Making Money on Payments: A Guide For SAAS Companies

Making Money on Payments: A Guide for SaaS Companies 2

Executive SummarySoftware companies are founded with one thing in mind: enabling their

customers to fulfill their business needs effectively. In many cases, enabling

payments is not their first priority, yet most cross paths with the payments

ecosystem eventually. Accepting payments and integrating the capability with

other functions is a universal business need. Most software companies start by

referring payment processing to an outside payment provider but that means

sharing clients, customer experience, important decisions, and revenue with

that provider.

By creating proprietary payments offerings as payment facilitators, software

companies can add a new revenue stream and increase profit margins. They

maintain control over their customer relationships and avoid having someone

else decline their valuable customers by managing risk decisions. Finally, they

maintain control over their products and operations. They are free to create

customized solutions for their clients and independently control their branding

and customer service.

Many thriving companies — including big names such as Square and Toast —

have chosen this model and risen to the top of their respective industries. Of

course, becoming a payment facilitator is not for everyone. A software company

needs to offer a compelling payments product and incorporate it into the positive

customer experience it has created.

Fortunately, a supportive ecosystem exists, offering all the resources needed to

help software companies succeed in payments. For those who are ready to act,

becoming a payment facilitator can be a lucrative business decision.

Ministry Brands: A Case StudyWhen they set out to create a technology epicenter for churches, the founders

of Ministry Brands planned to launch church management, web development,

communication, and giving platforms. They could not afford to get bogged down

in the intricacies of payments, so they entered a referral relationship with a

payment processor so they could maintain focus on their ambitious agenda.

As their business evolved, however, so did their thinking about payment

processing. They realized that an outside payments provider could never

understand or serve the unique needs of Ministry’s customers.

EXECUTIVE SUMMARYPAGE 2

MINISTRY BRANDS: A CASE STUDYPAGE 2

BRINGING PAYMENTS IN-HOUSEPAGE 4

BENEFITS OF CREATING YOUR OWN PAYMENTS OFFERINGPAGE 4

WHO IS BECOMING A PAYMENT FACILITATOR?PAGE 7

PF BEST PRACTICESPAGE 10

RESOURCES FOR THE POTENTIAL PF PAGE 13

“Founded on 2002, Ministry Brands, LLC is a family of Christian software companies across North America helping more than 115,000 churches and faith-based organiza-tions thrive in a digital world.”

Making Money on Payments: A Guide for SaaS Companies 3

This became evident when the partner began declining to serve some of

Ministry’s customers. “There were some nuances about our market that our

partner didn’t always understand,” co-founder and chief payments officer Jason

Butler says. “On paper, they might have seen a startup as risky, but we knew

that because the startup was affiliated with a large, established church, the risk

would be low.”

Ministry saw opportunities to use payments to enhance its customers’

experience in new ways. For example, the team knew they could unify payments

data with data from other sources to make accounting easier for church financial

administrators. Many church financial administrators are volunteers working

limited hours, so streamlined accounting services were especially valuable,

but with a referral relationship, the company lacked access to and control of

payment data.

“When working with a referral partner, we found we were further from our

goals than we wanted to be,” Butler says. “We realized we would like to

bring the process more in-house so we would have more control over those

touchpoints and our ability to serve our customers.”

Ultimately, Ministry realized that a referral partner would never abdicate enough

control over payment-related decisions and processes. So, the team began to

explore other ways to manage payments. Eventually, the company signed on as

a payment facilitator (PF) with processor Worldpay (which was later acquired by

FIS, another payment processor).

As a PF, Ministry no longer had a payment processing partner; rather, it had

a payment processing vendor to which it could outsource logistical functions

while maintaining control over the high-value customer- and product-impacting

components.

Initially, Ministry chose to control the new customer onboarding process,

customer service, and reporting. Worldpay provided application programming

interfaces (APIs) through which Ministry could add and update customer records

and extract transaction data for customer service and reporting. Worldpay also

collected funds from payers through the payment networks, delivered those

payments directly to Ministry’s customers, and served as the custodian of card

numbers and other sensitive data, thereby reducing Ministry’s exposure to

hacking and data security compliance requirements.

Subsequently, Ministry decided to take control of payment delivery, using

Worldpay’s APIs to control when and how payments are delivered to their

customers.

Many business-to-business (B2B) software companies have an opportunity to include — and earn revenue from — a payments component in their software.

Making Money on Payments: A Guide for SaaS Companies 4

This gave Ministry complete control over all payments-related decisions and

data and, therefore, complete control over product delivery and customer brand

experience. It also dramatically improved Ministry’s financial results, including

gross revenue, gross margin, and enterprise valuation.

“Choosing to become a PF also makes the company more attractive to

investors,” Butler says. “We own our customer accounts and can take them

where we want, which increases the field of potential buyers of our business.

We also have a large and growing stream of recurring revenue that investment

firms love.”

Bringing Payments In-HouseLike Ministry Brands, many business-to-business (B2B) software companies

have an opportunity to include — and earn revenue from — a payments

component in their software.

If your services include supporting transactions in some way, you have options

for including payment services. You can refer your customers to a partner in

return for residuals, or you can create a proprietary offering and generate more

revenue for yourself.

By becoming payment facilitators, software companies can offer proprietary

payment processing services. A PF buys payment processing services from

a payment processor (also known as a merchant acquirer) and resells those

services to its customers. It becomes the contractual provider of those services,

so its customers no longer need to set up separate payment processing

relationships with payments providers.

Benefits Of Creating Your Own Payments OfferingOffering payment processing directly to customers can offer significant

benefits to software companies.

Financial ImprovementsPayment processing services generate additional revenue and incremental

enterprise valuation. Software companies that refer customers to third-party

payments providers have revenue-sharing agreements with them. They receive

commission from their providers, paid as a percentage of net revenue. Software

companies that have a proprietary payments offering collect all (gross)

payments revenue, creating an immediate improvement to the top line. Instead

of revenue-sharing agreements, they have fee-based vendor agreements with

Payment processing services generate additional revenue and incremental enterprise valuation.

Making Money on Payments: A Guide for SaaS Companies 5

their merchant acquirers, which normally result in dramatic savings and a

significant earnings benefit as well. Figure 1 provides an overview of the typical

financial impact.

Figure 1: Referral vs Payment Facilitator Financial Impacts

Offering a proprietary payments product increases gross recurring revenue,

margins, and net income. Because processing revenues are normally expressed

as a percentage of transaction volume, it also ensures that your revenue

automatically scales to the growth of your customers. As a result, you can expect

increased enterprise valuations.

The software companies that integrate payments into their software often market

that streamlined payments access as a differentiator, offering themselves as a

one-stop shop for a business’s needs. Some even bundle other software services

together with payments by charging a larger-than-normal payment processing

fee but including other services for free.

The enormity of this opportunity has attracted interest from investors globally.

The payments sector drew $18 billion in venture capital in 2018, more than five

times the previous year’s total.i

“It is becoming more difficult for a traditional merchant services provider to

compete in this market,” says Ryan Goldenberg, principal at LLR Partners, a

private equity firm that invests in payments. “Providing payments or software

alone can work, but if you can provide them together, that’s really what unlocks

a broader segment of the marketplace.”

“Providing payments or software alone can work, but if you can provide them together, that’s really what unlocks a broader segment of the marketplace.”

Making Money on Payments: A Guide for SaaS Companies 6

Valuations have been growing as well. Payment facilitator Stripe, a software

platform for online businesses, is one of the most valuable venture capital-

backed companies in the United States at $35 billion.ii

Deeper Customer RelationshipsBecause referral relationships by definition involve introducing merchant

customers to a third party that will provide the payments services, those

merchants become shared customers between the software company and the

third party. Companies that offer their own payments product can maintain direct,

exclusive relationships with their customers, enhance customer experience, and

often improve their product offerings. It enables a software company to have full

control and get their merchants processing payments faster, resulting in quicker

revenue and greater customer satisfaction.

Improved Merchant ExperienceWhen you refer a merchant customer to a third-party payments provider, that

provider’s interests may not align with the best experience for your customer.

Ministry Brands found this to be true in the risk-decisioning process. If the party

providing the payment processing must make a risk decision, the customer may

be declined unnecessarily, creating a negative experience.

Payment facilitators manage their own application processes, make their own

approvals, and decline decisions without interference from third parties. These

choices can be based on their own tolerance for risk and on their knowledge of

their customers, which is often detailed and thorough. They are also able to tailor

merchant applications and other aspects of the underwriting and onboarding

processes directly to their customers and to what they know about them. They

can offer simplified, payments-inclusive contracts and have full control over

pricing and bundling of payment services, creating a product that is geared

directly to the businesses they serve.

Companies that refer payment processing to third-party payment providers

also turn operational control over to those providers. In a referral relationship,

payment processors onboard customers to their own platforms according to

the processes and time frames they use for all their merchants regardless of

size or industry, and in these types of arrangements, when a customer has a

question about their payment processing, they will ask the processor.

On the other hand, a PF directly owns and maintains all aspects of the payment

processing service. This includes underwriting and onboarding as well as

servicing and branding. PFs can develop boarding processes that get their

merchants up and running very quickly. They can manage the time frame

The top four payment facilitators currently process 6% of global payments volume, or about $929 billion.

Making Money on Payments: A Guide for SaaS Companies 7

in which their customers get paid, and they can customize reporting to their

customers’ needs. They host the payment relationship on their own websites

and can provide payment processing statements with their own brands on them,

establishing their role as the sole point of contact for their customers.

WHO IS BECOMING A PAYMENT FACILITATOR?The global retail payment processing industry currently moves nearly $16 trillion

in transaction volume annually and generates $371 billion in revenue, according

to data from payments consultancy AZ Payments Group, LLC.

Payment facilitators are responsible for a growing piece of that pie. In 2019, there

are just over 1,000 registered payment facilitators. At current growth rates, that

number is expected to more than double to more than 2,300 by 2025 (Figure 2).

Figure 2: Number of Payment Facilitators, 2018-2025

The payment facilitator market includes some well-known names in commerce.

One of those better-known names is Square. The company launched in 2009,

enabling small and very small merchants and sellers to accept payments using

a tablet or a smartphone through a card reader plugged into the headphone

jack. It describes its payments offering as the “foundation of our ecosystem”

While it continues to expand the services it offered to its millions of global

customers, payments processing revenue continues to grow at 25+% annually.

The top four payment facilitators currently process 6% of global payments

volume, or about $929 billion. That number is expected to grow to $4 trillion by

2025, according to AZ Payments Group’s data.

“Our customers should not even need to think about payments”

Making Money on Payments: A Guide for SaaS Companies 8

PFs outside of the top four currently process about $436 billion in payments

volume and generate $3 billion in revenue. These figures will more than triple to

$1.5 trillion in processing volume and $13 billion in revenue by 2025 (Figure 3).

Figure 3: Payment Facilitator Gross Payments Volume (GPV) and Revenue

Among these PFs is Wave Financial, a software platform that enables small

businesses and entrepreneurs to manage their business finances. According

to the company’s chief financial services officer, Les Whiting, Wave launched

in 2010 as a cloud-based accounting platform with initial monetization strate-

gies around advertising and insights it would obtain from its customers’ data,

similar to what personal financial management service Mint.com was doing at

the time.

As the company evolved to offer broader financial services, collecting payments

emerged as a necessary offering – and a revenue stream. Initially, Wave offered

payments in partnership with Stripe, but the company knew that adding

payments onto its own platform could enable it to capture more revenue than a

referral or partnership arrangement. Wave launched as a payment facilitator in

the U.S. in 2014 and in Canada in 2015.

“Payments has become a huge part of a broader financial services strategy, but

it also became the primary monetization engine of the company,” Whiting said.

The other, and arguably the most important, driver in becoming a payment

facilitator was the desire to own the entire experience around payments.

“Our customers should not even need to think about payments,” Whiting said.

“When a customer signs up, payments are already there. We focused on making

it incredibly easy.”

Software providers that cater to specific industries are becoming big business

as well. Phreesia, which offers a suite of patient intake and other business

applications for healthcare organizations and operates as a payment facilitator,

“A company must be able to invest between $100,000 and $500,000 to build out the infrastructure needed to facilitate payments.”

Making Money on Payments: A Guide for SaaS Companies 9

launched a $125 million initial public offering (IPO) in July 2019iv. I3 Verticals,

which serves several industries, including retail, hospitality, education,

healthcare, and property management, closed its $92.5 million IPO in 2018v.

Other examples include ASF Payment Solutions, which provides software and

payment processing for the fitness industry, including gyms, health clubs, and

martial arts studios; and ParTech, which provides point-of-sale systems and

payments processing for the restaurant and retail industries.

Is Offering Payments Right for You?You should consider bringing payments in-house if you are already referring

customers to a third-party payments provider, or if you sell a product where

payments could easily be integrated and you are looking for new revenue

streams.

Scale matters in payments. As Butler of Ministry Brands points out, companies

that become payment facilitators must build out the infrastructure needed to

support their payments products. “While it’s definitely advantageous, there is

also significant investment,” he says.

According to Rick Oglesby, president of AZ Payments Group, a company

must be able to invest between $100,000 and $500,000 to build out the

infrastructure needed to facilitate payments. That budget includes developing

risk management policies and procedures, customer onboarding and servicing

tools, selecting and integrating with a payments processor or gateway, and

training customer service and sales staff, he says.

Becoming a payment facilitator is not the first move for companies starting out

as software providers. It is for established and/or rapidly growing businesses

that either have scale or an expectation of soon achieving it. If you are too small,

you lack the investment capital or the resources needed, or you are not yet

growing, you should wait.

“We had to put a PF infrastructure in place, including a risk team and an

onboarding team. We had to write software that was specific for the payment

facilitator function. Customer support needed to be educated because they

were the ones who would need to provide information if a customer called in

with a question about their payments,” Butler says.

The technical team dedicated to supporting Ministry Brands’ PF infrastructure

consists of eight individuals, and Butler estimated that the customer service

team has seen a 10% to 15% increase in workload.

“Now there are third-party software companies that help a lot, so new PFs will

probably find it easier than we did,” Butler says.

“You have to offer an easy-to-use, comprehensive product offering. That’s where the opportunity lies”

Making Money on Payments: A Guide for SaaS Companies 10

Becoming a payment facilitator is also best for low-risk, low-fraud industries

where software companies know and trust their merchants. For high-risk

industries where fraud is common, payment processing is best left to parties

with the experience and infrastructure to properly mitigate the risk and protect

the payments ecosystem. For the companies that fit these criteria, offering their

own proprietary payments product provides them with the control they need

to create a customized and comprehensive solution tailored specifically to the

market they serve.

“With the full payment facilitator experience, we have complete control over the

data and onboarding information. We can provide our customers the services

that fit their needs. The way they run their finances is different from other types

of businesses, and we’re able to meet their unique requirements,” Butler says.

PF BEST PRACTICESFor a software company to more fully realize the revenue-generating

opportunity inherent in becoming a PF, it should keep some best practices in

mind.

Provide a Compelling Payments ProductSuccessful PFs must offer compelling payments products. Expectations are

high, as consumers have come to expect streamlined experiences everywhere,

thanks to companies such as Uber and Amazon.

“The smaller the business, the harder it is for them to adopt software or electronic

payments acceptance, so you have to offer an easy-to-use, comprehensive

product offering. That’s where the opportunity lies,” LLR Partners’ Goldenberg

says.

At its core, a payments product offering must get payments right. That means

making sure that all merchant’s customers can pay however they choose.

One-fourth of online shoppers cite lack of support for their preferred payment

method as the reason they abandon a transactionvi, and one study found that

$1.1 billion in retail sales had been lost over a 12-month period because retailers

did not support their preferred payment methodvii.

“Turning away any type of payment method puts the PF and its customers at a

significant disadvantage,” Oglesby says. “While a consumer may be able to pay

a different way — perhaps they have a different card in their wallet — you’ve

negatively impacted their user experience and decreased the likelihood they’re

coming back to you.”

Different payments types also appeal to different demographics, and excluding

any payment type can turn away customers. American Express® Card Members,

Making Money on Payments: A Guide for SaaS Companies 11

for example, are known to be high spenders, as 62% of members have annual

household incomes over $75,000, compared to half of nonmembers. Their

annual card spend is three times that of nonmembersviii, and their average

transaction size is 1.7 times that of nonmembersx.

“Is that really the customer that you want to turn away or inconvenience?”

Oglesby says.

In the book Influence: The Psychology of Persuasion, social psychologist Robert

Cialdini, PhD, outlines what he calls the contrast principlexi, which states that

individuals evaluate choices by contrasting them with their immediately

preceding thoughts, so a customer who sees $100 in his or her wallet prior to

making a purchase will see a $75 purchase as expensive. That same customer

thinking about his or her $5,000 credit limit will consider that same $75 purchase

as much more affordable.

It is therefore critical to never shift a consumer’s financial context. Forcing a

customer to switch from his or her preferred payment type to an alternative

could be forcing a switch from a high-limit card to one with a lower limit or

even to a debit card. That change in financial context may lead to changes in

purchase decisions or even sale abandonment, and it most definitely has an

adverse effect on the customer experience. This largely explains why more

than 3 million new merchants began accepting American Express® Cards in

2017 and 2018 alonexii and the network reached virtual parity in merchant

coverage with other top card networks in the United States as of year-end

2019xiii.

Similarly, a compelling payments product must be easy for customers and

consumers to adopt and use. Best practices include extremely simplistic

on-line application forms, near real-time approval, the ability to process

transactions immediately upon approval, complete integration with software

services, complete elimination of data security risks for the customer (the PF

takes all data security risk), comprehensive online servicing, simplistic pricing,

and a streamlined checkout experience at the point of service.

Maintain High-Quality Data in a Secure WayAs a company that enables the entrance of new merchants into the payments

ecosystem, a payment facilitator must adhere to the same rules, regulations,

and best practices that govern other payments service providers.

PFs must collect data from their submerchants during the application process,

which is then used for fraud prevention and compliance screening. As such, it

is important for the PF to complete the application forms carefully and make

sure they are putting solid data that is as complete and accurate as possible

Making Money on Payments: A Guide for SaaS Companies 12

into the system.

PFs have responsibility for protecting the abundant hacker-valuable data that

crosses their platform. To do so, they must adhere to rules governed by the

payments industry, a process known as “PCI compliance.” Most PFs choose

to outsource this function by purchasing payment processing services from a

vendor that specializes in managing payments logistics while still enabling the

PF to control all customer interfaces and servicing.

They do so by collecting payments data via APIs or forms provided by a payment gateway, a platform that integrates invisibly or nearly invisibly into software platforms and sequesters sensitive data. The gateway then forwards the data to a payment processor. This process enables the software company to technologically extract itself from payments logistics while still maintaining business control over product and servicing. (See Figure 4).

Figure 4: How PFs Outsource Payment Processing and Data Security while Maintaining

Control

Preventing Fraud and Money LaunderingGovernment regulations require payment providers, including PFs, to verify that

their customers are who they say they are and to prevent money laundering and

other forms of illicit activity such as theft, fraud, or terrorist financing. To comply

with these regulations, PFs must conduct due diligence on their customers and

on their transactions. To do this, each PF must create and follow underwriting

(customer review) and transaction monitoring policies and procedures. Many

of these policies can and should be automated with exceptional items raised for

manual review.

“Our relationship with American Express has contributed to our success as a payment facilitator”

Making Money on Payments: A Guide for SaaS Companies 13

RESOURCES FOR THE POTENTIAL PF Fortunately, significant resources are available to help software companies along

the path to more control and increased revenue through offering a payments

product.

The major credit card networks recognize the importance of payment facilitators

in helping them to grow card acceptance among smaller businesses. They

therefore publish and continuously update requirements that PFs and other

payments providers must follow to maintain compliance. They also support

PF service providers such as banks and payment processors in creating the

best possible solutions for PFs. This includes investing directly in the next-gen

products and technology that PFs need and in some cases investing directly in

the PFs themselves.

For example, American Express’ OptBlue Program is designed to increase

acceptance of Cards among small merchants in the United States and select

international markets by authorizing eligible payment processing companies

to directly offer American Express acceptance. Under the OptBlue Program,

payment facilitators can broaden their reach to smaller merchants across many

industries.

As part of this program, payment facilitators can include Amex together with

other brands on a single statement and consolidate payouts into a single

settlement. They can offer a full suite of payment options, including American

Express® Cards, to their customers and even provide marketing services

through exciting programs such as Amex’s Shop Small® initiatives. The entire

program is designed to make it easier for payment facilitators to enable more

card acceptance across industries.

American Express also offers free storefront and register decals and digital

signage for websites and invoices. It actively drives customers to small

businesses through its Shop Small map and online business directory and

through merchant recommendations in its cardmember communications.

“Our relationship with American Express has contributed to our success as a

payment facilitator,” Ministry Brands’ Butler said. “Their support has streamlined

enabling acceptance of their cards, which gives us access to a valuable segment

of cardholders.”

Beyond the card networks, a supportive ecosystem offers resources to drive

payment facilitator success:

The Electronic Transactions Association, a global trade association for the

payments technology industry, has played an active role in advancing the

interests of payment facilitators. In addition to offering educational resources

geared specifically to payment facilitators, the organization has:

Making Money on Payments: A Guide for SaaS Companies 14

• published guidelines that offer best practices for new entrants into the PF

market;

• developed a committee to address challenges and issues in the PF space; and

• launched a self-regulation program to acknowledge industry players, including

PFs, who are developing and following appropriate risk management policies.

Several companies have also arisen to help burgeoning payment facilitators

with education, technology, and training. Companies such as Infinicept, Finix,

Amaryllis, and Payrix provide a start-to-finish series of technical solutions and

consulting services to help software companies build their payment solutions

and make go/no-go decisions, select processing vendors or partners, establish

risk and compliance policies and procedures, automate operational and financial

processes, and provide reporting tools.

PaymentFacilitator.com is the leading educational resource for the payment

facilitator industry, offering a wealth of information, insights, and analysis to

help software companies become payment facilitators.

Becoming a payment facilitator is an effective way for many software companies

to not only increase their revenue but also create a deeper relationship with their

customers. Creating a compelling payments product requires commitment

and investment, but resources are available to help. For the right independent

software vendor (ISV), integrating a proprietary payments offering into their

software is a move that will help drive growth and future success.

Making Money on Payments: A Guide for SaaS Companies 15

ENDNOTES

i https://www.cnbc.com/2019/05/28/venture-capital-investors-bullish-on-online-payments.html

ii https://pitchbook.com/news/articles/stripe-bags-35b-valuation-as-b2b-payments-sector-matures

iv https://www.cfo.com/ipos/2019/06/health-care-software-maker-phreesia-files-for-125-million-ipo/

v https://www.globenewswire.com/news-release/2018/06/25/1529161/0/en/i3-Verticals-Inc-Announces-Closing-of-Initial-Public-Offering.html

vi https://www.businessinsider.com/chart-shipping-costs-are-a-top-reason-people-abandon-their-shopping-cart-2014-7

vii https://www.adyen.com/press-and-media/2018/adyen-study-reveals-the-cost-of-convenience-retailers-lost-377b-in-potential-sales-due-to-long-lines

viii American Express commissioned internet panel survey conducted in August 2018 based on online purchases made in the 6 months prior to the survey. Definition of

American Express® card members: Respondents who reported that they have an American Express card and that they used that card to make online purchases in the

prior 6 months. Definition of noncard members: Respondents who reported that they do not have any type of American Express card and that they used Visa, MasterCard,

Discover, debit cards, or payment services to make online purchases in the prior 6 months.

ix Nilson Report #1,147, February 2019. Spend per card derived from US year-end purchase volume divided by year-end cards in force (CIF), not from individual consum-

er-level data. CIF represents the number of cards issued and outstanding with cardholders. Average non-American Express spend per card includes Visa, MasterCard, and

Discover credit and charge card volume and CIF and excludes debit volume and CIF.

x Nilson Report #1,147, February 2019. Transaction size derived from US year-end purchase volume divided by year-end purchase transactions, not from individual

consumer-level data. Average non-American Express transaction size includes Visa, MasterCard, and Discover credit and charge cards and excludes debit volume and

transactions.

xi Cialdini, Robert B. “Influence: The psychology of persuasion.” New York: Morrow (1993).

xii Based on internal comparison of American Express small merchant locations in December 2016 to American Express small merchant locations in December 2018.

xiii https://www.businessinsider.com/american-express-may-have-reached-network-parity-in-us-2020-1