Payment Facilitators (commonly known as PayFacs or PFs) have risen in popularity over the recent years. Within the ARM industry, PayFac models can provide an especially significant benefit – these models can be used to enable full compliance for convenience fee solutions, in order to protect collection agencies from non-compliance risks including lawsuits, account cancellations, and significant fines.
However, PayFac models have been misused by processors engaging in dishonest practices, leading to serious consequences for merchants, as well as false misconceptions on how PayFacs can and should be used. In this article, we will break down what a PayFac model is, how PayFacs can help collection agencies stay compliant, and what to look out for when assessing a processor’s PayFac model.
What are PayFacs?
PayFacs are models where the service provider (e.g. Payscout) acts as the Main Merchant (also known as the Merchant of Record) and can board numerous merchants under this “master account.” In other words, instead of setting up merchants to process payments with their own unique accounts, a PayFac is like an aggregator, where the Main Merchant can bring on many merchants under this umbrella.
When should PayFac models be used to support ARM merchants?
Payscout utilizes a PayFac type model to implement our Convenience Fee solution for ARM merchants enabling us to fully adhere to the federal Fair Debt Collection Practices Act (FDCPA). According to the FDCPA, collection agencies may not “collect any interest, fee, charge, or expense incidental to the principal obligation unless it was authorized by the original debt agreement or is otherwise permitted by law”. The Convenience Fee is recorded by Payscout and the funds for the fee portion are deposited into our account. Therefore, we are able to allow for the necessary separation between collection agencies and any fees charged, as required by the FDCPA.
In addition to protecting our merchants under collection law, our Convenience Fee solution has built-in RegTech technology to ensure full compliance with varying state legislation, and also follows all of the Card Brand Rules closely. For instance, we utilize split funding in order to meet Visa’s requirement that the Convenience Fee is charged as a single transaction and is not collected separately. This allows us to offer the only Convenience Fee solution available to the ARM industry that fully complies with Card Brand Rules, State Law, and the FDCPA.
How have PayFac models been abused?
When used compliantly, PayFac models have the potential to actually increase your compliance, as demonstrated in the example above. However, some new processors intentionally abuse this model through non-compliant practices, so it is important to have a clear understanding of how the model can and should be used in order to help you identify dishonest practices used by processors.
PayFacs were designed to specialize in a particular business type, and the merchants that are brought on typically need to be of an approved business type by the Sponsor Bank. There are very specific rules in this dynamic regarding what type of merchants you can and cannot board and collection agencies have always been prohibited. However, some processors abuse this model by intentionally misclassifying a merchant’s business type so that they can try and get away with boarding an unauthorized merchant type. When the Sponsor Bank or the Card Brands conduct an audit and this is discovered, the violation can result in a strong risk of the processor being shut down by the bank, which is why it is critical to select a processor that abides by compliant practices.
What should I look out for when assessing a PayFac model or the right provider?
Payscout’s team has served the ARM industry for almost 20 years and has developed a deep knowledge and understanding of the needs of collection agencies.Payscout only provides services for established reputable collection agencies which allows agencies to enjoy a stable platform without the risk of interruption in service.
Sponsor banks can change their philosophy or adjust their risk appetite, but Payscout’s strong acquiring relationships and redundancy allows for payment processing continuity.
Payscout’s RegTech products such as 360 Fee-Free Payment suite satisfies all the requirements of Card Brand Rules, State Law, and the FDCPA.
Payscout provides continuous education and best practices to partners/merchants to ensure compliant practices are adhered to and followed.
We hope that through this guide, you have been able to gain a clearer understanding of how PayFac Models can be used to keep your business compliant and what to look out for when assessing a PayFac model. If you have any additional questions, please do not hesitate to reach out to our team at firstname.lastname@example.org.