Future Proof Payments

ISVs have adopted payment strategies varying from referral models to registered PayFac(Payment facilitators) and everything in-between. Independent Software Vendors(ISVs) generally aim to address a couple of common issues when exploring a new partnership: monetize an additional revenue stream, control the users experience including through the payments process, satisfy customer requests for payment processor support and optimize their development efforts. Given these variables, we are going to look at how ISVs are effectively implementing a payment strategy in order to solve for as many of these issues as possible.

 

Plan for growth. ISVs are often vertically focused, making them a great fit for a payment facilitator solution. A Payfac implementation can often solve for many key areas of the payment flow. It effectively allows ISVs to control virtually every aspect of the payment flow, from onboarding to settlement. This can often be an intimidating endeavor. Given the right guidance and platform, an ISV can go through the complete lifecycle of using a PayFac platform to taking liability and becoming a registered Payment Facilitator. The key to taking a phased approach is that it will also allow you to tackle each step individually without a massive disruption to the ISVs development roadmap.

 

Driving adoption. The Carrot and Stick is often the most effective strategy for driving adoption of integrated payments. Shopify is a great example of  a successful implementation of this strategy. They send their customers to their registered PayFac but also support a gateway only option. This allows them to drive adoption on the preferred, most profitable path. At the same time they are also able to support customers that require their own processor. Adoption rates of 80% or more can easily be achieved with the proper structure. However, most ISV’s have found that 100% payments adoption or a closed loop system can often be detrimental to the growth of the software. Customers often require processor exceptions when working with: enterprise accounts, high risk accounts, entangled banking or associated loans. Servicing these accounts requires a one-to-many connection accomplished through a gateway function.

 

ISVs looking to check off these strategies and features can work with a new breed of PayFac. Some payment facilitators have recently come to market that are able to act as a platform but also as a gateway. This eliminates the need for multiple integrations and reduces maintenance costs. It will be interesting to see if Stripe, WePay and ProPay ultimately follow suit.


Ask these 5 questions when evaluating the next platform for your business

HONOR has been evaluating platform partners for a couple of operational functions. We have had many conversations with Business Developers and Sales Representatives that have ranged from helpful and professional to pushy and less than forth coming. Typically we focus on ISVs looking to evaluate a payment solution partner but here are the top 5 things to assist when going through the buying process that can be universally applied.

  1. Seeing is believing. Ask to see the platform. Yes, demos can be a pain. Yes, asking for time from multiple people can be difficult. Gather input from all of the operational functions that will work with the technology. Product may have a different set of requirements or views than Finance or Accounting.  Seeing a platform in action is the best way to evaluate any solution. Sales people are great and helpful guides but don’t just take their word for it.
  2. Customization. We all think, “I want this to work for my specific industry”. The truth is that most functionality, whether it is for customer service, sales or operations is fairly universal. Before you spend a bunch of time/money and resources looking for customized features, understand what functions come stock. CRMs are a great example of this spectrum; Salesforce is endlessly customizable but difficult to implement for smaller businesses  while Insightly is ready to go out of the box but may lack integrations required by large enterprises.
  3. Data is king. You cant make smart business decisions without the right input and data. Make sure the platform can offer you the KPIs you are looking for plus the ability to customize. It is vital to have the ability to easily create and view a dashboard relevant for your business. Being able to deep dive into a specific problem or opportunity area with tangible, accurate data is critical.
  4. One size does not fit all. Platforms are generally designed to fit a certain market size and segment. Make sure that what you are evaluating is appropriate for your size and use case. Buying a license to a massive enterprise platform that requires a dedicated headcount if you are small company doesn’t make a lot of sense. It will always be a balance as you also want to plan for growth. In payments, Stripe is easy to implement but does not share much or any of the revenue with their partners. Payment platforms( PaaS) like Infinicept maximize revenue but require a greater payment volume(>$50M) and a larger investment.
  5. Don’t break the bank. What does it really cost? What is the pricing and how long is that price good for? What is included? Implementation? Support?  And most importantly, does it fit my budget?

Payment Sharks in the ISV's Pond

Community Brands, Evercommerce and Constellation Software have been on a terror acquiring as many vertically focused ISVs as they can. They seem to have a simple formula: buy and ISV, streamline supporting functions, increase monetization and offer in-house payments. As the payments community has long figured out, a successfully integrated payment strategy can sometimes drive more revenue than the actual SaaS fees.

These growing companies generally target ISVs that are vertically focused. They standardize or replace the service department and reduce overhead in areas like HR, accounting, marketing and operations. Their key to a healthy ROI of the their acquisition model is their ability to not only reduce expenses but increase revenue. Software companies or ISVs with nescient or underdeveloped payments revenue present an opportunity for acquisition, that is not necessarily in the ISVs best interest.

For example, if  “XYZ Holding company” purchased a software company charging $80 in monthly SaaS fees, with an additional $20 a month in reoccurring payments, totaling $100 per customer. Lets assume a total annual revenue of $1.2M and XYZ Holding are able to purchase that same company on a multiple of 10X. We could reasonably assume that with some investment, they could increase their reoccurring payments revenue to $60 per month, increasing their MRR by 40%. The payback now becomes ~7 years. If they are able to reduce expense by a reasonable 20%, the pay back could be estimated at 5.5 years.

While the acquiring entities may be the right fit for certain software companies, it is vital the ISVs have a clear path to a healthy payments strategy that may include Paas(Payments as a Service), PayFac(Payment Facilitator), ISO registration or a lucrative referral model. A poor payments strategy can cost the ISVs founders, owners or shareholders millions on their valuation multiple during an acquisition event. There is never one correct path but it is important for ISVs to have a clear understanding of their payment partners and implications of their payment residuals.


Becoming a Payment Facilitator

Stripe and WePay(now Chase) have made a significant impact on the eCommerce world through their cutting edge UI and easy to integrate API’s. These Payment Facilitators or PayFacs, along with Square have changed customers expectations of payment processors. These companies help set new expectations for boarding, funding controls and ease of integration.

The industry has since caught up and much of the technology they provide has become ubiquitous.  As early adopters, they enjoyed a brief runway, servicing many direct merchants and software providers with relatively high pricing and little to no, residual share for integrated partners. We are going to focus on the relationship between ISVs and PayFacs.

Integrated software providers continue to target ISVs, guiding them through a roadmap from integration to channel adoption. Many ISVs start with a referral relationship which requires the least amount of time, resources and commitment. From there they often progress to a fully automated experience or un-registered PayFac structure, and can eventually move to a fully registered Payment Facilitator. Some providers offer one or two paths for partnership; Stripe and WePay limited by the fact that they are Payment Facilitators themselves and not actual processors. Each step generally requires a more robust integration and stronger commitment which mirrors a scaling compensation structure when using more traditional payment processors. Most processors understand that larger companies with a clear, significant interest in payments want to work towards ownership of their portfolio.

ISVs can always recognize the revenue from a payments partner, however becoming a full Payment Facilitator gives larger ISVs ownership of the merchant contract and an increase in their valuation multiple as a result. Growing into a true payments facilitator can seem like a daunting task. It creates challenges, has strict requirements and generally a time frame extending out to longer than a year.

A new group of payment servicers have emerged. These companies recognize that although painful, becoming a PayFac is the right strategic decision for larger technology platform with $50-$100M or more in volume. These companies offer tools and APIs to handle some of the most painful parts of becoming a PF and bridging the connection that must be created between the ISV and Processor/Sponsor Bank. Ultimately, for large fast growing ISV, a processor, not an another PayFac is the best path for strategic growth.


Real Time Payments (RTP)

We have seen many new technologies emerge in payments. Most of the innovation has been based around traditional payment processing credit/debit rails. From issuing to acceptance, merchants, acquirers and issuers have improved the way we accept, handle and settle transactions but the core functions are virtually unchanged. Crypto-currencies have struggled with mainstream adoption while its underlying technology of blockchain continues to explore various applications. Various disruptive systems have struggled to gain adoption given payments perpetual chicken and egg ecosystem. In the world of B2B payments, we believe the landscape is about to change drastically.

Real Time Payments(RTP) was born from a consortium of 25 banks and launched in November 2017. It is also the first new payment rails deployed in 40 years. It is a completely new, closed loop infrastructure with massive, market-wide applications. Payment applications like Zelle, Venmo and Square Cash have gained popularity with in Person to Person(P2P) transactions, we believe RTP will have the same effect in B2B payments.

RTPs ownership structure, built on and by The Clearing House, and the fact that 50% of US customers will be given access natively through their existing banks interface create the potential for a massive adoption and deployment.  RTP is posed to make a substantial impact. Funds are secure, can be requested or pushed and happen immediately without waiting for a batch. They also meet Good Fund Laws required by certain industries like real estate and follow the ISO 20022 message specifications.

While the technology is new and use is limited, the applications and impact potential seem to be enormous.

Here is the Mastercard Deck for RTP https://www.mastercard.us/content/dam/mccom/en-us/business-payments/documents/real-time-payments-whitepaper-sept-2018.pdf


Top 5 features to look for in Virtual Terminals

Virtual Terminals can offer a great, low cost vehicle for accepting payments. They are inexpensive, easy to deploy and access can be implemented on almost any employee’s computer that is connected to the web. Here are the top features we recommend looking for when choosing a Virtual Terminal for your business.

Multiple Permission Levels: Keeping tight controls on payment access for employees can be vital to insuring the integrity of your payments and accounts receivable process. Look for functionality that will limit reporting visibility, transaction type and volume thresholds based on the individual users.

B2B Payments: If your company sells Business-to-Business it will be key to accept level 2 and level 3 transactional data(see more HERE). Certain Government(B2G) and Purchasing Cards (B2B and Large Transactions) will require this in order to authorize, approve and settle a transaction.

Interchange Optimization: Employees will always choose the path of least resistance when inputting transactional data which means higher interchange costs. Be sure and choose a virtual terminal with optimization options allowing merchants to save on costly Visa and Mastercard expenses. Certain processors and/or the gateway can assist with the additional data.

Reoccurring Billing: Taking a payment is one thing. Tokenizing and securely storing it is an entirely different animal. Reoccurring payments are important not just for membership-based businesses but for companies looking to support follow-on transactions, upsells or for any transactions occurring at a later date. If you are looking to set regular timing intervals, make sure the VT can support custom frequency and allows you to alter the transaction amount.

Security: PCI security is paramount to any company who accepts payments. Ensuring your Virtual Terminal is PCI Compliant is a must have, however it doesn’t necessarily lower your exposure. Sniffing software and Malware can live on individual computer stations or networks, scraping PAN data. Using P2PE devices will help limit card numbers from being collected on an infected device or workstation. As with any company accepting credit cards we recommend you follow your SAQ schedule and best practices.

 

 


Fighting Interchange

Merchants large and small have fought against the cost of accepting credit cards for decades. There have been numerous legal battles between retailers of every size and the card brands or acquirers, all over merchant fees and interchange. Merchants of all shapes and sizes constantly work to lower their processing costs and return margin back to their businesses. Large retailers like Target, Walmart and Costco have all waged this battle on multiple fronts.

Today were going to talk about the largest expense for accepting credit cards, interchange. Interchange is generally charged and dictated by card brands such as Visa, MasterCard, Discover and American Express with revenues going back to the card holders issuing bank.

 

Avoiding the Card Brands

Retailers route consumer cards through their preferred(generally least expensive) debit networks. This allows retailers to negotiate with the debit networks directly, prompting  consumers for their PIN number as an alternative to their signature. Ever since the Durbin Amendment, card issuers must support more than one debit network, giving retailers multiple routing options. This transaction path has only been traditionally available for card-present transactions. The rise of “PINless debit” allows for debit cards to be used for online purchases, avoiding core interchange charges for eCommerce transactions.  Acquirers can also participate in the value chain; routing to preferred networks where merchants are often indifferent, unaware or unable, to access routing technology.

 

Interchange Breaks

Large merchants solicit the card brands directly for pricing breaks. Through lobbying, lawsuits and sometimes boycotts (See the Kroger Boycott) merchants with larger processing volumes are given pricing discounts. Merchants with large volumes, “Threshold Retailers” (See chart below)   generally employ most, if not all, of these strategies to limit their costs.

 

Interchange Rebates

The largest issuers often give discounts to enterprise merchants to entice them to accept and even promote their cards. Some companies are competing for both the issuing card holders and merchants services like CapitalOne Merchant Services, Wells Fargo Merchant Services and Bank of America Merchant Services. Large RFPs for “Threshold Merchants” can often include issuer rebates. American Express has long supported separate interchange costs for their enterprise customers.

Will it Change?

European merchants enjoy a capped interchange rate .30%, roughly 1/5 of what the average US merchant pays. Even with their lower interchange they are still able to drive and lead merchant innovation for EMV, 3D Secure and Contactless payments. I believe it will only be a matter of time before the US landscape will more closely reflect the European regulatory environment given the size and scope of the pressure exerted by US retailers.


Facebook, Payments and Securing Customer Data

What happens when, as an industry focused on security, we continue to use, engage and advertise on platforms that are clearly abusing our customers data?

Read more


Visa's Supplier Locator

Developer Center

Visa makes available a number of development tools on their Developer site. The descriptions can be fairly vague but they also list a number of use cases. The APIs can be applicable for:

-ISV's

-Small Business

-Acquirers

-Banks

-Merchants

 

Visa's Merchant Locator

https://developer.visa.com/capabilities/merchant_locator

Visa's Supplier Locator

https://www.visa.com/supplierlocator-app/app/#/home/supplier-locator