Have you ever heard of Square, Stripe or PayPal? You might be surprised to learn that these recognizable names in the payments space are Payment Facilitators. There are numerous middlemen involved in credit card processing, and depending on your size and needs, different ones will prove most advantageous for you.
If you're unsure what defines a Payment Facilitator, here's your answer.
A Payment Facilitator provides businesses with one shared, mass merchant account. Anyone can use it, making them a preferred choice for small businesses with a low processing volume.
Businesses that opt for a Payment Facilitator will share their merchant account with millions of other businesses, which means a few things:
- Flat rate pricing: Because the merchant account is shared, the Payment Facilitator can’t offer businesses different rate plans and, therefore, offers Flat rate pricing to everyone. With Flat rate pricing, a mix of rates and fees are built into the pricing to produce one consistent rate, regardless of card or transaction type. This results in a far-from-transparent rate plan that’s more expensive than others.
- Volume constraints: Payment Facilitators are regulated to only permit the sharing of a merchant account to businesses that process within specific volume limits (that vary by card type). In 2014, the limits were $100,000 annually for Visa transactions and $1,000,000 annually for MasterCard transactions, according to Digital Transactions, and are subject to change. Upon reaching this threshold, these businesses are required to have a dedicated merchant account set up.
- Less customer support: Usually email is the only way to communicate with a Payment Facilitator’s support team because its customer base is so large.
Every Payment Facilitator has this in common. They sometimes differ when it comes to depositing funds to the merchant’s bank account.
Square and Stripe deposit funds directly into their businesses’ bank accounts, much like a Merchant Account Provider does. PayPal does not, and instead holds funds in the form of virtual credits. Merchants can use this for digital transactions in some ways, but they don’t translate into cash in the bank unless the funds are requested.
Payment Facilitators May Hold Funds
Payment Facilitators provide a quick fix for small, low-volume merchants that are eager to accept payments, but bypass the underwriting process that assesses the business’s financial risk. Because of this, PayPal holds funds in the event the business is hit with a large chargeback it can’t afford. This is also why volume constraints are put in place to ensure businesses that use the shared merchant account aren’t at risk of major fraudulent transactions.
Small businesses that are just getting off the ground might find that Flat rate pricing and volume constraints aren’t a turnoff. Larger businesses, however, should opt for a proper account through a Merchant Account Provider.
Payment Facilitators vs. Merchant Account Providers
Merchant Account Providers approve and underwrite businesses for individual merchant accounts. With this higher threshold come many perks, such as a wider variety of rate plans, better customer support and fewer restrictions.
Larger businesses benefit from an Interchange-plus rate plan, which charges the wholesale cost to run transactions with a flat markup. It’s the most transparent plan because you can clearly see what you’re paying the provider versus the card brands, who set Interchange.
If a business were to run a $1,000 transaction on a debit card, the Interchange rate without markup would be 0.05% plus $0.21. The wholesale cost for that transaction would be $0.71. Alternatively, a Payment Facilitator, such as PayPal, would charge 2.9% for the same transaction for a total fee of $29. That’s over a 40 times increase in cost.
Another difference lies in Interchange refunds. Businesses on Flat rate pricing don’t receive Interchange refunds when they issue a purchase return due to the pricing setup. Businesses on Interchange-plus, however, always have their Interchange costs returned when they issue a refund (except for Amex transactions, which are never refunded). This is a significant amount of money for any mature business.
Due to their smaller clientele and more boutique services, Merchant Account Providers usually offer better customer support. PayJunction customers, for instance, wait under one minute on average when they call our Santa Barbara, Calif.-based support team. They always receive help from a real person on the phone.
Merchant Account Providers properly underwrite each business they work with, which includes an evaluation of the type of business (physical store versus e-commerce), its history and policies, card acceptance methods, requested processing limits and financial stability. This results in proper volume limits and no holding of funds.
In conclusion, a Payment Facilitator is good for a small business that is willing to pay higher fees for lower transaction volumes and that doesn’t need extensive support and service. A Merchant Account Provider is better for high-volume a business seeking a better transaction cost structure and one-on-one customer support.
Getting ready to set up your credit card processing? Debating whether to go with a Merchant Account Provider or a Payment Facilitator? Share your thoughts in the comments section below. We’d love to hear from you!
Editor's Note: This post was originally published in January 2017 and has been updated for comprehensiveness and accuracy.