A Primer on Integrated Payments – Part I

Part I: Three simple models for integrated payment processing

This is the first of a series of articles discussing the rapidly growing integrated payments sector – a subset of digital payments – especially in the SaaS platform segment. Read on to know more:

There have, very recently, been a lot of shouts about the growth of the integrated payments industry. Growing as a subset of the digital payments industry that is already forecast to grow at a CAGR of over 20% for the coming decade, experts from consulting giants Bain & Co. are touting “independent software vendors to have the potential to address $35 trillion in payments, or 15% of the worldwide total, by integrating payments into their platforms.”

Integrated and Customisable Payments

Independent software vendors today have been taking an increasing share in merchant acquisition, i.e., the acceptance and settlement of credit payments on businesses’ behalf. However, having to compete with traditional financial lenders, such as banking giant J.P. Morgan Chase’s WePay, is set to be no mean feat.

WePay, for example, is a digital payment solution that provides integrated and customisable payment processing APIs to businesses such as SaaS and crowdfunding platforms, offering three tiers of service – Link, Clear and Core – all integrating to their parent firm, Chase. WePay is, however, not the same as PayPal. It is a payment provider for independent software vendors and software platforms, offering ‘White Label’ payments – an API integrated into a website so that customers don’t have to leave the site.

Thus, integrated payments, i.e. building payment systems directly into software that businesses use in order to conduct commercial operations, is all set to unlock significant growth in several software firms over the coming years. The objective is to make software more valuable and distinctive to merchants and add a revenue stream complementing the existing Software-as-a-Service (SaaS) models already in use. Bain & Co. writes:

“Participating in payment transactions as a software platform hinges on a “better together” logic for customers—the idea that bundling software with payments beats the standalone alternatives. At its best, payment processing becomes just one part of an integrated software package, not the main attraction. But when a range of tools and services work in unison, they improve the customer experience and reduce the need to stitch together unrelated products from different vendors.”

Three Simple Models of integrated payments processing

Payment processing usually connects businesses to payment ‘rails’, i.e., the infrastructure powering transactions using debit and credit cards. Platforms today are increasingly building payment processing using their own software in order to differentiate their products and tap into newer revenue streams.

The trend, so far, is more pronounced in the west, chiefly the United States, where cards account for nearly half of total consumer expenditures and profit pools are abundant for all involved in the process of operating payment rails – card issuers, card networks such as Visa and merchant acquirers. Software firms may facilitate payments through concentrating on models providing greater control over customer experience or greater shares of the profit pool through greater risk-taking.

Though the models may feel similar and often achieve similar economics, each has different underlying technologies and different regulatory requirements.

Figure 1: Different models for software platforms to facilitate payments; Source: Bain & Co.

The simplest model, for example, is the referral partner model. Bain writes, “the platform can monetize the customer relationship through referral fees or commissions, while leaving the provision of services largely to the payment service provider (PSP), often a bank or payments specialist.”

A pure referral strategy, for example, though provides the lowest revenue as part of the profit pool, requires almost no risk-taking or operating expenses, with minimal time-to-market.

Alternatively, a platform may choose to become an independent sales organisation (ISO), authorised to act on behalf of a PSP to sell card payment processing services to merchants. An excerpt from Bain:

“The relationship between an ISO and a PSP can range from a retail model, where the platform sells the PSP’s services as an agent in return for a commission, to a wholesale model, where the ISO buys processing at wholesale rates and resells at a markup. The wholesale model generally allows more control over pricing and the customer experience, but it entails taking on underwriting and merchant risk.”

A third model involves becoming a payment facilitator, i.e.,payfac, who stands in the merchant’s place for the purpose of debit and credit card rules, handling models in settlement funds flow as well as maintaining sub-merchant accounts for its merchant customers. Bain & Co. writes:

“An ecosystem of fintechs including Stripe, Finix, Payrix, and WePay has emerged to support ISVs, either through the rental of infrastructure or through alternative models that offer the benefits of being a payfac without registering with the card networks. This gives a platform more flexibility in terms of which responsibilities and risks it wants to assume.”

A heatmap of features depending on platform and model can be found below. Greater revenue comes from assuming greater risk and responsibilities.

Figure 2:Heatmap of features;Source: Bain & Co.

[Continued in Part II]

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