By Adam Atlas
Attorney at Law
It used to be unacceptable to process transactions for multiple merchants through a single account; now everyone is doing it with payment facilitators (payfacs) and payment service providers. In this article, I'll discuss legal issues pertaining to this new, legitimate form of aggregation, which a number of payfacs consider or use as a solution for the payments element of their business ideas.
A payfac is a relatively new form of registration with the payment networks that allows an entity to acquire payment card transactions for multiple sub-merchants through a single master merchant account. In plain English, a payfac has its own merchant account that it can use to process transactions for multiple merchants. Those merchants are often called sub-merchants, each of which has a separate merchant identification number. Merchants who reach $100,000 in processing volume are no longer aggregated and become direct merchants with acquirers.
Payfacs enjoy certain advantages:
In contrast, payfacs assume the risk of fraud or other losses on merchant accounts, board merchants instantly, and sort out the details later. This provides the fastest way to get merchants live.
Following are some disadvantages to the payfac model:
A payfac could unwittingly board hundreds of sub-merchants that are in bad faith and processing transactions unrelated to their stated field of activity. For example, a ride-sharing app that gives each driver a sub-merchant account might unintentionally process payments for an escort service. With gateways able to route transactions quickly between countries and banks, payfacs could end up processing transactions that are not what they seem. For example, a U.S. domestic payfac serving nail salons might unknowingly illegally acquire transactions for international online gambling.
It is a best practice for payfacs to establish know your customer (KYC) and anti-money laundering (AML) programs to reduce the chances of criminal abuses. Most acquiring banks will want to review a payfac's AML program before sponsoring the payfac.
The various payfac business relationships require distinct contract terms.
Scheduling features and other parts of the app that do not relate to payments are usually dealt with through the payfac's terms with its clients. The payments element then becomes an add-on, sometimes as an addendum to the payfac terms (that is, app terms) and sometimes as a separate stand-alone agreement. For example, at https://stripe.com/us/legal you can see the separation between Stripe's terms for its services and those of Stripe's sponsor bank, Wells Fargo & Co., for the payments terms.
Some acquirers let payfacs contract directly with sub-merchants for the payments element; others require stand-alone terms for the payments element between the acquirer and sub-merchants directly. Payfacs should know the acquirer's requirements in advance so they can plan their boarding terms and processes accordingly.
Payfacs are an excellent innovation well worth investigating, both for new fintechs and established ISOs. Visa provides useful reading on payfacs here: https://usa.visa.com/dam/VCOM/download/merchants/02-MAY-2014-Visa-Payment-FacilitatorModel.pdf.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at firstname.lastname@example.org or call him at 514-842-0886.
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