With Embedded Payments, you’ve got options

This is the traditional model you may be familiar with. Your software company makes an agreement with a payment processor to become a referral partner. When your customer needs to set up payments for their business, you refer them to the payment processor. In return, the payment processor pays you a referral fee. The end.

In this scenario, your customer is using a bolt-on payments solution that doesn’t necessarily integrate fully or at all with your platform. Therefore, someone else has control over merchant onboarding, customer service, and all facets of payment processing for your customer. The only thing you do is make the referral.

However, this hands-off approach does come with the risk of your customer having a bad experience with the payment processor, which in turn, could sour your relationship with your customer. In addition, your customer is left managing a separate system for payments that creates more work for them. The user experience for customers making payments is typically less than ideal as well.

PayFacs are at the opposite end of the spectrum from referral partnerships. Often these are software companies who aspire to become payments companies and want to reap the maximum benefits of embedded payments.

With the PayFac business model, your SaaS company establishes a master merchant account through an acquiring bank to process or facilitate payments. Your customers can then set up a sub-merchant account under your master account, making it much easier for them because you’ve done all the heavy lifting with the bank.

You’ve monetized your payments by collecting processing fees, but you’ve also taken on all the risks of becoming a processor, such as underwriting, compliance, investment in new technology, disruptions to your strategic plan, distraction from your core business, and managing the full payments experience.

As of today, software businesses typically become a PayFac in one of two ways:

Buy it – Requires a partner that provides expert guidance on operating a payments business and a complete payment infrastructure as-a-service.

Build it – Requires engineering resources that are expert in payment software development

This is the newest model and better overall for monetizing payments, one that offers much more upside and control than referral partnerships (namely revenue) and mitigates many of the drawbacks of being a registered PayFac when you’re not ready.

A PayFac as a service partner provides the infrastructure you need to offer payments to your customers in the form of a white-labeled solution. To your customers, the payments experience is seamless and fully integrated with your SaaS platform. It looks like you’re processing their payments, but your partner is absorbing the risks, build-out costs, and complexity of managing payments in-house. Plus, they’re decreasing your time to market.

This model is also inherently flexible, so you can have as much control over onboarding and customer service as you want. Plus, it offers more recurring revenue from a share of processing fees compared to one-time referral fees you get with a referral partner.

Ultimately, the right partner will offer a solution that can help you become a full PayFac if and when it’s right for you.