Seeing Dollar Signs: The Revenue Potential of Embedded Payments
The allure of embedded payments success stories tend to blur or gloss over the reality that many revenue factors are in play when you become a payment facilitator, all of which can impact your return on investment.
This article will explore on a high level the revenue potential of a payment facilitator as well as expenses and other factors that can impact what you ultimately net from embedded payments.
Generally speaking, the evolution of embedded payments has shown that when you take on more risk or have more ownership in the process, your return will also increase.
- In the old referral models, a software company took on little or no risk. The return followed suit, ranging from zero to up to 20 basis points (bps) on Gross Merchant Volume (GMV) if you’ve negotiated well.
- With traditional integrated payments, you take on more ownership of the process than in the referral model, so your revenue share increases as well – up to 40 bps of the GMV processed.
- Now, with the payfac as a service and payment facilitator models, you can move from revenue sharing to full payments monetization. You can still partner with a payments expert to save time and money building out systems and infrastructure, but your revenue potential increases to 60-100 bps on your GMV. Take on 100% of the risk and management of your payment business, and you’re looking at up to twice that or 100-120 bps on the total annual volume of payments processed on your platform.
Do you know the total available payment volume (GMV) on your platform? It’s equal to the total value of the goods and services sold by your customers. That’s what you’re working with and want to capture through your payments offering. Obviously, the more transactions you process or increase your volume, the more payments revenue you can make.
When calculating your total available payment volume, consider:
- Some of your customers using legacy payment providers may not switch to processing through your platform quickly. Change is not easy for everyone.
- If your customers accept cash or check payments in any volume, those transactions won’t be captured through your platform. The same goes for countries that are not supported.
Your payment volume is a critical factor in deciding to become a payment facilitator. As mentioned above, you need to reach a certain scale for it to make sense. For example, if your volume is less than $750 million, becoming a registered payment facilitator and taking on all the risks, infrastructure, and business functions of a comprehensive payments business may not be justified. In this case, the payfac-as-a-service model may be a smarter choice.
Again, in the payments business, you have to play nice with others, including sharing revenue with your acquirer and the card brand networks (Visa, Mastercard, Discover, American Express, etc) in the form of fees and interchange rates, respectively.
The good news about acquirer fees is they can decrease as your processing volume increases. The same can’t be said for interchange rates charged by card brands. They are mostly fixed and the highest cost for a payment facilitator at around 1-1/2% to 3%.
The easiest factor to understand is how your pricing structure affects your revenue. With old-school ISOs, it used to be a race to the bottom where pricing and basis points were concerned, because those were the only selling points. Cheaper equaled better.
Now, vertical SaaS companies who provide embedded payments in their offering are much more valuable to merchants, because they’re helping merchants manage their entire business. The SaaS company is taking much more of the burden off merchants, so merchants are willing to pay more for the software. It’s a win-win.
As a payment facilitator, you also have a lot more flexibility when it comes to the pricing you offer merchants. You don’t get stuck with all the ancillary fees that ISOs typically charge merchants, so you can streamline pricing for a better customer and merchant experience.
Becoming a payment facilitator from scratch is incredibly expensive, time consuming, and will eat into your return on investment. A payments partner can greatly reduce your upfront costs and get your embedded payments solution to market (and revenue flowing) much quicker.
Discover how pioneering expertise and a comprehensive embedded payments offering can help you achieve your revenue potential and increase the value of your software with Payrix.