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Education

the account is approved, it must be activated, and the
merchant has to go through the necessary integra-
tions to go live. This takes time.
In contrast, payfacs assume the risk of fraud or other
losses on merchant accounts, board merchants in-
stantly, and sort out the details later. This provides
Legal ease: the fastest way to get merchants live.

• Control: In contrast to a regular ISO, payfacs have
greater control over boarding, pricing and risk man-
agement. Payfacs can control the settlement of funds
to sub-merchants and are therefore more able to man-
age risk in the account.
Disadvantages of payfacs

Following are some disadvantages to the payfac model:
A legal take on the • KYC and AML: Being able to board sub-merchants

within seconds provides significant convenience, but
rise of legitimate it also creates opportunities for money launderers
and other criminals to abuse the payfac's payment
rails to process fraudulent payments.
aggregation A payfac could unwittingly board hundreds of sub-

merchants that are in bad faith and processing trans-
By Adam Atlas actions unrelated to their stated field of activity. For
example, a ride-sharing app that gives each driver a
Attorney at Law sub-merchant account might unintentionally process
payments for an escort service.
t used to be unacceptable to process transactions for
multiple merchants through a single account; now With gateways able to route transactions quickly be-
everyone is doing it with payment facilitators (pay- tween countries and banks, payfacs could end up
I facs) and payment service providers. In this article, processing transactions that are not what they seem.
I'll discuss legal issues pertaining to this new, legitimate For example, a U.S. domestic payfac serving nail sa-
form of aggregation, which a number of payfacs consider lons might unknowingly illegally acquire transac-
or use as a solution for the payments element of their busi- tions for international online gambling.
ness ideas.
It is a best practice for payfacs to establish know your
What is a payfac? customer (KYC) and anti-money laundering (AML)
programs to reduce the chances of criminal abuses.
A payfac is a relatively new form of registration with the Most acquiring banks will want to review a payfac's
payment networks that allows an entity to acquire payment AML program before sponsoring the payfac.
card transactions for multiple sub-merchants through a
single master merchant account. In plain English, a payfac • Processing volume cap: Most payfacs eventually
has its own merchant account that it can use to process want to have merchants that, for the most part, are
transactions for multiple merchants. Those merchants are processing more than $100,000 in volume. That is,
often called sub-merchants, each of which has a separate most payfacs want a portfolio of "real" merchants.
merchant identification number. Merchants who reach Boarding a merchant as a payfac sub-merchant offers
$100,000 in processing volume are no longer aggregated speed, but since merchants processing more than
and become direct merchants with acquirers. $100,000 cannot be boarded as sub- merchants, they

Advantages of payfacs must go through the traditional vetting process for
merchant accounts, which is time consuming.
Payfacs enjoy certain advantages:
• Risk: A regular, no-liability ISO does not take liabil-
• Speed: If you are not a payfac, boarding a merchant ity for chargebacks, fraud and other losses caused by
involves collecting certain information concerning merchants or their customers (provided the ISO is
the merchant and then waiting for the acquirer's un- not complicit in the wrongdoing). A payfac, on the
derwriting department to approve the account. Once other hand, assumes liability for chargebacks and

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