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PayFac Considerations

Status: Complete

Last Updated: 2025-12-28

Overview​

Payment Facilitators (PayFacs) have unique onboarding responsibilities that differ from traditional merchant onboarding. As a master merchant, the PayFac inherits underwriting, compliance, and risk management duties delegated by the sponsor bank. Understanding these responsibilities is critical for PayFac platform operations.

What You'll Learn​

Why PayFac Onboarding Is Different​

Traditional Merchant Onboarding​

  • Acquirer underwrites each merchant individually
  • Sponsor bank approves each merchant
  • Direct relationship: Merchant ↔ Acquirer ↔ Sponsor Bank

PayFac Sub-Merchant Onboarding​

  • PayFac underwrites sub-merchants
  • Sponsor bank approves PayFac's underwriting program (not each merchant)
  • Indirect relationship: Sub-Merchant ↔ PayFac ↔ Sponsor Bank

Key Differences​

AspectTraditional AcquirerPayFac
UnderwritingBank underwrites each merchantPayFac underwrites sub-merchants
MID AssignmentUnique MID per merchantSub-merchants share PayFac's MID
LiabilityBank liable for merchant lossesPayFac liable for sub-merchant losses
ComplianceBank ensures merchant compliancePayFac ensures sub-merchant compliance
ReservesBank holds merchant reservesPayFac holds sub-merchant reserves
MATCH ReportingBank reports to MATCHPayFac reports to MATCH
Approval AuthorityBank approves each merchantPayFac approves sub-merchants (within program)

Topics Covered​

What responsibilities the sponsor bank delegates to the PayFac:

  • Sub-merchant underwriting and approval
  • KYC/KYB verification
  • Sanctions screening
  • Ongoing monitoring
  • MATCH list reporting
  • Sponsor bank audit mechanics

Portfolio Risk​

Managing aggregate risk across all sub-merchants:

  • Portfolio-level monitoring
  • Concentration risk (industry, geography, volume)
  • Aggregate chargeback ratios
  • Network chargeback programs (VAMP, ECP)
  • Risk-based pricing strategies

Network Requirements​

Card network registration and compliance:

  • Visa PayFac registration and VROL access
  • Mastercard requirements and MATCH obligations
  • VIRP (Visa Integrity Risk Program) for high-risk MCCs
  • Network audit rights and preparation

Sub-Merchant Management​

MID structure and sub-merchant lifecycle:

  • Master MID vs. Sub-Merchant ID (SMID)
  • Descriptor requirements
  • Chargeback routing mechanics
  • Graduation process to direct MID

Financial Requirements​

Capital and insurance requirements:

  • Minimum net worth requirements
  • E&O, cyber liability, and fidelity insurance
  • Portfolio reserve vs. sub-merchant reserves
  • Liquidity and operating capital planning

PayFac Onboarding Challenges​

Balancing Speed and Risk​

Challenge: PayFacs promise fast onboarding (hours, not days) while maintaining compliance

Solution: Automated risk scoring, data validation, and risk-based decisioning

Sub-Merchant Volume Limits​

Challenge: Individual sub-merchants growing beyond PayFac program limits

Solution: Volume caps, graduation to direct MID, tiered underwriting

Challenge: Demonstrating effective risk management to sponsor bank

Solution: Robust reporting, audit trails, policy documentation, regular reviews

Regulatory Compliance​

Challenge: Inheriting compliance obligations for potentially thousands of sub-merchants

Solution: Automated compliance workflows, third-party verification services, dedicated compliance team

Self-Assessment​

Test your understanding with the PayFac Considerations Quiz - 16 comprehensive questions covering sponsor delegation, portfolio risk, network requirements, and financial considerations.

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Merchant LifecycleOnboarding ModuleSponsor Delegation
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