation (PayFac) model. This innovative approach streamlines the process of enabling businesses to accept electronic payments, making it particularly beneficial for small and medium-sized enterprises (SMEs) and emerging e-commerce platforms. To fully grasp the nuances of this model, it's essential to understand the key terminology that underpins it. This article delves into the fundamental terms associated with the Payment Facilitation model, providing clarity for industry professionals and newcomers alike.

1. Payment Facilitator (PayFac)

A Payment Facilitator is a company that enables merchants to accept electronic payments under a single master merchant account. Acting as an intermediary between the merchants and acquiring banks, the PayFac simplifies the onboarding process by aggregating multiple sub-merchants, thereby eliminating the need for each to obtain individual merchant accounts.

2. Sub-Merchant

A Sub-Merchant is a business or individual that processes transactions under the Payment Facilitator's master merchant account. Sub-merchants benefit from expedited onboarding, reduced compliance burdens, and simplified access to payment processing services.

3. Acquiring Bank (Acquirer)

An Acquiring Bank is a financial institution that processes credit and debit card payments on behalf of the merchant. In the PayFac model, the acquiring bank partners with the Payment Facilitator to handle transactions from sub-merchants.

4. Sponsor Bank

A Sponsor Bank provides the necessary banking infrastructure and compliance support to the Payment Facilitator. They hold the master merchant account and ensure that the PayFac adheres to regulatory requirements set by card networks and financial authorities.

5. Merchant of Record

The Merchant of Record is the entity recognized as the seller in a payment transaction. Though not a recognized model by the Card Associations, in the Payment Facilitation model, the sub-merchant is typically the merchant of record, responsible for delivering goods or services and handling customer service.

6. Underwriting

Underwriting is the process of assessing the risk associated with onboarding a new sub-merchant. This involves evaluating the sub-merchant's business model, financial stability, and compliance with regulatory standards to mitigate potential fraud and credit risks.

7. Know Your Customer (KYC)

KYC refers to the procedures used by financial institutions and Payment Facilitators to verify the identity of their clients. This process helps prevent fraudulent activities, money laundering, and ensures compliance with legal requirements.

8. Payment Processor

A Payment Processor is a company that handles the technical aspects of processing transactions between merchants, acquiring banks, and issuing banks. They facilitate the transfer of payment information and funds during a transaction.

9. Payment Card Industry Data Security Standard (PCI DSS)

PCI DSS is a set of security standards designed to ensure that all companies accepting, processing, storing, or transmitting credit card information maintain a secure environment. Compliance with PCI DSS is mandatory for Payment Facilitators and their sub-merchants.

10. Chargebacks

A Chargeback occurs when a cardholder disputes a transaction, prompting the issuing bank to reverse the payment. Managing chargebacks is crucial for Payment Facilitators, as excessive chargeback rates can lead to fines and termination of merchant accounts.

11. Risk Management

Risk Management involves identifying, assessing, and mitigating risks associated with payment processing. For Payment Facilitators, this includes monitoring transactions for fraudulent activities, ensuring compliance, and managing financial exposure.

12. Boarding

Boarding is the process of enrolling a new sub-merchant into the Payment Facilitator's system. This includes collecting necessary documentation, completing underwriting, and setting up the merchant for transaction processing.

13. Aggregator

An Aggregator is another term used to describe a Payment Facilitator. It is no longer a valid model recognized by the Card Associations.  Aggregators pool multiple sub-merchants under one master merchant account, simplifying the payment acceptance process for smaller businesses.

14. Settlement

Settlement refers to the process of transferring funds from the acquiring bank to the sub-merchant's bank account after a transaction is approved and processed. Timely settlement is vital for maintaining cash flow for sub-merchants.

15. Funding Delay

A Funding Delay is a period imposed on the disbursement of funds to sub-merchants. This practice helps mitigate risk by providing time to detect fraudulent transactions or chargebacks before funds are released.

16. Reserve Account

A Reserve Account is an account where a portion of a sub-merchant's funds is held to cover potential chargebacks or fraudulent activities. This acts as a financial safeguard for the Payment Facilitator and the acquiring bank.

17. Compliance

Compliance involves adhering to laws, regulations, and industry standards governing payment processing. Payment Facilitators must ensure that they and their sub-merchants comply with regulations such as PCI DSS, anti-money laundering (AML) laws, and card network rules.

18. Application Programming Interface (API)

An API is a set of protocols and tools that allow different software applications to communicate. In the context of Payment Facilitation, APIs enables seamless integration of payment processing services into sub-merchants' platforms.

19. Transaction Fee

A Transaction Fee is a charge imposed on each payment processed. This fee typically includes costs from the Payment Facilitator, acquiring bank, and card networks, and is often a combination of a fixed fee and a percentage of the transaction amount.

20. Card Networks, aka Card Associations, aka Card Brands

Card Networks like Visa, MasterCard, American Express, and Discover facilitate the transfer of payment information between acquiring and issuing banks. They set the rules and standards that govern card transactions and charge interchange fees for their services.

Conclusion

Understanding the terminology within the Payment Facilitation model is essential for anyone involved in the payment processing ecosystem. These terms form the foundation of how payments are processed, how risks are managed, and how compliance is maintained. As the payment industry continues to evolve, staying informed about these concepts will enable businesses to navigate the complexities of payment processing effectively.