High Risk Merchant Handbook

Merchant of Record vs PayFac Model

Both models let you take cards without your own acquiring contract. They sit in different spots in the payment chain and split the duties in different ways.

You want to take card payments without signing your own acquiring contract. Two models promise that. One is the merchant of record. The other is the payment facilitator. They are not the same thing, and the differences show up in who you sign with, who pays for fraud and how your money moves. Visa's own guide gives us a clear picture of the payment facilitator side.

What each model is

A merchant of record is a company that sells to the buyer in the card system's eyes. The buyer's card is charged by that company, not by you. That company owns the sale end to end. It handles the payment, the sale's tax duties, and refunds. It also carries the rules that bind a seller.

Visa's guide says a payment facilitator is also known as a PayFac or merchant aggregator. A PayFac does not become the seller. It signs you up and sends your sales through its acquirer. Visa's guide says a sponsored merchant is a merchant whose payment services are provided by a payment facilitator. In that model, you stay the seller. The PayFac stands behind you.

So the short answer to a common question: no, a merchant of record is not the same as a PayFac. One takes your place as the seller. The other clears a path for you to keep that role.

Where each sits in the payment chain

Visa's guide names three key players in the PayFac model. These are the acquirer, the payment facilitator, and the sponsored merchant. The acquirer is the bank that sponsors the PayFac. The PayFac sits between that acquirer and you. You are the sponsored merchant at the end of the line.

Visa's guide says Visa treats a payment facilitator's sponsored merchant as a merchant of the payment facilitator's acquirer. So the chain still ends at a bank. The PayFac just shortens your part of it.

A merchant of record sits in the buyer's view of the chain, not the bank's. The buyer sees one seller. Behind that seller, there is still an acquirer and still a processor. You sit outside the card chain as a supplier or service provider to the merchant of record.

Who holds the merchant contract

Visa's guide says payment facilitators enter into payment services contracts with sponsored merchants in order to provide payment services. It also says a payment facilitator can own the merchant relationship itself. The acquirer does not have to sign that contract. Your contract is with the PayFac. The acquirer's contract is with the PayFac too, not with you.

With a merchant of record, your contract is not a payment services contract at all. You agree to sell through that company. The card contract sits between the merchant of record and its own acquirer. You never touch it.

In both cases you escape the direct acquiring contract. That is the shared promise of the two models. Who you sign with and what the paper covers is where they part ways.

Who pays for disputes and fraud

This is where the models feel most different day to day.

Visa's rules say a Payment Facilitator or DWO is liable for all acts, omissions, and Cardholder disputes caused by its Sponsored Merchants. They also say a Sponsored Merchant's acts and failures count as the Payment Facilitator's own. The blame rolls up the chain. Visa's guide says acquirers are responsible for the acts of both payment facilitators and sponsored merchants.

A PayFac still has ways to limit its own loss. Visa's guide says payment facilitators may use merchant reserves as a way to reduce loss exposure. It says reserve funds belong to the sponsored merchant. The acquirer must hold and control them. A PayFac can also hold back your money. Visa's guide says a payment facilitator may hold a seller's payout for a time. It may do so when a payout could lead to a loss.

With a merchant of record, ask who handles each dispute. What it takes back from you depends on your contract. Read that part closely before you sign.

How settlement and funds flow

Visa's guide says the acquirer puts the settlement funds right into the payment facilitator's account. From there, the PayFac pays its sponsored merchants. You get paid by the PayFac, from money the acquirer already sent it.

Visa's guide says acquirers are obligated to pay the settlement obligations of their merchants and third party agents on a timely basis. Visa's guide says acquirers require PayFacs to honor their sellers' settlement obligations. But the money passes through an extra pair of hands before it reaches you.

A merchant of record collects the whole sale. It then pays you under your agreement with it. The card system pays the merchant of record, not you.

What Visa requires of payment facilitators

The PayFac model is not a loose one. Visa's guide says payment facilitators and marketplaces are third party agents that require sponsorship and registration by an acquirer. An acquirer must wait for Visa to confirm a PayFac's registration. Only then can it send transactions for that PayFac.

Visa's guide also says payment facilitators must have sound merchant underwriting policies. These must follow the Visa Rules, the GARS, and the acquirer's own acceptance criteria. It says they must decide on each new seller. They can approve it, approve it with terms, or turn it down. It says they must keep watching their sellers' websites. They must also watch each seller for risk and for odd activity.

Visa's guide says payment facilitators are prohibited from providing payment services to outbound telemarketers, other payment facilitators, and marketplaces. It also says a PayFac must sign up with Visa before it serves high-brand risk merchants. It must register as a High-Risk Internet Payment Facilitator.

Visa's guide says acquirers must keep oversight of the PayFacs they sponsor. See why banks watch payment processor accounts for how that oversight works.

Which model fits which business

No one can pick for you from the outside. The right question is what you want to keep and what you want to hand off.

Want to keep your seller name, your customer data, and your prices? A PayFac may fit you. You stay the seller. You keep the buyer relationship and the duties that come with it.

Want someone else to own the sale, the tax duties and the dispute front line? Then a merchant of record takes more off your plate and takes more control in exchange.

Do you sell in a restricted category? Ask hard questions either way. A PayFac must follow its acquirer's acceptance rules. A PayFac must register with Visa before it signs high-brand risk sellers. Do you sell by phone? Read up on billing authorization on phone sales too. Visa's guide says PayFacs may not serve outbound telemarketers.

Questions to ask before you sign

Ask any provider, of either model:

  • Who is the merchant of record for each sale? Get it in writing.
  • What does our contract cover: payment services, or the full sale?
  • Who handles a chargeback, and who funds it first?
  • Can you hold or suspend my settlement, and under what terms?
  • What seller types can you not board? Are you registered with Visa to sign high-risk sellers?
  • What do you monitor on my website and my transactions?
  • What tax and compliance duties do you take, and what stays with me?

Compare the answers against your own sales model. Both models get you card access. But they sit in very different seats in the chain. Pick the seat you can live with.

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