Webinar: Understanding and Optimizing Embedded Payments

Not long ago, SaaS companies relied on legacy payment models (networks, banks and processors) to manage transactions. Today, customers expect a fully integrated payments experience when using SaaS platforms, and SaaS companies have responded by integrating with embedded payments solutions. The result is a streamlined user experience.

But, as with most SaaS experiences, the underlying technology is always more complex than the end-user experience.

In this webinar, Meg Heinz, Director of Revenue Operations, and a Certified Payments Professional at Mainsail Partners, talks with Matt Thomas, Director of Business Development at Payrix, an embedded payments company for high-growth vertical software platforms. Matt discusses the benefits of embedding payments in a SaaS platform, and how to optimize the integration in an effort to increase revenue.

Below are our key takeaways from the webinar. You can also watch the full webinar HERE.

A brief history of the payments industry

For most of the history of SaaS, payments were managed using one of three legacy models: networks (Visa, Mastercard), banks (Wells Fargo, Chase), and processors. SaaS companies could accept payments from a customer by relying on one of these third-party facilitators. The model was inefficient; customers weren’t thrilled; and revenue was being left on the table in processing fees.

Enter embedded payments solutions: software that integrates directly with a SaaS platform. From a customer standpoint, these solutions meet the demand for an easy, integrated experience.  From an operational standpoint, an improved customer experience results in greater utilization and the opportunity to capture more revenue in the form of processing fees. Without having to launch any additional product, companies now have an additional revenue stream in the form of rev-sharing with embedded payment solutions.

Today, these solutions dominate the market and many SaaS businesses are actively migrating from legacy payment models to embedded ones.

The benefits of switching to embedded payments

According to Thomas, companies that migrate to embedded payments report a 2-5X increase in revenue, principally because they can monetize every transaction without raising prices on licenses. This growth is expandable, too, in that if your customers’ profits grow month over month, your bottom line grows as well. As Heinz put it: “With embedded payments, you’re not just growing your customer base; your customers’ growth is driving revenue to your own bottom line.”

Thomas described several additional benefits to implementing embedded payments, including:

1. Improved user experience (UX) –> increased stickiness –> improved retention. By offering frictionless commerce, the buyer experience improves, and customers are less likely to churn.
2. Improved customer relationships. Because the SaaS platform owns the complete buyer journey, your company becomes the first point of contact for customer support issues. Without that third-party processor, you gain better visibility into and control over the customer experience.
3. Increased ARR from recurring transaction fees charged to end-users.
4. Increased Total Enterprise Value (TEV) and increasing revenue per customer.

Understanding how payment fee structures work

Typically, when a customer completes a payment using a credit or debit card, there is a fee paid by the merchant to the payment processor, which generates revenue from every payment processed.

The processing fee breaks down into two components: the interchange and the remaining revenue shared between the payments company and your business.

Interchange is a rate set by card networks like Visa and Amex and varies depending on the vertical, risk, payment card type, and payment acceptance method. For example, debit cards have a lower interchange risk because they will be declined if funds are not available in the payer’s bank account.

Ultimately, the interchange rate should be viewed as a pass through cost, but there are ways to minimize this cost. When selecting an embedded payments partner, ask about data collection and transmission opportunities to ensure optimized rates and review your rates quarterly. There are specific discounts you may be eligible for, depending on your business model.

The remaining revenue from the processing fee is then shared between the payments company and your company. It’s impacted by:

1. Your buy rates: The pre-negotiated fees paid to the payment company (e.g., 0.30% + $0.10 per transaction)
2. Your revenue share percentage: The percentage of remaining revenue, after the interchange and buy rates, that is paid to your platform (e.g., 60% to the SaaS platform and 40% to the payment company).

It is important to note that not all models will incorporate both. The model is generally outlined by the embedded payments company, so be sure to review it carefully.

Key revenue drivers to consider with embedded payments

To calculate which embedded payments platform is best for your business, Thomas suggests considering these three key revenue drivers:

1. Customer activity: Define your customer’s card/ACH volume, their number of transactions and payment acceptance methods. This will help you understand interchange categories and ensure your payments offerings meet the needs of your customers.
2. Merchant fees: Review your potential partner’s pricing structures, processing fees, and incentives. Ensure whoever you’re working with can support the pricing structures you want to offer. Although flat-rate pricing structures are common, if you have price-sensitive clients you may consider a tiered approach. Some companies use pricing to incentivize clients, such as discounts on SaaS license fees if they set up embedded payments within your platform.
3. Costs and revenue share: Consider the estimated interchange cost, buy rates, and revenue share percentage of the embedded payments platform. You’ll need to have an accurate estimate of the interchange and understand your buy rates to determine what your potential upside in revenue is.

As an example of how embedded payments can drive revenue, consider total processing volume of $100M. The processing fee might be $3M, with $2M paid to the card associations via interchange. Your business then earns half the remaining $1M in revenue (on a 50/50 revenue share model). You can quantify your recurring revenue opportunities by reviewing the potential gross merchant volume and multiplying it by the percentage you think you can earn on it.

Select, sign, and integrate: your embedded payments provider

Thomas laid out a step-by-step process for adopting an embedded payments solution, including ways to avoid common pitfalls:

1. Research internally. Review your existing customer base. How many customers do you have? How are they accepting payments? What type of payments are they accepting?
2. Research externally. What are your competitors offering? What are their price points?
3. Evaluate your options. Reach out to embedded payment providers to explore their solutions.
   • Ask what control you would have when offering payments as a service.
   • Consider which solution works best within your business model and customer base.
   • Understand the interchange rates, buy rates, and/or revenue share.
   • Ask about the company’s roadmap. As the industry evolves, you will be able to offer more and more integrated financial services to your customers within your product. Make sure that the payments provider you select can grow with you.
4. Read the fine print. Avoid contracts with exclusivity, non-solicitation, and performance minimum requirements to avoid legal and financial risk.

Once you’ve signed the contract, you can expect implementation to take between four to six weeks, depending on whether you already have an embedded payments framework in place. Of course, you’ll need to train your teams and work closely with customers as you expand your offerings. Because you will be handling everything in-house, this process will only further streamline your revenue streams and customer service experience.

Enhance your platform with embedded payments. The embedded payments and finance industry is expected to grow $230B in revenue by 2025, according to Lightyear Capital, and SaaS platforms are in a prime position to benefit from the features offered by this field. While the potential is massive, Thomas was careful to point out how important it is to do your homework. Select your partner carefully and pre-plan how you will train up your team and transition your customers.

If done correctly, embedded payments will allow any SaaS company to offer payment processing as your product and service. It’s worth the effort to integrate wisely. After all, embedded payments could help fund your next chapter of growth.