It’s no secret that software led payments are taking our digital ecosystem by storm. It’s a buzzword that’s in just about every conversation regarding payments, payfacs, and how to optimize the fintech space. In this episode, WorldPay Vice President of Merchant Strategy, Samuel Callen joins Bob Butler, Host of PayFAQ: The Embedded Payments Podcast to talk all about what’s creating all that buzz.
According to Sam, software-led payments refer to any form of payment that is consumed or sold from a software provider, so this is not your average ISO pushing standalone terminals around his local territory. This refers to small businesses that are opting to use a piece of software to run their business and empowering these software providers to sell payments to the SMBs.
When it comes to a target market for this type of offering, there are two extreme ends of a very broad spectrum, says Sam. The initial end of the spectrum starts with what we call the low touch end, referring to ISV referrals with no capacity for embedded payments. In this scenario, companies can monetize payments even when they’re not necessarily a payments company themselves.
The opposite end of the spectrum will be wholesale payfacs, referring to a fully embedded payments product that a company can use to differentiate themselves in the marketplace. The middle ground would then be what we call managed payfacs or payfac lite, referring to software companies that are powered by a payments company behind the scenes but offer the full look and feel of a payment facilitator without any of the risk or overhead.
Tune in this week to hear Sam talk about who the ideal candidate is for software-led payments, the most common pain points in the middle space of the spectrum and what to expect in the industry as it relates to software-led embedded financing.
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Full Transcript
Bob Butler
Hi, everyone. Welcome to the PayFac® embedded payments podcast, brought to you by Payrix. I’m your host, Bob Butler. And today I’m going to be talking with Sam Callen. He’s the Vice President of Merchant Strategy and Platform Go-to-Market at FIS, and we’re gonna be speaking all about software-led payments. So hi, Sam, welcome to the show.
Sam Callen
Yeah, nice to be here. Excited to have a chance to chat with you.
Bob Butler
Awesome, you know, the term software-led payments is becoming more and more common today. Can you tell us a little bit about what does that actually mean?
Sam Callen
Yeah, of course, it’s a great question. I think that as with most things, you know, if you went out and asked five people in the industry for a definition of it, you’d probably get five different answers. But at the end of the day, I would say the way that I define software-led payments is really, it’s any form of payments that are consumed or sold from an actual software provider. So think back in the old days where your friendly local ISO would be strolling through town and selling a standalone terminal, that would be a non-software led approach, there’s no software that’s being led to that sale. So when we’re talking about software led, it’s more about a small business, that is, say, using a piece of software, like if it’s a funeral home, maybe a funeral home management system; if it’s a salon, a salon management system, some piece of software to run their business. And so, it’s about using those software providers to be the ones who sell payments themselves to the SMBs. And so even software-led payments itself has many different flavors. And there’s been a lot of evolution there over the last decade, where it used to be more about just a software company throwing a referral over the fence to a payments provider. But now, it’s a much more elegant and seamless experience. So a nuanced definition. And it’s certainly been a quite an evolution for sure.
Bob Butler
Well, can you talk to us a little bit about the different types of software-led payments?
Sam Callen
Yeah, of course. So I think there’s really several different forms and flavors that are out there. And I’ll kind of take you from one end of the spectrum to the other, and then we’ll cover in between.
I think really, the variation between the forms and flavors just comes down to how sophisticated software company is, where they’re at, and their evolution as a company. And how much of the process do they really want to run themselves, and what their risk appetite happens to be.
So at one end of the spectrum, that’s called the low-touch end for a software company, you have what we call ISV referral. And in this model, just like the name suggests, it’s a referral. So the software company may not be prepared to be a payments company, or really embed their payments into their product, or take on the regulatory or compliance burdens that are associated with being a payments company. But they have a valuable list of SMBs, who use their product. And in that case, they can go ahead and take those leads as referrals, throw them over the fence to a payments company, and if the payments company can capitalize on that referral and make a sale, then they’ll share some of those economics back with the software company. So, it’s an opportunity for some of these software companies to monetize payments when they’re not necessarily payments companies themselves.
Now, on the other end of the spectrum is really a full wholesale PayFac®. This is going to be the most sophisticated payments option for software companies. And these are ones who have fully embedded a payments product, often leveraging that own product to differentiate their software itself with a seamless embedded customer experience. In this case, the software company is taking on all of the compliance and regulatory costs and risks. But for a large client who’s doing say $10 billion a year in volume through their platform, they’re probably pretty comfortable with that risk. And in the end, it can be a product differentiator, but it does provide improved economics for the software companies since they do handle more elements of the value chain. And so if you’re a software company that’s getting ready to do an IPO or you’re super late-stage startup, that can make a ton of sense.
Now for most of the companies that are out there, they’re gonna fall into the middle and that’s where you’ve got this opportunity. You can call it managed PayFac® or PayFac® light, whatever you want to call it. Essentially, they’re describing the same thing and that’s really the graduation path from a referral model to a full-scale PayFac® model. And this is where the software company is really being powered behind the scenes by a payments company, but is able to have the full look and feel of a payment facilitator. So they can have a fully white-labeled experience with their customers and their own custom branding around their payments product. The software company takes on full service and support of the merchants for that payments product, but without the millions of dollars and years of effort and headache that are needed to ensure compliance to be set up as a full registered PayFac®.
So it’s a great graduation path that allows a lot of the software companies to continue along this journey from just being on the referral model to being a full payment facilitator. And, the way that I think about it is to use an analogy, it’s almost like you’re trying to climb a mountain, and the journey to becoming a PayFac®. It’s like scaling that vertical rock face. What the managed PayFac®, or PayFac® light model gives you is a nice, gentle trail that kind of goes up the side and leads you to the top of that mountain without first conquering it straight on it.
Bob Bulter
Sam, you were really involved in the due diligence as it related to the FIS acquisition of Payrix. So, can you talk to us a little bit about what made that exciting for FIS?
Sam Callen
Yeah, absolutely. I mean, this is one that was top of the list for us in terms of, asset classes and companies that we really saw as a lot of opportunity in the market. And I think to understand that you have to know a little bit about Worldpay’s history. So Worldpay, we were in at the ground floor of software-led payments, we acquired Mercury Payment Systems back in 2014. And this was the company that really founded that ISV referral model. And so we’ve really been there on the ground floor to see that. You know, one of the unique things that’s come up over the years is that as the software companies try to make the transition from one model to the next, there are a ton of pain points associated. Taking on service and support for your merchants on their payments offering is really hard work. It’s especially hard when you’re trying to just work on your software company, not even trying to think necessarily about the payments product, let alone when you have a large customer base, and you’ve never done it before. And so, I don’t think that there’s a ton of payments companies out there in the market, that operate as thought leaders and partners who are working to help their clients on that journey, which can make it hard for a software company as they grow.
And for Worldpay, that’s what made Payrix so appealing. And that’s ultimately why we bought them late last year. At Worldpay, we have this industry leading payment facilitator solution trusted by the largest companies in the industry. And that infrastructure has been industry leading for quite some time. We invented the term PayFac® quite literally. And so we also had this industry leading ISV referral infrastructure based on the company that actually founded the entire model. But what was really missing was that middle piece around the managed PayFac® or the PayFac® light solution. And so now, what we have that’s really exciting and unique is the full spectrum of expertise of everything, from ISV referral, to managed PayFac® or PayFac® light, to full wholesale PayFac®.
We like to kind of joke internally or as we’re doing the diligence is, we’re really the only payments company a software company would ever need. But the reality is, it’s true. And so we really can enable that end-to-end journey to make it as painless as possible, and also have the human capital expertise internally, to almost serve basically, as consultants to some of these payments companies and help them on that evolution, which I think is something that’s truly unique and differentiated from maybe some of the more modern neo players who are exclusively focused on things from the technology angle.
Bob Butler
I couldn’t agree with you more. And it makes me think you mentioned something about a software company never having to leave FIS/Worldpay. But can you talk to me a little bit about what kind of software company is really that ideal candidate for software-led payments?
Sam Callen
Yeah, for sure. I mean, I think the first thing to start off with is, how large is that company? You have to be at a certain amount of scale to justify the investment. And so I would say typically, these are software companies that are going to be doing more than $10 million a year in volume that’s flowing through their platform. And I think anybody who’s kind of in that model can start really thinking about how: do we monetize payments. When you start getting to the really high end of the market, call it $2 billion plus, I think then it makes a ton of sense for someone to start looking at that payment facilitator model. But really, that $10 million to $2 billion neighborhood is going to be perfect candidates for either ISV referral or that PayFac® light offering. So I would say that from a size standpoint, or a company evolution standpoint, I’d say that’s one key piece.
I think the other key piece is what type of software, is it? Because at the end of the day, there’s going to have to be a commerce flow or payments flow associated with that software. And so, you’re thinking things like, ones that really touch payments or at the heart of business management. So any sort of business management software solution that’s at the heart and soul of running a company, that’s really going to be that sweet spot as well, that truly kind of goes across the full spectrum. Plenty of software companies, I would say, are in that ideal fit, but just have to be at a certain size and scale and be able to touch that commerce flow.
Bob Butler
Totally make sense. You know, as we look at the market, can you tell me a little bit about how would you describe the market dynamics in this space? And what differentiates the different players?
Sam Callen
Yeah, that’s a great question. And I mean, look, I work at Worldpay. So you know, take my answers with a grain of salt. But I’ll try to be as honest as I can. I think like the obvious one who’s a pretty big player in this space is Stripe. Stripe, to their credit, can get you set up very quickly, some of the easiest integrations in the entire industry. And if you’re a software company that’s just getting started out, and you need that speed to market, huge differentiator. And I think that you see them have a ton of success in software companies that are at that seed stage, or maybe less than $10 million in volume, they do very well there.
Now, if you’re a software company that’s been around for a little bit of time, you already have a payments provider. And so the difference between being set up in minutes versus days or a couple of weeks isn’t as important and you’re trying to look for a new vendor. That’s where I think they have a tendency to lose some of those clients. However, another point to their credit where they’ve done really well also is with some of these super large, complex, multi-sided marketplaces, where they’ve built out quite a bit of technology behind the scenes, that helps power the solutions for that industry. And so, within the marketplace segment, Stripe does incredibly well, Adyen does incredibly well. And just speaking from what we’ve heard from our clients, there do seem to be some pain points, though, in kind of that middle piece of the spectrum, especially around payments economics, and the rev shares that can be offered aren’t necessarily as competitive as others in the market. And then feature functionality, customization, that the software providers really looking for as they move into that PayFac® light model seems to be a bit of a pain point.
So you do see a lot of folks in the market who kind of graduate out of Stripe at a certain point in time. Now, if you take a look at Adyen, their bread and butter historically has been the mega-end of the market. And this would be that enterprise space, and they built a lot of feature functionality that’s allowed them to be successful there. And I think that where they’ve started to gain a bit of traction is with their Adyen for platforms offering. And it’s still early, right. I mean, I think they just launched this product within the last six months. It’s in that enterprise space of the market. And so that’s where a lot of the tools and the feature functionality is being pushed more toward the partner themselves, to be able to bring to bear. And so really serving kind of the upper end of the market. I think what they’ve done especially well at but another one that’s doing pretty well in marketplaces as well, wouldn’t say that they have the same level of share that someone like Stripe has, but they’ve been fairly competitive there.
I think that when you look at kind of the rest of the market, what we’ve seen at least, and in part, what went into the acquisition of Payrix, was there didn’t seem to be anyone who was really serving that middle piece of the market. And that’s a big piece of the market, $10 million to $2 billion in volume. So a lot of software companies that fall into that bucket. And what we’ve always thought of as a company is how can we take some of the tools that the big guys use, democratize those and provide them for all and really bring those capabilities down market to enable some of those software companies that don’t quite have the scale yet. Maybe they have the product, but the scale isn’t quite there to be able to compete on an equal footing with some of the mega players in the industry. And so, we almost kind of view ourselves as like the neutral Infrastructure-as-a-Service player behind the scenes that’s powering the technology and building the technology that allows these guys to compete with the largest players in the industry.
Bob Butler
You know, before we wrap, can you talk to me a little bit about opportunities in software-led embedded finance? Really, you’re starting to hear embedded finance a lot now. And so we’d love to know your thoughts on software-led embedded finance.
Sam Callen
Yeah, of course. I mean, it gets a lot of mind share, for good reason, right. I think it was McKinsey who took a look at the SMB market and share of wallet and what they had determined was that embedded payments or payments flows for an SMB, you’re capturing about five-ish, maybe 10-ish, percent share of wallet with that SMB, when you can actually get more into embedded finance. And when we say embedded finance, we’re talking card-issuing, banking-as-a-service like getting them set up with a bank account, things like term loans, working capital loans, insurance products, stuff like that. That’s when you unlock that other 95/90% share of wallet and the great thing about this is that you know when you can deliver these products elegantly and everybody wins at the end of the day.
The SMB is looking for, how can I run my business in the easiest, most efficient manner possible. Your software companies are looking to capture greater stickiness with those SMBs, deliver more value to them, and be able to capture more share of wallet. And certainly the payments companies are in a similar boat where they want to be able to bring those products to the SMB as well, for similar reasons to the software company. And so you hear a lot about embedded finance, I think in large part, it’s a way for a lot of companies to maybe make a press release, because you’ve got some large clients that are out there who may be able to do issuing products. But that’s really the extent of it. And I think that for FIS, one of the things that I think is really interesting and gets me super excited to wake up every day is about how we democratize that. How do we bring card issuing, merchant cash advance, term lending in a sophisticated manner? How do we bring that down market and allow every software company in America around the globe to be able to provide these embedded finance products to their SMB base?
And I think one of the interesting things that FIS has, when you look within our broader business, you know, we’ve basically powered the top capital markets players, banking players in the entire world behind the scenes. We know banking-as-a-service, we know embedded finance, we have things like program management, where basically you’re outsourcing some of the responsibility for administering some of these programs, and we can bring that to our entire client base, right. And so, for us, we see that as an opportunity to take embedded finance, which historically has only gone to the largest of the large, and really bring that down market. So when you couple, all the things that we’ve done as a company that have enabled us to serve that $10 million to $2 billion segment, you know, the graduation path and stuff like that, there’s also a product play there as well, which is, we’re going to be able to bring these embedded finance tools and products to that mid-market segment, which is going to enable them to continue growing, and be competitive in the space. We could do a full deep dive just on embedded finance, and kind of where we’re thinking about that. But yeah, it’s just a little bit of a teaser of at least why we find it so exciting. And it’s going to be an interesting few years ahead to see how that plays out in the market as well.
Bob Butler
Well, I definitely think I’m going to take you up on a follow up to talk embedded finance, because I think that is more than probably even one session with us. So, we’re coming towards the end. Are there any final thoughts you’d like to leave with the audience?
Sam Callen
Not really. I mean, I think that if you’re a company that’s out there, and you’re a software company that’s thinking about, what does your payments journey look like? Give us a call, by all means, do your diligence and check with all those providers out there. But I really do feel like it’s something that we’ve taken to heart is how can we be that one company that you need that takes you from just starting up in your garage as a new software company, to getting ready to IPO on the NASDAQ, we can handle it across the board. And I think there’s nothing that would give us more pride than being able to work with clients on that journey, right? I mean, for your clients, you’re going to take a certain amount of pride knowing that you were there helping them to grow from their infancy to some big IPO. And so, as you’re thinking about your journey, give us a call. If nothing else, we’re there to talk you through the journey and hopefully help you make the best decision for your company.
Bob Butler
Sam, thank you so much. I really appreciate you being on the show today. You know, I’ve spent a lot of time with you personally over the past few months. And I know we’re both big believers and sharing knowledge and experience. So I truly appreciate you joining us today.
Sam Callen
Yeah thanks, really appreciate it and happy to join anytime.
Bob Butler
Thank you so much. We want to be that trusted resource for software providers who are out there trying to make sense of embedded payments, embedded finance, and embedded commerce and to help them get the education they need to make the business decisions, their customers and their investors will thank them for. Thank you for joining us today on the PayFac® embedded payments podcast brought to you by Payrix.
