Here’s everything you need to know about payment facilitators and their functions.
The payment management ecosystem goes beyond what can be seen from the outside.
A payment facilitator is the linchpin for facilitating smoother payment experiences for the sub-merchants.
But, who are sub-merchants, and why are payment facilitators helping them?
And who are these ‘acquiring’ banks?
The following will discuss in detail all such things.
So, let’s get to it.
Understanding The PayFac Model
Let’s assume that you’re a small business owner in the hardware industry. You have an online store, a website, a logistics setup, and everything. But in order for your online store to function and enable order placement, you will need to provide a smooth transaction process for your customers.
Now, for this setup to come into action, you will need to connect with your bank, which is usually connected with payment facilitators or “merchants” who provide the necessary technology to set up the payment infrastructure.
The payment facilitators reach out to your business and help integrate a seamless payment gateway network technology.
When this happens, your business can make and receive payments online using third-party payment networks (Venmo, PayPal, etc.) and network cards (credit/debit cards).
In this context, the bank is “acquiring” the merchant, hence the bank is called an ‘acquiring bank’. The acquired merchant (the payment facilitator) then connects with a sub-merchant (your business) in order to integrate the online and digital payment technologies for your business.
So, when the buyer makes a payment on your online store, the payment facilitator receives the funds immediately and transfers the funds to you later. Although this is an older model, there are advanced PayFac merchants who facilitate real-time payment experiences for their customers.
Who Is A Payment Facilitator?
A payment facilitator is someone who facilitates electronic payments for emerging sub-merchants or small businesses. These sub-merchants can be small businesses, startups, and other micro-entities that do not have a payments management ecosystem.
A payment facilitator underwrites the sub-merchants and proceeds to onboard the profile. Underwriting is a risk assessment practice that helps the PayFac entity understand the nature of the sub-merchant business and the risks involved in onboarding such a profile. After the vetting process, the PayFac entity adds the sub-merchant to its master list of sub-merchants or customers.
When the PayFac entity integrates the necessary payment technologies, the sub-merchant (your business) starts accepting various online payments through network cards and online (no-card-required) payment methods.
What Is A PayFac?
PayFac is just short for ‘payment facilitator’. A PayFac is commonly used to term the payment facilitation model and for acknowledging the payment facilitator merchant.
A payment facilitator or a PayFac helps sub-merchants accept electronic payments and network card payments by providing the digital infrastructure necessary to accept such payments.
What Does A Payment Facilitator Do?
As the term suggests, a payment facilitator precisely facilitates payment experiences for their customers or sub-merchants of the acquiring banks. A payment facilitator helps sub-merchants with integrating their digital ecosystem with a variety of online and payment card solutions, helping the sub-merchants accept payments from customers.
A payment facilitator holds a master merchant identification number (MMIN) which helps the PayFac onboard customers without having to create separate merchant accounts for each of the sub-merchant users (which is a process that was followed traditionally). This simplifies the account management process and enables a smoother flow.
Right from approving/rejecting the customer profiles, to integrating the necessary payment technologies, to monitoring compliance, a payment facilitator has a variety of functions,
Functions Of Payment Facilitators: An Overview
- Processing the applications of the sub-merchants who want the PayFac’s payment interface
- Underwriting and on-boarding the sub-merchants after a risk assessment
- Achieving an amicable pricing agreement with the sub-merchants
- Providing the infrastructure necessary for their sub-merchants
- Helping sub-merchants begin accepting network card payments.
- Monitoring the account activity for noncompliance
What Are The Compliance Obligations For Payment Facilitators?
Payment facilitators are required to follow a few regulatory compliance protocols to avoid risk. Just like an insurance company, a payment facilitator, too, underwrites the sub-merchant to assess the risk quotient and verify if the sub-merchant would fit into the risk threshold of the PayFac entity.
A payment facilitator must also verify the identities of the sub-merchant and check if the business details provided are in accordance with the incorporation details recorded in the federal records.
Payment facilitators are also required to monitor the risk of the sub-merchant per the compliance schedule policy of the PayFac. This would help the PayFac entity to check if the sub-merchants are functioning within the regulatory guidelines of the federal laws. Any inconsistencies in the process will be flagged by the PayFac and must be addressed by the sub-merchant as necessary.
Key focus in regulatory compliance for PayFacs.
A Payment facilitator must verify the basic identity details of the sub-merchant along with the proof of identification to ensure that the identities match the real-time federal records.
This includes verifying the TIN/EIN/Social Security Number of the profile along with their legal names. You can start verifying the TIN/EIN/SSN + legal name of the sub-merchants with Tax1099’s real-time TIN Matching system.
Protect your payment ecosystem from onboarding high-risk profiles with a history of money laundering or fraud. Anti-Money Laundering and Anti-Terrorism Financing regulations specify that the identities of the businesses and individuals must be thoroughly vetted against the real-time identity databases of the US Treasury Department.
This helps ensure that your payment facilitation ecosystem is free from money launderers and other high-risk profiles who misuse the financial technology your business offers. This additional step also prevents the PayFac entity from on-boarding profiles (both entities and persons) from countries targeted by the U.S. government.
When you plan on on-boarding a sub-merchant, make sure that the profile is free from any adverse media coverage. This step also reiterates rejecting money launderers and related financial fraud participants who could adversely harm or misuse the integrated payments ecosystem.
Continuous Risk Monitoring
Continuous risk monitoring is the process where the participating merchants and their accounts are audited to identify any suspicious activity. This step also includes a comprehensive verification process at timed internals, where the key profiles of the sub-merchant entity are vetted. This helps the sub-merchants to maintain tax and regulatory discipline throughout the year.
If found to be suspicious, the PayFac entity can alert the local authorities (in some cases, banks must also be alerted since the accounts are inter-connected) for swift and stringent action.
How Tax1099 Can Help Your Payment Facilitation Entity
Tax1099 is an IRS-authorized digital tax and regulatory compliance interface. If you’re a PayFac, your sub-merchant vetting processes are powered with our suite of identity verification solutions, including but not limited to:
- Real-time IRS TIN Matching
- USPS Address Validation
- PEP Watch List
- In-demand AML and KYB checks
Establish a KYC/KYB-compliant payments ecosystem with Tax1099. Verify your sub-merchants in real-time and improve your approval rate.
Sign Up Now For Free & Optimize your compliance process. Or with our Tax1099 API, you can automate the processes such as KYC/KYB compliance checks, Tax-exempt checks, OFAC checks, DMF checks, TIN matching and 1099 bulk filings. Schedule a Demo Now to see our software in action and how it works.
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