Bob Butler:
Hi everyone. Welcome to the PayFAQ Embedded Payments podcast brought to you by Payrix. I’m your host Bob Butler. And today I’m going to be talking with Benny Silberstein, the Co-Founder and Chief Strategy Officer of Payrix about the return on investment of integrating payments into software. So, hey Benny and welcome to the show.
Benny Silberstein:
Hey, Bob. Pleasure to be here.
Bob Butler:
Before we get started. Can you tell the audience a little bit about yourself and your software and payments background?
Benny Silberstein:
Yeah, sure. Happy to. I’ve always been a tech guy at heart, you know, and I was living out in the Bay area back when the Apple iPhone was announced, always really excited about next generation technologies. It was around that same time in 2007, when I got into payments and I was quite frankly pretty surprised about how old all the payment technologies running on green screen mainframe systems, all the new Nurit, 25 terminals that required.
And those were like the best modern terminals on the market. And they had a little calculator screen. So yeah, I’ve been doing payments for about 14 years now. I started out as an ISO and then transitioned over the years to becoming a full-blown payments facilitator as well as launching a PayFac® platform for other payment facilitators or software companies that want to monetize and embed payments like a PayFac®.
Bob Butler:
Excellent. So, when you think about the ROI regarding any typical business decision, there’s always two sides to an equation, the revenue and the expense or costs. Can you first talk a little bit about the revenue side of the SaaS or PayFac® type model?
Benny Silberstein:
Yeah, absolutely. So, I think if you look at kind of the evolution of payments and integrated or embedded payments over the years, you’ve kind of seen some software companies take a little bite of the payment action, making a little revenue.
Some of them took bigger bites and some take smaller bites, but most software companies, their primary source of revenue is their license or SaaS fees. So, if you think about it your typical, for example, gym or hair salon software company, if they’re charging a hundred dollars a month or so as a license fee that comes out to roughly $1,200 annually or so, right, when they start thinking about adding payments and the opportunity actually becomes so much larger that they’re getting the ability to actually make revenue on the entire payment volume being processed through their platform. Going back to our example of the gym or a hair salon software company, where they’re typically charging about a hundred dollar a month license fee, that’s $1,200 annually, when they start bringing in the payment revenue and their clients are typically processing about a million dollars annually in card volume. And if they can get another 50 to 100 basis points of that volume that equals another $5,000 to $10,000 a year in additional revenue per customer. So there’s definitely a huge opportunity there.
Bob Butler:
I mean, it’s a game changer. I mean, I’ve seen this with a couple of the platforms that I’ve worked with. Conversely, there’s the expense side. And can you talk about the typical expenses associated with embedding payments?
Benny Silberstein:
Yeah, absolutely. So, as you think about embedding payments there’s a lot of different fees and expenses. Some of them are more known to everyone. Some are less known and some of them are more hidden. There’s obviously always the card brand interchange fees. Those typically range somewhere between 1.5% to 2% could be a little higher, a little lower depending on the verticals, but those interchange fees are going to be pretty much across the board and anywhere you go, but then there’s the actual cost of running a payments business, right? So, if you think about it in order to give your customers that best experience with embedded payments, you really want to be able to have that full solution. And that’s typically really about becoming a payments company, right? So, if you think about back to the old referral model there was really no costs upfront, but there’s also very low revenue upside, typically probably less than 20 basis points. At the other end of the scale, there’s becoming a full-blown payment facilitator where over there you can make 100 to 150 basis points, but it’s also incredibly expensive.
You’re typically going to want to hire consultants upfront to help build out your policies and programs. You actually build out a platform which can cost you upwards of $2-$3 million building out a risk and compliance teams. And then just the ongoing payments expertise you’re going to need to have on staff. You can typically make about 100-150 basis points, but if your volume is less than $750 million in volume, having to have a few hundred thousand dollars or more of salaries on staff, it doesn’t always make the most sense. Somewhere in the middle is the hybrid – PayFac-as-a-service, which is a much lower cost model. You are going to give up somewhere between 20 to 40 basis points of upside, but that still leaves you with a great upside of 50 to 100 basis points. You can get to market much faster. You can offload most of that regulatory and compliance burden to your provider.
Bob Butler:
Absolutely. I mean, it makes a ton of sense. So, when a software company is thinking about embedding payments, what are some of the revenue pieces and/or costs that most people don’t even realize they need to consider? You hit on a couple of them just a second ago, the overhead that it costs to run a PayFac®, but if you could hit on a few more, that would be awesome.
Benny Silberstein:
I think one of the most interesting things that we’ve seen in the market is as traditionally in the ISO old-school model, everyone was fighting over basis points and pricing with their merchants. If you walked into a hair salon and you sold that merchant, merchant services at 10 basis points cheaper, and the last time the merchant switched to you at the end of the day, everyone was racing down to the bottom. What we’ve seen with software embedded payments spaces as the software company is providing much more of a service to the customer than just payments, right? They’re actually managing their entire hair salon, they’re managing the entire gym, they’re managing the entire storage space, doctor’s office, et cetera. And they’re actually taking a much bigger burden off of the merchants shoulders and merchants are actually what the cost of that payment processing is, is much less of a concern to them.
So, merchants are willing to pay a lot more. So merchants that traditionally would argue over basis points for interchange plus 5, 10, 20 basis points are willing to pay 2.9 30 cents which is like pretty much the industry standard. And that obviously creates a much higher revenue upside for the software company. At the same time while being the PayFac® or act like a PayFac® there’s a lot more flexibility in price in how you price your merchants. You typically don’t get stuck with all the ancillary fees that ISOs like to charge merchants; statement fees and PCI fees, et cetera. You know, you can really streamline the merchants pricing and give them a better experience that makes them happier in the long run. On the expense side, there’s always things like consulting. Consulting could end up costing a lot of money up front, building a risk and compliance team. As you’re building this and you’re running payment volume, there’s always that hidden risks costs. And it’s a very important aspect to think about card brand registration fees and, and just the general ongoing expense of running a payment business.
Bob Butler:
You know, what other guidance would you provide to software companies as they’re creating or working through an ROI model?
Benny Silberstein:
I think it’s very important to pick your partners wisely. There are a lot of people who advertise and say a lot of different things, but not all of them are really providing the right solutions out there. And it’s important to work with people who really know the numbers, really know the space and know what they’re doing. They’re not trying to push odd revenue sharing models on you. They’re not trying to charge you a bunch of consulting fees upfront, and then just drop you off in the deep end afterwards. Like we’ve seen some out there and people that aren’t transparent, people that care about your growth and ambitions and what you want to accomplish in the future. You know, at the end of the day, this is going to be a huge revenue driver for you and picking this partner is probably one of the most important things you’re going to be doing in the next year or so.
Bob Butler:
So, any final thoughts you’d like to leave with the audience today?
Benny Silberstein:
We touched on it earlier. We’ve seen software companies that have embraced the embedded payment strategy are really seeing huge upside. They’re seeing sky high valuations. You know, look at Shopify, Mindbody, Storable they have all recently announced raises et cetera that have, or earning reports that have really shown that the payment revenue was a huge driver of their revenue in total and of their valuations. So, it’s a really interesting time where we’re seeing the market acceptance of embedded payments through valuations. Stripe recently announced $95 billion valuation. Obviously that Stripes entire mission is all about embedded payments.
Bob Butler:
Well, Benny, I really want to thank you for being on the show. I know we’re both big believers in sharing knowledge and experience. So, I really appreciate you joining us today.
Benny Silberstein:
Absolutely, happy to be here.
Bob Butler:
Here at Payrix we want to be a trusted resource for software providers who are out there trying to make sense of Embedded Payments. And we want to help you get the education you need to make the business decisions that your customers and key stakeholders will thank you for. This is Bob Butler, and this has been the PayFAQ Embedded Payments podcast brought to you by Payrix.
