Payment facilitators (PayFacs): Uses and Alternatives for SaaS

Payment facilitators (known as PayFacs) make it easy to start accepting payments, but they're not a complete solution for growing SaaS and digital product companies. As you scale across states and countries, PayFacs leave you managing tax compliance, chargebacks, and a growing stack of additional tools. There's a better way to handle payments that lets you focus on your product instead of payment operations.

What is a payment facilitator (PayFac)?

A PayFac is a third-party service that enables businesses to accept online payments without setting up their own merchant account with a bank. Instead of spending months navigating the traditional merchant account application process, businesses can start processing payments in days by becoming sub-merchants under the PayFac's master merchant account.

For startups and small businesses, PayFacs offer a faster path to accepting digital and credit card payments. You avoid the complexity of building direct banking relationships, and the PayFac handles the technical infrastructure needed to move money from your customers to your bank account.

Popular examples include Stripe, Square, PayPal, and Shopify. These companies have become the go-to solution for many businesses because they simplify the initial setup. But as your business grows, the PayFac model can create new challenges that weren't obvious at the start.

How do payment facilitators work?

Payment facilitators operate under a master merchant account they've established with banks and payment processors. When you sign up with a PayFac, you become a sub-merchant under this umbrella. The PayFac acts as the middleman between you, the banks, and the payment processors.

Here's what happens during a transaction: Your customer makes a purchase, the PayFac processes the payment through their master account, handles the security and compliance requirements, and then transfers the funds to your account (minus their fees).

The PayFac model means you don't need to worry about PCI compliance details or managing relationships with multiple banks. Stripe handles the connection to Visa and Mastercard. Square manages the fraud detection. PayPal deals with the payment gateway infrastructure. You just integrate their API and start collecting payments.

This sounds ideal for getting started quickly, but the PayFac model was designed to solve one specific problem: getting businesses up and running with payment processing. It wasn't built to handle everything that comes after.

Pros of the PayFac model

For businesses just starting out or testing product-market fit, payfacs offer clear advantages.

• Fast setup: You can integrate a PayFac and start accepting payments within days, not months. For a new business testing product-market fit, this speed matters.
• Simple integration: Most PayFacs offer well-documented APIs and SDKs that your developers can implement quickly. You don't need to become a payments expert to get started.
• PCI compliance handled: You're still responsible for how you handle and store customer data, but the PayFac manages the security requirements for the actual transaction processing.
• Low barrier to entry: There's no lengthy application process or bank relationship to establish.

Cons of the PayFac model

The limitations become apparent as you scale, with operational burdens falling squarely on your shoulders.

• Tax compliance is your responsibility: If you're selling across US state lines, you need to register for sales tax in each state where you have nexus, calculate the correct rate for every transaction, file returns, and remit payments. Sell internationally and you're dealing with VAT rates across dozens of countries, each with their own rules and thresholds.
• Additional software required: You either build an in-house team to manage tax compliance or purchase additional software to calculate and file taxes. Many businesses buy a separate tax platform on top of their PayFac.
• Chargeback management: When a customer disputes a charge, you're handling the documentation and fighting the chargeback yourself. The PayFac processes the reversal, but you're doing the work to protect your revenue.
• Limited customer support: The PayFac will help you with issues related to your account or the payment processing itself, but they don't support your customers. When an end user has a payment question or needs a refund processed, that's your team's responsibility.
• Scaling challenges: Some PayFacs place holds on funds or implement rolling reserves as you grow, which can strain your cash flow. You're also subject to their terms and policies, which can change. Account freezes or sudden policy changes can disrupt your business.
• Fragmented operations: Managing multiple vendors for different aspects of payment operations creates administrative overhead.

The cost of payment facilitators

PayFac pricing looks simple at first glance. You typically pay a percentage of each transaction plus a fixed fee. But the total cost of using a PayFac goes beyond these processing fees.

Many businesses discover that they need to purchase additional services beyond their PayFac, including checkout optimization tools, payment localization, fraud prevention, subscription management software, and tax platforms. Each addition means another monthly fee, another integration to maintain, and another vendor to manage.

Here's what the actual cost breakdown looks like when you account for everything needed to run payment operations at scale:

• Payment processing: 2.5-3% + 30¢ per transaction (processor, PayPal, and other methods)
• Subscription management platform: 0.5-1% of revenue
• Anti-fraud product: 0.5% of revenue
• Payment routing tools: 20¢ per transaction
• Refund and chargeback fees: 0.1% of revenue
• Tax calculation software: 0.5% of revenue
• Tax filing services: $200-$5,000 per month per market
• Customer billing support: ~$60,000 per person per year
• Administrative and operational headcount (finance, engineering): $1,000s per month
• Advisory services: Up to $100,000 per year

For a SaaS company processing $5 million annually across multiple markets, you're looking at transaction fees plus potentially $200,000+ in additional software, personnel, and services just to manage the operational side of payments. And that doesn't account for the engineering time spent integrating and maintaining all these separate tools.

Each vendor means another contract to negotiate, another integration to maintain, another point of failure in your payment stack. The supposedly simple PayFac model becomes an expensive collection of separate tools.

Payment processor vs payment facilitator vs merchant of record

Understanding how payment processors, PayFacs, and merchants of record (MoRs) differ helps you choose the right solution for your business needs.

Payment processor

• Connects directly to card networks and banks
• Requires your own merchant account with a lengthy setup process
• Infrastructure layer that most businesses don't interact with directly—they sit beneath PayFacs and other payment solutions

Payment facilitator (PayFac)

• Lets you become a sub-merchant under their master merchant account for faster onboarding
• Handles payment processing and PCI compliance on transactions
• Leaves operational responsibilities with you: tax calculation and filing, compliance management, chargeback handling, refund processing, and customer support
• Requires additional tools for tax, subscription billing, and other operations
• You remain the seller of record and assume liability

Merchant of record (MoR)

• Becomes the legal seller for your transactions, shifting liability away from you
• Handles the complete payment operation: payment entities, tax calculation and remittance, compliance across jurisdictions, chargebacks, refunds, and fraud prevention
• Provides one integrated platform instead of managing multiple vendors
• Built specifically for SaaS, app, and digital product companies
• Takes on legal responsibility for sales tax compliance

The bottom line: A payment processor is a form of infrastructure. A PayFac helps you accept payments but leaves operational work to you. A MoR manages your entire payment operation, allowing you to focus on your product instead of payment logistics.

Focus on your product, not payment operations

Payment facilitators solved an important problem by making it easier to start accepting payments. But for SaaS and digital product companies looking to scale globally, the PayFac model creates as many challenges as it solves.

There's a better approach. A MoR like Paddle handles the full payment cycle as a single solution. Paddle calculates and remits sales tax in every jurisdiction, manages chargebacks and refunds, ensures compliance across currencies and payment methods, and takes on the legal liability for the transaction.

Every hour your team spends on payment operations is an hour not spent improving your product or acquiring customers. Every dollar spent on multiple vendor subscriptions is a dollar that could be used to fund growth initiatives.

Paddle was built specifically for SaaS, app, and digital product companies. We handle the payment operations that would otherwise require multiple teams, letting you focus on your product and your customers.

Find out more about Paddle or speak directly to an expert by booking a demo here.