Optimizing a Payments Processing Partnership

Greg Myers
Greg Myers
Greg Myers is a payments ecosystem expert and the host host of the Monetize your Payments podcast. In this guide, he outlines the different types of payment processor relationship options available to software companies, along with the risks, benefits, and considerations that come with each.

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Questions Covered in this Guide

Questions Covered in this Guide

Why is there value for software companies to facilitate payments?

Potential for revenue share – there are multiple arrangements for software companies to offer payments to their customers. Historically, it was more common to do a lower-risk, lower-reward referral partnership with a third party payments processor, but now the right tools have become available to allow software companies to execute payments faster and with less expense, while outsourcing some of the really hard stuff. Software companies that do transaction processing in-house stand to keep a larger share of the revenue. 

Control of customer experience – if payments go through a third party and a customer comes to you with a problem, you have no way of helping them because you can’t see the back end. You may not even understand the problem. If customers have to wait a long time to talk to someone at the third party company to help them with their problem, they get mad and you look bad. 

What are the options for software companies who want to offer payments to their customers?

Referral partnership – the most traditional relationship that a software company has with a payment processor. Basically, the software company says to the processor “we’ve got a new merchant coming onto our software who needs payments, here’s the lead, pay me a referral fee”. The processor is then responsible for the customer service, and to do everything to get the merchant boarded.

White-labelled middle ground – a middle ground is arising because the software company doesn’t make a lot of money with the referral model and they don’t control the experience, but many software companies aren’t ready to become a payfac (that takes a long time, costs a lot of money, and requires in-house expertise). In this middle ground model, it looks like the payments are coming from the software company itself, but depending upon the model, the software company isn’t fully responsible for some aspects of risk, onboarding, or customer service.

Payfac – a payfac is a master merchant; one entity (the software company) processes or facilitates payments for a base of sub-merchants (its customers). A payfac takes on some of the benefits and costs of being a processor, which means this setup is more lucrative than referral partnerships, but also requires the most work and for the software company to accept the most risk.

What is payment processing, and who gets a cut of credit card interchange fees?

Payment processing is the automation of transactions between merchant and customer – this includes processing and accepting or declining credit card transactions, using hardware (like point of sale systems and mobile credit card readers) and software (virtual terminals and online payment processing software). Payment processing can also involve other forms of electronic payment, like ACH.

Issuing bank provides the customer with their credit card, and receives most of the interchange fees.

Credit card brands – e.g. Visa, MasterCard set rules for card use, acceptance, and interchange rates, but actually receive very little of each transaction fees, a few basis points.

Payment processor (or merchant acquirer) connects businesses (merchants) to card brands and banks via hardware and software so that funds are moved from the issuing bank to the merchant’s bank. The share that processors receive is highly variable, usually in the 10’s of basis points. By becoming a payfac, a software company takes on some of the risks and benefits of being a payment processor.

Referral partner – a payment processor may agree to share revenue with a referral partner who helps them sign up merchants (e.g. a software company who refers their customers). This rev share is also variable.

What are the different arrangements between software companies and payment processors (referral, payfac, etc.)? How does each arrangement work?

ReferralWhite-labeled middle groundPayfac
Customer ExperienceSoftware company has little control or onboarding or service, is reliant on third partyOnboarding looks like it’s being done by the software company but the payments company is handling everything on the back-endThe software company handles the customer experience
RiskAlmost no payments related risk, potential for reputational risk if customer experience is badDepends on how much responsibility you’re willing to take on. You could take on the risk yourself, but not do the onboarding so you aren’t considered a “pure” payfacHigh risk. The software company (master merchant) is responsible for looking into every merchant that onboards.
ComplianceDon’t need PCI complianceNeed for PCI compliance depends n how much the software company takes onNeed PCI compliance
Rev Share (to the software company)Highly variable but up to -20 basis points on credit card transactionsThe more you take on, the higher the % you make, up to -50 basis pointsThe majority of the processing revenue, less some fees for tools you need to be successful. Up to -100 basis points

At what payment volume does it make sense to enter into a payments partnership or move up to a payfac?

Do a referral partnership at any scale – if your merchants are asking for payments and you want to get started, it wouldn’t matter if you had 10 merchants or 100 merchants. You’re likely to start with an ISO (independent sales organization) relationship. 

You likely need $50M+ in payment volume to consider becoming a payfac – $50M is likely on the low end because many processors have higher thresholds than that before they’ll consider a deal. 

How can you charge your customers for payments?

Charge similar to what customers are used to – if a customer is used to paying a certain percentage, then you can try to charge that (e.g. if your customers are coming over from a company like Square and are used to a certain rate).

Consider offering flexible pricing for individual customers – if a customer is bringing you a lot of volume, consider offering a lower percentage price. 

In certain circumstances, embed the price into the software fees – you might not be directly charging for payment processing, but it’s buried into other fees. An example of this is a company that works with customers who create marathons and other events, and the company has software to help manage those events. So they say “we’ll help you with marketing and build a website for you. And the website will have payment processing in it.” They might provide that bundle of services for 5% of the race revenue instead of charging separately for the payment processing. 

Who should own payments?

CEO, Finance, or Technology – if you’re small, it could be the CEO since they understand both the finance and the technology side. If you’re a little bigger, it could be the CTO or CFO.

Consider a specialist if you decide to make the payments experience a priority – there are so many components that you’ll want a specialist to take care of both the technology and financial side. You might also want this person to come from an industry where they understand payments products at a deeper level so they know how to best integrate them. Some companies will also want to have their first hire be an expert on the risk side of it because that’s usually what they’re most worried about. 

What types of software companies are best positioned to monetize payments?

Vertical B2B software, especially serving small business – if you’re your customers’ operating system or you’ve created a software that helps a business run their business, payments just make sense.

The more horizontal, the harder it is – not just from a software perspective, but also from a processor perspective. If your company is super specific in what you do and only offer one little component of operating your customers’ business, then payments might not be a good fit. 

What should you think about if you have international customers?

International hasn’t been perfectly solved for payfac – going international can throw another wrinkle into this process. You need to consider if your processor can support your business overseas. You also run into all the rules and regulations of doing business in Europe, Australia, or wherever you may be. So, when you start talking about payments, think about how it aligns with your vision as a company and your growth strategy. 

A white label partner may be easier for managing international payments – you may have a relationship with a company who can do that for you. You can stay out of that and let them manage the international piece for you. 

When you set payments up, how do you drive adoption?

Sell the value of integration to your customers – put together a sales and marketing package that shows your existing base that it’s worth moving over to your payments system because they’ll be able to do everything in one place. Demonstrate that they won’t have to go to Stripe to get reporting that’s not integrated into your business. 

Think through strategy to enable your customers’ customers – to get payment volume up, you need your customers’ customers to pay your customers via your system. Think about what kind of marketing you are going to do with your customers; the right answer depends upon what kind of relationship you have with them. 

Make a decision on whether you want to require your payment method – one way to drive adoption is to require your payment method, but first consider whether you’re willing to lose customers because you may not offer them the payment choice that they want or currently have.

Make a plan to deal with legacy payment processors – some companies end up with multiple processors (e.g. through M&A) and continue to operate with both for some period of time. If you’re a payfac, you typically have one processor and want to move customers over, which can be a challenge, and can take years.

How long does it usually take for payment partnerships to reach maturity?

If you’re starting payments with a white label “middle ground” approach – a few months. It’s quicker because you don’t have to build out the whole user experience, but that’s also control you’re giving up by using a white label. 

If you’re becoming a payfac – 6 months to a year. Timing depends upon whether you have the payments expertise in-house. Consider whether it’s part of your corporate strategy to invest time, money, and effort into this before committing. 

If you need to convert a portfolio from one processor to another – no limit to a timeframe on this; it could be multiple years. You’ll need to factor where your merchants are coming from, how many of them are there, are they breaking contracts by leaving their current processor. 

Who are the big payment processing players for software companies?

Strategic partners can help you grow – some partners can grow with you as you crawl-walk-run from ISO relationship to payfac. As you start growing, then integrate more pieces into software. When you’re ready to fully run, you become a payfac.

  • Payrix – started as an ISO, so they have a lot of payments expertise. They have a pathway to go from referral all the way to payfac. 
  • Finix – started as a software platform, then partnered with Fattmerchant (a processor). They have a pathway to go from referral all the way to payfac, 
  • Infinicept – a payfac option that only offers a set of tools. They don’t take transactions, but they do everything else as far as onboarding tools, risk management tools, and all the things that you generally need to become a payfac plus expertise and consulting.

Many payment processors claim to offer a “payfac light” – companies like CardConnect, Elevon, and Worldpay advertise that they’re basically a white label payfac solution; middle-ground arrangements vary a lot, evaluate any partner to ensure they can really meet your needs.

Turnkey referral partnerships are easy, but not true partners – companies like Stripe, Square, and PayPal have pre-built offerings and can list what they’re going to charge you for their services, but they don’t help at all with your business strategy. 

What should you evaluate when choosing a payment processing partner?

Ask “who have you successfully done this with that I can talk to?” – because the industry is still young, I think that’s where you find out if everything they’re promising is what they can really do or not. 

Think about what expertise you need – some of the partners will be more niche than others, so think about what you need for your business. 

Determine what level of service you need – each partner will offer a different level of service, from being more generic to assigning you your own account manager.

What are the most important pieces to get right?

The customer experience is really important to avoid reputational risk – it’s about more than look and feel on the front end; I’ve heard horror stories about customers not being able to reconcile their books because the reporting was wrong. That aspect is extremely important.  

What are the common pitfalls?

Not validating that payment companies really do what they say – it’s especially important in this space because it’s still so new. 

Not aligning payments with corporate strategy – think about where you want to go with this when you do it. 

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