With Mastercard’s North American payment facilitator registry listing close to 250 companies and companies like Finix and Infinicept touting the ease of implementing, PayFac is at a fever pitch in the software and payments world. This has only been compounded with IPOs like Toast, Lightspeed, Freshworks and Squarespace. Traditional payment processing companies account for net revenue, free of interchange and assessments, where as software companies and technology enabled platforms are recognizing revenue including interchange and assessment. These two approaches have massive financial implications when it comes to valuation. The common misperception is that these two accounting methods are NOT directly correlated to a SaaS platform becoming a registered payment facilitator.
According to Investopedia, “Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the specific conditions in which revenue is recognized and determines how to account for it. Typically, revenue is recognized when a critical event has occurred, and the dollar amount is easily measurable to the company.”
Deloitte recently published a research paper on US Revenue Recognition in the Payments Industry. According to their interpretation, “an entity must determine whether it controls the service prior to it being transferred to the customer”. This determines if the revenue and platform is a principle or an agent. Principles, are counting total transaction volume as revenue and agents are accounting for the just revenue net of interchange, assessment and processing costs.
While there is not, a one size fits all or black and white rule. If a platform controls the process from boarding to billing and takes liability, a strong case can be made that the revenue, inclusive of interchange can be recognized. This drastically increases the company’s valuation multiple, recognizing a significantly higher revenue volume. The key is to achieve this without massively increasing operating expense or shifting the company’s core focus.
