Payments’ Place in SaaS Economics
Many eCommerce platforms are becoming payments providers today thanks to the proliferation of white label solutions from payment facilitators (AKA “payfacs”). These solutions, such as API-based white label partnerships with Stripe, Global Payments, Worldpay, and Tilled among others, enable platforms to provide branded payment solutions to their merchants without actually being payfacs themselves.
A payfac is a type of payment service provider that allows clients, called sub-merchants, to accept payments using their infrastructure. The benefit of using a payfac is that receiving an account at one is much easier and quicker than getting a merchant account at an acquirer bank. Instead the payfac is connected to an acquirer and acts as an intermediary for its sub-merchants. Key aspects delegated fully or partially to a payfac by an acquirer include underwriting, onboarding, payment processing, funding, reconciliation, settlement and reporting.
Goal #1: Controlling customer UX
Many eCommerce platforms out there are adopting the payfac-as-a-service model to thoroughly integrate all merchant lifecycle-related processes within their system. These activities include onboarding, payment processing, chargeback handling and funding, as well as reporting (i.e. issuing of merchant statements). While under the hood all these activities are performed by another payfac, all customer-facing platform interface components, including documents, portals, etc., are branded by the eCommerce company.
The goal is to control, simplify and improve the user experience of sub-merchant clients on the platform.
A great example of this would be Shopify Payments, which runs on the Stripe API. Shopify Payments lets Shopify storefront owners accept card payments without having to integrate with third party PSPs. There is no need to log into another platform to check on your funds – it’s all on your Shopify dashboard.
Goal #2: Developing new profit centers
Another reason for software companies to get into the Payfac-as-a-Service business is because of the economics of it. Similar to fighting chargebacks, monetizing payments is an area where many online platforms are simply leaving significant sums of money on the table. The total amount of revenue gained may seem small when compared to total company turnover, but it is certainly felt when added to the bottom-line.
A study by the Double Diamond Group estimated that there are roughly 11,000 B2B SaaS companies in the U.S. alone that could operate as payfacs if given the right tools. However, becoming a credit card brand recognized payfac via the traditional route can be expensive. It can take companies as long as two to three years to become a payments facilitator at a cost between $3 million and $5 million, according to Finix CEO Richie Serna.
White labelling reduces the costs considerably and opens an opportunity to profit.
Online platforms that go from offering their merchants payments through managed payfacs to offering their own payments experience through Payfac-as-a-Service providers benefit from the spread between the two. Regular service through Stripe or Braintree will cost platforms 2.9 percent and 30 cents per transaction and the costs will be passed through to the end-user merchants. However, Payfac-as-a-Service pricing is lower by tens of basis points and in terms of the per transaction fee. The platform can pay this lower price and still pass along the marked-up retail rate to merchants to monetize the site’s payment stream. For platforms with tens of millions of dollars or more in annual payments processing volume this can easily turn into hundreds of thousands of dollars in additional annual revenue.
Goal #3: Payments-boosted startups
For software startups, monetizing payments adds a valuable revenue stream, especially when revenue from core services are growing slowly. Revenue growth goes from linear to an exponential growth curve when software companies start monetizing payments, according to the president of a Canadian payment processor.
This can lead to much more favorable valuations when it comes to raising investment rounds.
Whether an established publicly traded eCommerce platform or a fast-growing B2B SaaS startup with payments in the tens of millions of dollars or more, it makes sense to consider getting into the payments game. With easily accessible white-label solutions, ignoring this opportunity would just be leaving significant sums of money on the table.
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