Should Your Business Use a PayFac For Credit Card Processing?

Payment Facilitators (PayFacs) have exploded in popularity in recent years. 

Platforms like Stripe, Square, and PayPal make it easy for businesses to start accepting credit card payments in minutes without a lengthy underwriting process. There are no confusing applications or complex contracts, either.

But this convenience comes at a cost.

While PayFacs work well for many businesses, they’re not always the most cost-effective or flexible solution—especially for merchants processing high volumes of payments or those operating on thin margins.

I’ll help you figure out if a PayFac is right for your business, how to reduce costs if you’re using a PayFac, or whether you should go another route.

What is a PayFac?

A PayFac (short for Payment Facilitator) is a company that allows businesses to accept card payments without applying for their own merchant account. 

PayFacs operate a master merchant account with a processor and assigns businesses a sub-merchant ID under the larger umbrella. This structure lets businesses start accepting payments quickly, without all the red tape involved in setting up a traditional merchant account.

Examples of popular PayFacs include:

• Stripe
• Square
• PayPal
• Shopify Payments
• Toast

These providers let merchants accept payments without having to establish a direct relationship with an acquiring bank. 

Read More – Square vs. Merchant Account: Key Differences Explained

How PayFacs Work Behind the Scenes

When using a payment facilitator, you’re technically not the direct customer of the actual payment processor. The PayFac is.

Here’s how it works on a high level:

1. PayFac holds a master merchant account with an acquiring bank.
2. Businesses apply to be a sub-merchant under the PayFac’s umbrella.
3. The PayFac handles the underwriting, onboarding, risk management, and settlement.
4. Merchants are paid out by the PayFac—not directly by the processor. 

For businesses, this setup allows for faster onboarding but limits your control.

Using a PayFac adds an extra step to the funding process. The acquiring bank settles the funds to the PayFac first, who then distributes the money to each individual sub-merchant. 

But since the PayFac assumes the risk, they reserve the right to freeze funds, hold payouts, or even shut down your account if they flag any suspicious activity.

On the consumer side, there’s really no difference if the merchant uses a PayFac vs. a traditional processor. Card payments are accepted quickly and securely in both scenarios, with no distinguishable difference on the front end. 

Pros and Cons of Using a Payment Facilitator (PayFac) to Accept Card Payments

PayFacs offer several perks and compelling advantages, which is why they’ve become so popular. Just make sure you weigh the downsides of using a PayFac before you jump in assuming it’s all perfect.

Pros

• Instant setup and approval: Most PayFacs can have you accepting payments within minutes.
• No complex underwriting: This allows new businesses, higher-risk merchants, and owners with bad credit to process card payments without waiting on bank approvals.
• Simple and transparent pricing: PayFacs typically use flat-rate pricing models, like 2.9% + $0.30 per transaction, which makes it easy for businesses to understand their costs.
• All-in-one integrated solution: Many PayFacs have robust technology that goes basic payment processing, offering additional tools for inventory, reporting, accounting, billing, and more. 
• Low barrier to entry: It’s a great way for new or low-volume businesses to start accepting payments using a single provider without having to go through extra steps.

Cons

• Higher fees: While flat-rate processing might sound simple, it’s significantly more expensive than interchange-plus pricing structures at scale.
• Account holds, rolling reserves, and freezes: Your account is subject to the PayFac’s risk team, and they can delay or deny your payouts without warning at any time.
• Lack of transparency: You don’t see what you’re actually paying for, and the PayFac’s high markup is masked by its “simple” pricing model. 
• Limited support: This varies by provider, but PayFacs don’t typically have the best reputation for payment-specific support, as they’re managing other software solutions with support geared toward developers. 
• Less room for negotiation: Unless you’re a high-volume merchant, you’ll have a much tougher time negotiating your rates with a PayFac.

PayFac Pricing Models and Cost Comparison Explained

Regardless of your pricing structure, PayFacs are always going to be more expensive than using a traditional payment processor. Not only are they a middleman in the payment flow, but they’re also providing extra services that they need to be compensated for.

PayFacs typically offer pricing that looks something like this:

• 2.6% + $0.30 per transaction (in-person)
• 2.9% + $0.30 per transaction (online)
• 3.5% + $0.30 per transaction (manually keyed or card-on-file)

Many businesses—especially startups and smaller companies—like the idea of this flat-rate processing model because it’s easier to understand.

But despite its simplicity, flat-rate processing is very expensive. PayFacs set their rates high enough to ensure all of the interchange fees and other costs are covered, plus a significant margin into their pockets.

Read More – How Flat-Rate Credit Card Processing Eats Into Your Profits

Flat-Rate vs. Interchange Plus

If you’re using PayFac, do whatever you can to get set up on an interchange-plus contract. The markup will probably be slightly higher than you could get by going directly to a processor, but you’ll still save thousands compared to just taking the advertised flat rates.

While not always promoted, lots of PayFacs do offer interchange-plus pricing. 

For example, if you read our Stripe review, I break down the costs of three different clients that are each on a different pricing structure.

The interchange-plus route is always the most cost-effective because you’re paying the wholesale rate per transaction plus a predetermined markup to the PayFac.

Cost and Savings Comparison

Once you start processing $10,000 or more per month, the convenience of flat-rate pricing isn’t really worth it. 

Flat-Rate Example

Businesses processing $50,000/month would pay roughly $1,450/month at 2.9% + $0.30 per transaction.

Interchange-Plus Example

The same business on an interchange-plus plan could pay closer to $950/month, saving $6,000 annually with no change to volume. 

Hidden PayFac Fees to Watch Out For

Beyond the costs you pay to process each transaction, many PayFacs have additional fees and hidden costs that can eat into your margins and raise your effective rate.

Examples include:

• Reserve funds — Some hold back 5-10% of your funds in a rolling reserve to cover risk.
• Account fees — $25 to $50 per month (sometimes billed annually) as a maintenance subscription that includes additional “features.”
• Instant deposits — If you want funds right away, you’ll likely need to pay 1% of the deposit amount to get them ASAP.
• Currency conversion — Another 1-2% to process international card payments.
• Chargeback fees — $15 to $25 per customer dispute.
• Refund and void fees — $0.10 to $0.50 per instance.

You also need to account for terminal fees and POS hardware, which is often billed as a monthly subscription. 

When you factor in all of these costs, you’re likely paying at least another 1% on top of the advertised flat rate—ultimately bringing your effective rate closer to 4-5% (which is way too high).

Who Should (and Shouldn’t) Use a PayFac?

The decision to use a PayFac depends largely on your business type, transaction volume, and growth plans.

Ideal PayFac Candidates:

• Newer businesses processing less than $10,000 per month
• Anyone who needs to start accepting card payments immediately
• Seasonal or irregular businesses seeking month-to-month flexibility
• Businesses with no credit or bad credit
• Companies fine with paying a premium rate for convenience 

Who Should Avoid PayFacs:

• High-volume merchants
• Well-established businesses
• Businesses with thin margins
• Merchants operating in industries with high chargeback rates
• Businesses that need highly customized setups and integrations 

Cost-Saving Strategies

If you’re committed to using a PayFac for any reason, it doesn’t mean that you should just accept high rates and overpay for processing. 

There are a few cost-saving strategies that you can implement right away. 

Negotiate Interchange-Plus Pricing

Do not accept the basic flat-rate pricing terms being advertised by your PayFac. Ask for an interchange-plus deal, which you can do when you’re first signing up or after you’ve already established a relationship.

If they won’t give you an interchange-plus contract because your volume is too low, then try to negotiate a lower rate (like 2.3% + $0.10 instead of 2.9% + $0.30).

Audit and Monitor Additional Fees

Read your monthly statements and review each line item with scrutiny. What exactly are you paying? Where are those fees coming from? Are they legitimate?

If you’re unsure, a merchant consultant can help you understand these costs and even negotiate on your behalf to get bogus fees removed from your account. 

Don’t Switch Processors

While you might be tempted to move away from a PayFac and switch to a traditional processor, this isn’t always more cost-effective.

You actually have more leverage with your current PayFac because they don’t want to lose your business. Plus, there’s a lot more that goes into changing your payment operations beyond the cost per transaction. 

So I recommend trying everything in your power to get a lower rate with your existing provider before you jump ship.

Final Thoughts: Is a PayFac Right For You?

PayFacs have definitely earned their place in the payments space. They’re a solid option for small and low-volume businesses seeking a simple way to accept card payments.

But just be aware that using a PayFac is never going to be the cheapest option.

You’re paying for convenience and technology. Some merchants we’ve worked with are totally fine with that. Others prefer to save an extra $10k or $20k every year.

If you need some help determining the best solution for your business, contact our team here at Merchant Cost Consulting.

Whether you’re considering a PayFac for the first time or you’re already using a PayFac that’s overcharging you, we can help you get the best possible deal on payment processing without switching providers or changing operations.