Making Money

on Payments:
A Guide For SAAS Companies
 EXECUTIVE SUMMARY
PAGE 2
Executive Summary
Software companies are founded with one thing in mind: enabling their
MINISTRY BRANDS: customers to fulfill their business needs effectively. In many cases, enabling
A CASE STUDY
PAGE 2
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
BRINGING PAYMENTS
IN-HOUSE referring payment processing to an outside payment provider but that means
PAGE 4
sharing clients, customer experience, important decisions, and revenue with
that provider.
BENEFITS OF CREATING
YOUR OWN PAYMENTS By creating proprietary payments offerings as payment facilitators, software
OFFERING
PAGE 4 companies can add a new revenue stream and increase profit margins. They
maintain control over their customer relationships and avoid having someone
WHO IS BECOMING A else decline their valuable customers by managing risk decisions. Finally, they
PAYMENT FACILITATOR?
maintain control over their products and operations. They are free to create
PAGE 7
customized solutions for their clients and independently control their branding
PF BEST PRACTICES
and customer service.
PAGE 10
Many thriving companies — including big names such as Square and Toast —
RESOURCES FOR THE
have chosen this model and risen to the top of their respective industries. Of
POTENTIAL PF course, becoming a payment facilitator is not for everyone. A software company
PAGE 13
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.

“Founded on 2002, Ministry Brands: A Case Study

Ministry Brands, LLC When they set out to create a technology epicenter for churches, the founders
is a family of Christian of Ministry Brands planned to launch church management, web development,
software companies communication, and giving platforms. They could not afford to get bogged down
across North America in the intricacies of payments, so they entered a referral relationship with a
helping more than payment processor so they could maintain focus on their ambitious agenda.
115,000 churches and As their business evolved, however, so did their thinking about payment
faith-based organiza- processing. They realized that an outside payments provider could never
tions thrive in a digital understand or serve the unique needs of Ministry’s customers.
world.”

Making Money on Payments: A Guide for SaaS Companies 2

 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.”

Many business- Ministry saw opportunities to use payments to enhance its customers’
to-business experience in new ways. For example, the team knew they could unify payments
(B2B) software data with data from other sources to make accounting easier for church financial
companies have administrators. Many church financial administrators are volunteers working
an opportunity limited hours, so streamlined accounting services were especially valuable,
to include — and but with a referral relationship, the company lacked access to and control of
earn revenue payment data.
from — a payments
component in
“When working with a referral partner, we found we were further from our
their software.
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.

Making Money on Payments: A Guide for SaaS Companies 3

 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
Payment processing
where we want, which increases the field of potential buyers of our business.
services generate We also have a large and growing stream of recurring revenue that investment
additional revenue firms love.”
and incremental
enterprise valuation.
Bringing Payments In-House
Like 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 Offering

Offering payment processing directly to customers can offer significant
benefits to software companies.

Financial Improvements
Payment 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

Making Money on Payments: A Guide for SaaS Companies 4

 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

“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.”

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.”

Making Money on Payments: A Guide for SaaS Companies 5

 Valuations have been growing as well. Payment facilitator Stripe, a software
platform for online businesses, is one of the most valuable venture capital-
The top four backed companies in the United States at $35 billion.ii
payment
facilitators
Deeper Customer Relationships
currently
process 6% of Because referral relationships by definition involve introducing merchant
global payments customers to a third party that will provide the payments services, those
volume, or merchants become shared customers between the software company and the
about $929 third party. Companies that offer their own payments product can maintain direct,
billion. 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 Experience

When 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

Making Money on Payments: A Guide for SaaS Companies 6

 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?

“Our customers The global retail payment processing industry currently moves nearly $16 trillion

should not even in transaction volume annually and generates $371 billion in revenue, according
to data from payments consultancy AZ Payments Group, LLC.
need to think
about payments” 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.

Making Money on Payments: A Guide for SaaS Companies 7

 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).

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

Making Money on Payments: A Guide for SaaS Companies 8

 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.

“You have to offer

an easy-to-use, Is Offering Payments Right for You?
comprehensive
product offering. You should consider bringing payments in-house if you are already referring

That’s where the 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
opportunity lies”
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.

Making Money on Payments: A Guide for SaaS Companies 9

 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 PRACTICES
For 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 Product

Successful 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 10

 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 Way

As 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 11

 into the system.
“Our relationship
PFs have responsibility for protecting the abundant hacker-valuable data that
with American crosses their platform. To do so, they must adhere to rules governed by the
Express has payments industry, a process known as “PCI compliance.” Most PFs choose
contributed to outsource this function by purchasing payment processing services from a
to our success vendor that specializes in managing payments logistics while still enabling the
as a payment PF to control all customer interfaces and servicing.
facilitator”
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 Laundering

Government 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.

Making Money on Payments: A Guide for SaaS Companies 12

 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 13

 • 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 14

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

Making Money on Payments: A Guide for SaaS Companies 15