What is the difference between a payment processor and a payment facilitator (payfac)?

Electronic payments in South Africa are booming. The country made 1.7 billion card transactions in 2020, according to Argus Advisory Research. The trend is set to continue. McKinsey expects the whole of Africa’s e-payments market to grow by around 150% from 2020 to 2025, to reach almost $40 billion in domestic payments revenues.

There are a lot of layers to the payments ecosystem in South Africa, with many players working to make it easier and more secure to move money. Two types of players in the payments space are payment processors and payment facilitators, or payfacs. Choosing the correct one for your business can significantly impact your bottom line and legal obligations. Here are a few of the differences between them and how to determine the best partner to take your enterprise to the next level.

A payment processor is a company that handles the logistics of electronic payments. It acts as a messenger between a merchant and the financial institutions involved in a payment.

Imagine you sell something to a customer who pays with a card. Before their payment can arrive in your account, several things need to happen:

• A payment gateway captures the customer’s card details, encrypts that data and passes it on to a payment processor. A payment processor shares the details with the card network, e.g. Visa or Mastercard, which checks that the card is legitimate and has sufficient funds available
• If the card network approves the payment, the payment processor relays that information back to you – the merchant – so you can accept the payment
• The money then moves from the customer’s account to your account, and the transaction is complete

To use a payment processor, you need a merchant account – a type of bank account for accepting customer payments. It’s a legal requirement to ensure safe payment options for the customer, protect sensitive data and prevent fraudulent transactions. You can’t access a merchant account directly. The funds are automatically transferred to your business bank account after a couple of days.

Getting a merchant account can be a tedious, time-consuming and expensive process involving a detailed application and credit checks. Factors include how long your business has existed and whether it’s considered high risk. If you don’t want to go down this route, there’s another option.

What’s a payfac?

A payment facilitator, or payfac, simplifies the process of accepting payments by acting as both a payment processor and a merchant account. It does this by operating its own merchant account that businesses can use instead of setting up their own. The payfac is known as the ‘master merchant’, and the businesses are ‘sub-merchants’. As a result, payfacs give businesses everything they need to accept digital payments without having to manage integrations with multiple providers, methods and banks.

Payfacs usually do more than just process payments. They offer other services that help to streamline financial operations. These include:

• Underwriting sub-merchants. Payfacs vet businesses before allowing them onto the system. If successful, the business is onboarded
• Risk and compliance. All businesses that accept electronic payments must meet certain requirements. Payfacs assume that responsibility on behalf of sub-merchants by adhering to standards such as the Payment Card Industry Data Security Standard (PCI DSS) as well as card network policies. They can also provide fraud protection, encryption and tokenization
• Refunds and chargebacks. If a customer wants to reverse a transaction, the payfac manages the process. Not having to think about this can be very valuable to businesses

The first payfacs were companies like Stripe and Square, both founded in 2009. Today, there are many others, some of which are household names. For example, in the early days, eBay offered auctions but left buyers and sellers to arrange payment. In order to allow users to make and receive payments on the platform, it acquired its own payfac – PayPal. Similarly, platforms like Shopify, Airbnb, and Uber all operate as payfacs.

Many companies offer both payment processing and payfac services. In South Africa, the most popular companies include Stitch, PayGate and Payfast, but there are more to choose from depending on your specific business needs.

Should you use a payment processor or a payfac in South Africa?

The choice between a payment processor and a payfac depends on your needs as a business.

A payment processor might be right for you if:

• You have high transaction volumes. Although a payment processor’s pricing structure is usually more complicated than the flat rate often charged by payfacs, it could be more cost effective in the long run. Visa and Mastercard cap sub-merchants at $1 million and $10 million in transactions a year respectively. If you are processing more than that, you’ll need to use your own payment processor
• You want more control. Some businesses want to be able to customise their payment flow, which is much easier to do if you have a direct relationship with your payment processor

A payfac might be right for you if:

• You want to start accepting payments quickly. Payfacs can onboard you within hours because they already have a relationship with the payment processor, and underwriting is typically automated. By comparison, onboarding for a payment processor can take up to several weeks because you have to apply for a merchant ID and sign with a sponsor bank. If you don’t have a merchant account, it’ll take even longer
• You don’t qualify for a merchant account. If you have a poor credit record or your business is considered high risk, you may struggle to get a merchant account, which will prevent you from using a payment processor
• You don’t want to worry about risk and compliance. Payfacs usually handle this, but payment processors generally don’t, which could mean taking additional measures such as hiring a security expert or working with another partner. If you do choose a payment processor, make sure it’s PCI-compliant and offers fraud protection
• You only want to interact with one company to accept payments. Payfacs own the relationships with other financial institutions, such as the card networks, which means there’s only one company to call if you have an issue with payments

Generally speaking, a payfac is most suitable for a startup or small business that needs a quick and easy way to accept electronic payments. A payment processor will likely be a better option if you’re a larger international business entering the South African market with more complex needs for your payment setup.

For those businesses, Stitch has a product partnerships team that can work with you to help with legislative and compliance requirements. We act as your on-ground eyes and ears to provide localised insights that enable you to optimise your payments experience and processes.

Choosing the right payment processor or payfac

Whichever method you choose, there are some important considerations to bear in mind:

• Compatibility. Your payment system should work smoothly with the other e-commerce software you’re using 
• Freedom. A payment processor or payfac should suit your business, not the other way round. With Stitch, you’re free to bring your own banks, providers and agreements, combined with Stitch methods, so you always have access to the solutions that perform best for you
• Scalability. As well as thinking about your needs today, consider where your business is headed and what requirements it may have in the future. Your payment system should scale with you, rather than buckling when you get to a certain size

Whether you opt for a payment processor or payfac, the company you choose will become a crucial part of your payment system and a trusted partner. It’s worth taking your time to make a smart decision that will benefit your business for the long term.