Payment processing and, more specifically, SaaS platforms with an integrated payment solution, are both hugely attractive to venture capitalists. Having a somewhat captive audience that drives incremental revenue from payment processing fees makes a business significantly more valuable.
Most SaaS businesses are valued at a multiple of revenue. Adding a recurring monthly revenue stream from payments increases this multiple. Software businesses with a product that has or can add a payment solution should have an understanding of their options.
Payments in particular make for a sticky product. If your solution provides field service management for HVAC businesses and does everything from route management to inventory to CRM and on top of that, processes and reconciles one-time and recurring payments, you have a solution that becomes very painful to disengage with.
That is precisely why software businesses with embedded payments are such attractive businesses.
What are a Developer’s Options?
In the past when looking at payments the typical process was to start with a payment gateway.
The decision to integrate with a payment gateway was usually motivated by a fairly small number of factors and is not typically a strategic decision. Some common reasons:
- The usual suspects: Integrating with a well-known gateway (e.g., Authorize.net) is expected as the name is known and recognized.
- Ease of deployment: If the developer can integrate quickly and the development tools are easy to work with that makes the gateway attractive. In some cases, ease of deployment may also come with a payment aggregation model (eg Stripe) where the end-user merchant does not own their processing account and has few options if problems arise.
- Client demand: if a large user asks the developer to use a specific gateway [possibly to use an existing merchant account] this can be the motivation.
In some cases, a conscious decision to be “payment agnostic” is made. The reasoning here is around transparency. The platform does not want to be seen as forcing the user to a particular solution. So the platform user is left to procure a merchant account and then enter account credentials into the software (not the best UX).
While arguments can be made that this decision is what’s best for the end customer, the reality is that platform users don’t particularly want to deal with various layers if support needs arise. Eg the gateway support team is needed or the merchant account support team must be engaged.
The closer the platform is to payments the better it understands the client experience.
This does not mean the platform has to devote staff and resources to support. Only that a broader understanding of payments (via education from your payments partner) informs your development and broader business decisions.
The clear issue from this “gateway only” approach is that you are choosing to disregard the payments revenue. If your application delivers value by providing an automated payment collection and reconciliation tool and you have dev and maintenance costs doesn’t it make sense to generate ancillary revenue from those payments?
In fact, we have seen platforms offer their service for free in return for the payment processing business/revenue.
We will look at three potential integration/business model options.
1. Payment Facilitation
A Payment Facilitator (Payfac) is essentially a Master Merchant that processes credit and debit card transactions for sub-merchants within their payment application.
These clients or sub-merchants don’t have to go through the traditional merchant account application process and can typically enroll and begin accepting customer payments in hours. This instant onboarding can be a powerful customer acquisition tool and is how Square has been able to grow so significantly.
Becoming a true PayFac or PSP (Payment Service Provider) can be a great fit for businesses that fall into the software provider classification and particularly SAAS business service providers.
And while there are certainly many benefits of being a true PayFac there are also significant financial requirements, compliance obligations and ongoing operational demands.
These prerequisites to true Payment Facilitation or aggregation often leave out the SAAS provider that does not have the financial or staffing wherewithal or does not want financial risk exposure.
In summary, Payment Facilitation is a great fit for established platforms with a sizable base whose payments revenue can more than make up for significant compliance/risk/costs involved.
2. Managed Payment Facilitation
If instant onboarding is vital but the SaaS is not ready for true Payment Facilitation then Managed Payment Facilitation can be an attractive option.
Managed Payment Facilitation (also called Hybrid Payment Facilitation or Payment Facilitation as a Service) offers the many pros of true Payment Facilitation without the very significant investments of time and money as well as very limited financial risk.
Managed Payment Facilitation offers the benefits of EZ client onboarding as well as more ownership of the payment process. It also offers a recurring revenue stream from payment fees charged to end-users.
In the Managed PayFac model, you are in essence a sub Payfac. There is a true PayFac that assumes all those compliance and regulatory and infrastructure costs. They create a platform for you to leverage these tools and act as a sub PayFac. They have a lot of insight into your clients and their processing. This level of insight mitigates much of the risk that the master Payment Facilitator faces after approving a platform to act as a Manged PayFac.
Recurring revenue is the holy grail and becoming a Managed Payment Facilitation definitely offers your organization the opportunity to create a new revenue stream.
3. Payments Partnership
There is a third alternative to becoming a Payment Facilitator while still being able to offer fast account set up. There are Third Party Processors with slick APIs for merchant account onboarding that offer a hybrid blend between traditional re-selling merchant accounts for a merchant account provider and acting as a Payment Facilitator.
Advantages are no risk, no support and much lower implementation costs. You still gain revenue benefits without admin burdens. It is unlikely you would be able to provision accounts as quickly as if acting as the PayFac, but this may be the best fit for you.
There are third-party processors that have realized that instant onboarding must become part of their product offering to compete with the Payment Facilitation solution.
Some now offer 70% plus instant boarding and in essence, have created the Payment Facilitation experience. In addition, the payments partner tends to play a much larger role in the support, compliance and risk management roles.
Revenue is derived simply from the difference in buy rate from the processing networks and the sell rate charged to the end customer. For illustration, if a Payment Facilitator knows their true overall cost amounts to 2.4% of processed volume and they sell at 2.9% their margin is .5% of dollars processed. If they process $10,000,000 per month that works out to $50,000 in revenue per month.
Note: ACH processing is often available in Payment Facilitation and also contributes to revenue generation.
In Managed Payment Facilitation your revenue potential is typically less than true Payment Facilitation. This is true because you have much reduced “infrastructure” costs as well as an added layer of risk exposure for your master Payment Facilitation partner.
The payment partnership can offer the greatest potential for revenue generation as it a-removes risk exposure as your partner onboards and b-you tend to have lower true costs because of the reduced risk.
We have seen organizations increase annual revenue from a few hundred dollars per month up to over $100k. The revenue depends on the client base and the platform+partners ability to drive adoption of the payments solution.
What tends to be overlooked in the payments integration model is the single biggest factor in maximizing revenue. We see this time and again. Significant time is spent integrating and testing, and the new solution is rolled out to your base. Your belief is that the vast majority of that base will take advantage. The issue is this often does not happen for various reasons.
Your development must consider how to maximize payment adoption. A consistent messaging campaign including in-app messaging around the benefits. Pre-selling your base on your new solution, using surveys to drive development, creating case studies of successful users and more must be an integral part of your planning process.
Payments and how they can impact your business and its customers should be given significant thought. Developers have a massive opportunity to drive new revenue streams and create a more valuable company.