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What is an ACH payment facilitator?

Last editedJan 20222 min read

Modern technology helps blur the lines between business, bank, and payment networks. Payment gateways offer more ways than ever to facilitate transactions and accept multiple payment methods right from your own website. If you want to accept ACH payment from customers, you might want to consider using a payment facilitator, or PayFac. What is a PayFac exactly, and how does this type of solution work? Here’s what you need to know.

What is a PayFac?

PayFac is short for payment facilitator, which refers to any merchant service that enables business owners to accept electronic payments in person as well as online. How does this differ from using an individual merchant account? When you sign up for a PayFac platform, your business won’t have an individual account. Instead, the platform works as a third-party to help process ACH payments in a similar way that a service like PayPal does. Transactions are pooled together and processed as a group over the ACH network.

How does an ACH payment facilitator work?

To help visualize how a payment facilitator works, imagine that you have payment processors on one end of the spectrum and merchants on the other. A PayFac will fall in the middle of this spectrum, providing payment processing services using sub-merchant accounts. They’re closely related to independent sales organizations (ISOs), but the main difference is that ISOs repackage payment processing services and sell them on behalf of a larger company. By contrast, the PayFac directly processes payments.

By signing up for a sub-merchant account, the business owner can accept ACH payments directly on their own ecommerce website or marketplace. They don’t need to apply for a merchant ID (MID) from a payment processor. Instead, the payment facilitator acts as a middleman to perform the work of the processor under the PayFac’s own MID. The PayFac is partnered with a payment processor or bank to provide these services to its sub-merchants.

Types of PayFac payment gateways

There are a few types of payment facilitators to be aware of.

  1. Traditional solution that partners with a bank or vendor to build custom systems for payment processing, onboarding, and payment acceptance.

  2. Modern solution that uses technology to embed payments into your business software. You’ll create your own sub-merchant experience. Examples include Stripe or Square.

  3. A web-based service directed at SaaS businesses blending accounting features with payment processing and transaction reconciliation. Examples include Xero and QuickBooks.

Pros and cons of PayFac platforms

There are advantages and disadvantages to using an ACH payment facilitator. While card payment remains the top option for retail businesses, ACH processing is increasingly popular for service-oriented businesses operating online. However, one thing to keep in mind is that there’s no authorization layer with ACH processing. The system won’t verify that a customer has the funds in their account before going ahead with the payment process, compared to a credit card transaction that authorizes the payment upfront. This does mean that ACH payment facilitators might involve a slightly higher level of risk.

If you’re thinking of becoming an ACH payment facilitator, you’ll need to put robust risk prevention and security measures in place. Because PayFacs lend their merchant IDs to customers, any resulting financial problems are the facilitator’s responsibility.

When looking at PayFac platforms, their primary benefit is convenience. They’re more accessible to businesses than traditional merchant accounts, particularly for start-ups or entrepreneurs who may not be ready to commit to a full-service account. Sub-merchant accounts using PayFacs are easier to set up and are ready for use on the same day. This makes them worth considering for any small ecommerce start-up.

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