For a long time, Software-as-a-Service (SaaS) companies viewed payments as a cost center. Due to a new breed of FinTech startups, payments can take a prominent role in driving revenue. SaaS companies increasingly realize that taking a more active role in the payments process can increase their valuations by providing a new source of revenue and reducing churn.
Core Payment Functions
To understand if your company should take a more active role in payments, consider the core functions in the payment ecosystem. See Figure 1.
Merchant Acquirers Payment Functions
Merchant Acquirers provide multiple payment functions above (e.g. onboarding, underwriting, the merchant risk, customer service, etc.). These bundled solutions are helpful but expensive: up to 1% of all money moving through their platform, regardless of industry.1 Even after removing the pricing variance for high- and low-risk industry verticals, there is still a “cost” for access to and use of these respective payment service layers. That’s where different SaaS/ISV payments models – like integrated payments or payment facilitation – come into the picture.
Drive Platform Valuation
As software companies take a more active role in the payments process, they keep more of the 1% Acquirer fee as revenue for themselves. To put that in perspective, a company with $1 billion passing through its platform annually could keep $10 million in incremental revenue.
The value proposition is particularly strong for companies with large payment volume and relatively low merchant risk. In other words, the more money you process and the more creditworthy your customers are, the more likely that owning payments can pay off for your company. Platforms that have monetized payments such as Shopify, Intuit, Mindbody, and RealPage have catalyzed valuation after, in some cases, doubling revenue – evenly split between SaaS fee revenue and payments revenue.2
Embedded Payments in Practice
Let’s walk through how this might look for a fictitious SaaS/ISV platform – HSS Healthcare (HSS). HSS provides revenue cycle management software to healthcare providers such as small physician groups. A component of HSS’s capabilities is facilitating point-of-care patient payments, for which they delegate all payment responsibilities to Square – a large Merchant Acquirer. In this arrangement, HSS surrenders a sizable opportunity by referring their healthcare providers to Square for payment processing. Since HSS focuses on healthcare – an industry characterized by relatively low merchant risk and relatively high payments volume – the ceded opportunity is even larger than it would be for other industries.
Given its low merchant risk and high payments volume, there are two ways HSS can create payments revenue by embedding payments into their platform and operations: 1) Integrated Payments and 2) Payment Facilitation
See Figure 2. HSS owns the full customer relationship in either case, giving it much more control to craft touch points that strengthen customer relationships. The primary difference between the two models is who owns the merchant underwriting risk and corresponding ongoing fraud and risk monitoring. In the Payment Facilitation model, the software platform owns the merchant risk whereas in the Integrated Payments model the Merchant Acquirer owns the risk. Payment Facilitation offers higher monetization opportunity because with increased risk comes increased revenue.
Which Embedded Payments Model is Right for Your Company?
Your software company should consider two questions when evaluating which path is right for you:
1 What client experience do you want to give your customers?
2 What’s your risk appetite?
XUP can help software companies assess which embedded payments approach best fits their business model. XUP provides a full suite of payment functions and white-glove support to SaaS/ISV platforms utilizing embedded payment models.
Payment Stack and Responsibilities
