Untangling how to accept credit cards without a merchant account
In today’s world of payments everywhere, anytime, you need to be able to accept credit cards, no matter what you are selling. The most common way is to set up your own merchant account with a merchant service provider. But small businesses have another option—accepting payments via a payment facilitator (PayFac).
Going the PayFac route can be attractive to the owner of a small, start-up business that has just a few items to sell and doesn’t want to hassle with opening their own merchant account. We’re going to take a look at how credit card processing works, how a small business can accept credit cards without a merchant account using a PayFac, and compare that to using a traditional merchant account.
A credit card transaction happens so quickly and seamlessly, we sometimes forget there is actually a lot happening behind the scenes. The customer provides card data, which is sent by the merchant’s processing solution to the merchant’s bank (the acquiring bank), then to the credit card network (consisting of Visa, MasterCard, Discover and American Express), and to the customer’s bank (the issuing bank). The issuing bank approves or declines the transaction request and sends a response back through the card network, to the acquiring bank, and ultimately to the merchant’s processing solution to complete the sale.
Most businesses handle credit card transactions by contracting with a merchant service provider. Signing up for a merchant account isn’t difficult, but it requires completing an application and being approved by the service provider’s underwriting team. The entire process can take some time and effort.
For small businesses that want to receive credit card payments but not go through the process of applying for their own merchant account, PayFacs are a good option. A PayFac is an aggregated merchant account that serves multiple merchants. PayFacs board merchants under one, master merchant account, so that each merchant does not need their own merchant identification mumber (MID). In this way, PayFacs simplify the merchant account enrollment process. PayFacs are very quick and easy to set up, often with an instant decision on approval. Some examples of PayFacs include Square and PayPal.
What are the pros and cons of using a PayFac versus a traditional merchant account to accept payments? Here are a few key things to think about.
As mentioned, signing up for a PayFac account is fairly quick and easy. While applying for a merchant account isn’t difficult, it does require more documentation and time for approval. One of the biggest benefits PayFacs offer is a simplified merchant account enrollment process.
Since PayFac transactions are part of a shared merchant account, fees are set at a flat rate without options for varying rate plans. While this makes it easier to understand the transaction fees, it also often results in less economical rates. For example, a merchant pays the same fees per transaction, no matter how many transactions they process. This may be fine for a business with lower transaction volume. But as a business processes more transactions, a merchant account has the ability to offer more flexible rate plans that can offer more savings with higher volume. Merchant account rate plans may be more complex, but they are based on each individual merchant’s needs and qualifications, and often cost less. Another thing to note is that merchant accounts often charge monthly fees, while PayFacs do not.
Both PayFacs and merchant accounts require a way to input customer credit card data. Both can be as simple as a small device attached to a mobile device or an online credit card processing gateway. The cost for these is generally about the same, although some PayFacs offer promotions for free processing equipment. For sellers that have greater in-store needs, merchant service providers also offer a higher cost option of terminals.
Merchant accounts offer greater flexibility in terms of transaction volume (often unlimited) and individual sale amount, while PayFacs tend to include a limit on the volume that can be processed in a specified period of time.
PayFacs and merchant accounts pay funds directly to a merchant’s account in a timely manner. Although some PayFacs don’t actually deposit funds into the seller’s bank; instead they hold funds in the form of virtual credits which can be used for purchases or requested to be transferred to the seller’s bank accounts as cash.
Because PayFacs serve so many merchants, customer support is generally only offered via email or online. Merchant service providers often offer a higher level of customer support including set up assistance, and the ability to trouble shoot issues via phone, chat, or email.
So, how should a small business decide whether to open their own merchant account, or choose a PayFac? A merchant account usually costs less per transaction, offers unlimited transaction volume and has better customer support. With a merchant account, a business usually has access to more advanced payment processing tools and services. On the other hand, the application and approval process is generally more in-depth and takes more time.
PayFacs offer a great option for smaller merchants to start accepting credit cards. The sign up process is generally fast and easy, although costs are usually higher. Merchants who use a PayFac are also subject to certain restrictions on the amount of sales that may be processed, and don’t have access to the breadth of customer support available when working directly with a merchant service provider. Still, for many small, start-up businesses, the ease of using a PayFac is worth these trade-offs.
Businesses that have a higher volume in sales, offer more products, or have a need for more customer and business support, should consider establishing a traditional merchant services account. The best way to decide is to analyze the pros and cons we just discussed as they relate to your own business. Ready to get more information? Contact us to talk to a payments expert.