No matter where people go, be it the gym, the dentist or the local store, they expect a seamless experience – including how they pay.
Accepting different forms of payment is a necessity for doing business today. And yet, it can be fraught with complexity without capable software.
With most businesses relying on vertical software as the engine of their operations, many are now choosing platform providers that incorporate payments into their service offerings.
Software platforms that embed payments can quickly provide customers with multiple secure, convenient payment options.
This shift is driving the rise of Payments-as-a-Service (PaaS) in Australia, with software providers embracing payment capabilities to better support their customers and gain a competitive advantage.
Integrating payments goes beyond solving pain points for customers. It can also be lucrative for software providers too.
Fuelling SaaS growth and profitability
The truth is, adopting a payments monetisation strategy can help SaaS companies generate new revenue streams.
Take Shopify as an example. In its 2020 full year results1, Shopify's total revenue increased by 86% from 2019 – a large part due to the growth of its embedded payments business. Its Merchant Solutions revenue rose by an incredible 116%, surpassing its Subscription Solutions revenue which grew by 41%.
Meanwhile, McKinsey2 estimates that platforms and marketplaces process 30 percent of global consumer purchases today.
If you're a vertical software provider thinking about monetising payments, there are two key steps to kickstart your journey:
1. Choosing the right payment model
There are three main payment models to consider, each with its own advantages and costs:
Referral/
ISO Model
Earn a commission by reselling payment provider services. Ideal for small to medium providers due to low risk and minimal management requirements.
Embedded/Integrated Payment Model
Partner with a payment facilitator to embed payments directly into your platform. This is the preferred option for most SaaS companies, offering increased monetisation opportunity and improved customer experience without the hefty upfront costs.
Payment Facilitator (PayFac) Model
This is best suited to large software providers processing high payment volumes. It requires significant investment and operational expertise but allows for full control over pricing and higher revenue per transaction.
2. Setting a pricing strategy
Here are some of the most popular pricing strategies to consider:
Charging a small transaction % fee for processing payments
If your customers are businesses that have many recurring customers and process frequent transactions, this is the most profitable way to generate income from payments. It’s also the least intrusive way to monetise payments as it doesn’t require any upfront commitment or fees from your customers.
Say you decide to generate a 0.50% profit on top of every transaction. If your provider is charging 1.25% per transaction (including bank fees), you could work with your payment partner to set the total fee to 1.75% per transaction. For a $25 purchase, this amounts to 12.5 cents going to your pocket – a seemingly small amount, but one that can add up significantly over time.
Add a margin to the processing fee for each payment
A set fee is a simple and upfront way to generate payments revenue. This works well if you have a high volume of payments, but not necessarily high average transaction values. Most providers offer a processing fee of 30-50c per transaction.
For example, by adding 7c per transaction to 1.82M payments annually, you could generate $127,400 in additional revenue.
Incorporating payments into tiered pricing plans
Tiered pricing plans allow your customers more choice and control over the features they choose to engage with, as well as creating an opportunity to establish more perceived value by assigning a monetary figure to upgrades and add-on features.
This strategy requires upfront commitment from your clients, and therefore it’s a pricing strategy that should be handled with care.
The path to profitable payment
Deciding whether to partner with a PayFac or become one yourself really depends on your business size, goals, and resources. Either way, the opportunity can be very lucrative.
If you choose to become a fully-fledged PayFac, you will need to accommodate for increased staffing, risk and compliance training , full fraud liability, data security, licensing, and added time and resources needed to maintain a payments infrastructure. However, you also receive more revenue per transaction and can set your own processing fees.
On the other hand, partnering with a specific type of payment provider (like Worldpay for Platforms) allows you to generate profit per transaction at a slightly lower rate, but with significantly less costs to get up and running.
Before making a move, it's worth noting that: without an Australian Financial Services License (AFSL), you cannot set pricing or sell payments directly. Partnering with a licensed provider simplifies compliance while still unlocking new revenue opportunities.
Download our whitepaper to discover more about the potential rewards of incorporating payments into your software offering.
Sources: