With Embedded Payments, you’ve got options

Updated on April 13, 2021


There’s more than one way to embed payments into your software stack. This hasn’t always been the case, but continued focus on embedded payments is driving opportunities for SaaS companies selling to vertical markets. No doubt that’s why you’re reading this.

Thanks to continuous innovation there are a growing number of business models for realizing the benefits of embedded payments. Choosing the right model comes down to your goals and how much you want to take on as a business.

First, let’s define what embedded payments are. Simply put, embedded payments refer to a payments solution that is built or embedded into a software offering. Embedded payments is often the final piece in creating an all-in-one business management solution for your customers that also adds a new revenue stream to your bottom line.

Which Model Is Right For You?

Monetizing payments isn’t reserved for the big guys anymore. As of this writing, there are three primary business models a software company can use to generate revenue from payments.

  • Set up a referral partnership with a payment processor.
  • Become a PayFac® (a.k.a. payment facilitator).
  • Choose an embedded payments technology partner that offers a middle ground.

Your Roadmap for Embedded Payments in 2024 Awaits!

Here’s more about each model.

  • Referral Partnership

    This is the traditional model you may be familiar with. Your software company makes an agreement with a payment processor to become a referral partner. When your customer needs to set up payments for their business, you refer them to the payment processor. In return, the payment processor pays you a referral fee. The end.

    In this scenario, your customer is using a bolt-on payments solution that doesn’t necessarily integrate fully or at all with your platform. Therefore, someone else has control over merchant onboarding, customer service, and all facets of payment processing for your customer. The only thing you do is make the referral.

    However, this hands-off approach does come with the risk of your customer having a bad experience with the payment processor, which in turn, could sour your relationship with your customer. In addition, your customer is left managing a separate system for payments that creates more work for them. The user experience for customers making payments is typically less than ideal as well.

  • Payment Facilitator

    PayFacs are at the opposite end of the spectrum from referral partnerships. Often these are software companies who aspire to become payments companies and want to reap the maximum benefits of embedded payments.

    With the payfac business model, your SaaS company establishes a master merchant account through an acquiring bank to process or facilitate payments. Your customers can then set up a sub-merchant account under your master account, making it much easier for them because you’ve done all the heavy lifting with the bank.

    You’ve monetized your payments by collecting processing fees, but you’ve also taken on all the risks of becoming a processor, such as underwriting, compliance, investment in new technology, disruptions to your strategic plan, distraction from your core business, and managing the full payments experience.

    As of today, software businesses typically become a payfac in one of two ways:

    1. Build it – Requires engineering resources that are expert in payment software development
    2. Buy it – Requires a partner that provides expert guidance on operating a payments business and a complete payment infrastructure as-a-service.
  • PayFac as a Service

    This is the newest model and better overall for monetizing payments, one that offers much more upside and control than referral partnerships (namely revenue) and mitigates many of the drawbacks of being a registered payfac when you’re not ready.

    A payfac as a service partner provides the infrastructure you need to offer payments to your customers in the form of a white-labeled solution. To your customers, the payments experience is seamless and fully integrated with your SaaS platform. It looks like you’re processing their payments, but your partner is absorbing the risks, build-out costs, and complexity of managing payments in-house. Plus, they’re decreasing your time to market.

    This model is also inherently flexible, so you can have as much control over onboarding and customer service as you want. Plus, it offers more recurring revenue from a share of processing fees compared to one-time referral fees you get with a referral partner.

    Ultimately, the right partner will offer a solution that can help you become a full payfac if and when it’s right for you.

Referral Partner Model PayFac® Model PayFac as a Service Model
Traditional model You become the processor White-labeled technology solution
Revenue from one-time referral fees Maximized revenue potential. Increased risks and costs Seamless integration with your SaaS platform
Your customers manage the relationships with the processor and payments technology solution provider Responsible for technology infrastructure, underwriting, onboarding, and customer service Revenue from customizable pricing/processing fees
Partner assumes most of the risks and cost of build-out
Fast and efficient onboarding
Choose your level of control
Path to becoming a full PayFac®
Decreased time to market

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