How Embedded Payment relationship models have evolved

Updated on May 5, 2023

The world of embedded payments has come a long way in the last decade, and the payment relationship models that have emerged are a testament to that. In the past, Software-as-a-Service (SaaS) businesses only had two options when it came to payments — they could either refer their customers to a third-party payment processor, or they could become a full-fledged payment facilitator (PayFac®) themselves. Both of these options had their pros and cons, and neither was ideal for every SaaS business model. However, in recent years, a new payment relationship model has emerged: payment facilitation-as-a-service or PayFac-as-a-service.

PayFac-as-a-service allows software companies to take on a greater role in the payment experience and go-to-market strategy without having to bear all the risks and responsibilities of being a full PayFac®. With PayFac-as-a-service, SaaS businesses gain greater control and visibility over their payment processing while also achieving higher returns. In this article, we’ll take a closer look at how payment relationship models have evolved and how PayFac-as-a-service is creating a sweet spot for software companies.

What are the three payments business models for software companies?

The main payments models that software companies use to manage their software payments are referral partnerships, PayFac-as-a-service, and payment facilitation. For software companies looking to maximize their customization options without the compliance and underwriting risk of becoming a PayFac®, opting for PayFac-as-a-service can deliver these options while also providing a revenue stream from and existing business model: payments. Below is an overview of each embedded payment business model.

1. Referral partnership

The referral partnership model is the most common payment business model. In this model, your company will have an agreement with a payment provider to be a referral partner. When your software users need to set up payments for their business, you then refer them to the payment processor. In return, you receive revenue share.

  • Revenue share from referral fees
  • Limited integration with your platform
  • Lack of control and visibility over your customer’s pricing

2. PayFac-as-a-service

PayFac-as-a-service seamlessly integrates with your existing software to provide you with the upside of monetizing payments without the compliance and risk of being a full registered PayFac®. The aim of this option is for the solution to seamlessly integrate with your software keeping you in the driver’s seat controlling the full customer experience. Your customers will have a unified payments experience, and your PayFac® service provider manages the compliance, technology, and risk in the background.

  • More monetization
  • Customer portals and workflows can be customized
  • Underwriting and risk assessment are fully managed
  • Billing and funding protection is provided for your company
  • You get access to a full suite of payment capabilities
  • More responsibility (you will own pricing, branding, marketing, selling, servicing, etc)

3. Payment Facilitation

At the opposite end of the spectrum to the referral model is becoming a full PayFac®. With this embedded payments model, your company has complete control and ownership as it becomes a payment company. This allows your company to facilitate payments while your customers will set up a merchant account under you as the registered PayFac®.  Basically, you’ve done all the heavy lifting, and your customers can benefit from that too.

  • Payments are a significant part of the business and overall revenue
  • Customer portals and workflows are fully customizable
  • You get access to a full suite of payment capabilities
  • Underwriting and risk assessment are your responsibility
  • No billing or funding protection
  • Costly to build, implement and maintain

Why PayFac-as-a-service?

The progression of software development into cloud computing and open-source platforms have democratized how programs are developed and implemented. In fact, around 90% of public software-as-a-service (SaaS) now have subscription-based revenue models. This shift has influenced how payment business models have evolved too. It has become more accessible for software companies to white label their solution so it can be used seamlessly through your platform, allowing payments and your core business solutions to operate as a single platform.

By choosing PayFac-as-a-service, software companies stand to increase their revenue per user by 2 to 5x compared to offering a standalone software subscription alone. And according to a recent Forrester report, The Total Economic Impact of Payrix Pro, companies can realize up to 264% return in three years, with a payback period of less than a year. Your software platform will also be able to do more for customers without the complexity and burden of being a full PayFac®. Further, PayFac-as-a-service provides:

  • greater control over the entire merchant user experience
  • an additional revenue stream through monetizing payments
  • support and expertise from one committed payments partner
  • increased capabilities within your software platform, which provides more robust functionality for your users
  • better user retention by seamlessly offering payments through your platform

Further, by embedding payments into your platform, you can unlock new verticals where previously your total addressable market (TAM) may have been relatively small, or the customer acquisition costs were high. And for those businesses looking to get as much functionality from one platform as possible, they are willing to pay a premium. Almost two-thirds of businesses (57%) are willing to pay a premium for an embedded finance experience compared to getting the same services through a traditional bank.

Explore a world of PayFac-as-a-service possibilities with Payrix

Just as the software industry has evolved from on-premise services and licensing to subscription-based and bottom-up revenue models, payment relationship models have evolved too. The development of infrastructure that allows software platforms to white label a solution, allowing for PayFac-as-a-service, is a game changer that provides the benefits of being a PayFac® (more functionality, additional revenue, better customer retention) without the compliance and underwriting risk of managing everything in-house.

For software companies looking to transfer how they offer and manage/own payments through their platform, they should focus on finding a partner who offers flexibility, a robust suite of backend tools, and automation options where possible. Taking the time now to understand your customer’s payment needs and working with a genuine partner who can help you build out customer-centric embedded payment solutions is key. And once the fundamentals are in place and working well, it can open up a world of other possibilities. The first key step, however, is finding the right payments partner for your journey — one who is as committed to optimizing the user experience as your company is every day.

Click here to explore more about PayFac-as–a-service and learn how Payrix can support your payments journey now and into the future.

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