How to pick an Embedded Payments model | Episode 21

Bob Butler

Hi, everyone. Welcome to the PayFAQ Embedded Payments podcast brought to you by Payrix. I’m your host, Bob Butler. And today I’m going to be speaking with Steve Wilson, who is the Head of Revenue for Worldpay for Platforms. And we’re going to be talking about the various ways or business models a software can integrate payments into their software. So hi, Steve, and welcome to the show.

Steve Wilson

Hi Bob. Thanks for having me here. Excited, ready for this!

Bob Butler 

I am excited you’re here. Before we get going, Steve, can you tell our audience a little bit about yourself and your software and payments experience?

Steve Wilson

Yeah, you bet. My career started 20 years ago with Mercury Payment Systems. So I was really born into the integrated payments side of the business. But all of my career has been working with software developers to ultimately enable payments. But for many of those years, and kind of through some of those acquisitions, and mergers, I think we’ve really expanded even the integrated payments model, the original integrated payments model. I think we’ve built and support the largest payment facilitators in North America today. And then obviously, with our most recent acquisition of Payrix in 2021, we now have a great PayFac-as-a-service solution. So really, we are the one stop shop for embedded payments for verticalized software. So, I guess you did ask a little bit about me, but I’m a payments geek, I guess like you, Bob. I reside in Denver, and I stay super busy with my family. You can find me probably in my downtime, traveling, cooking, skiing, or hiking somewhere.

Bob Butler 

Yeah, I’ve always enjoyed my time with you, Steve, you know, especially given you are like the OG of integrated payments. It’s been great getting to know you and getting to work with you for the past year and a half. Well, diving right in, what I’d love for you to do is if you could explain the different ways or the different model options for integrating or embedding payments into a software platform? Because I know you have a lot of experience in this space.

Steve Wilson 

At a high level, let’s see, I really think about software and payments evolution. You know, we’ve historically we had this bunch of software companies, and they were either directly or indirectly through VARS [value-added resellers]. And the payment processors did all the legwork to do all the boarding of the merchants, we did all the support. And the developers, in the past, didn’t really have anything to do with it. So this is why we pioneered that original ISV partnership model. And the other concept is to become a full payment facilitator. This is where a software company completely registers with a card brand. They hold the risk; they operate like an independent payments company. And I think this has also become a really great business where we can offer this service to what I characterize as a little bit more of a sophisticated verticalized software platform. And then right smack in the middle, you’ve got PayFac-as-a-service. And we’re really seeing considerable growth there. Because a lot of these verticalized software partners are adopting what they want in this particular model, which is, they don’t want to be referral, and they don’t want to be a full blown PayFac®. They want what we call that hybrid model. So, at a high level, those are still the three models that I see today.

Bob Butler

Well, can you describe each one of those models in a little more detail, like starting with the referral, the ISV referral model, and then moving on all the way through to the payment facilitator model.

Steve Wilson

Okay, yeah. So, if you think about the referral model, this is really the old, I call it the ‘feet on the street’ model. And it’s been around a while but it’s the integrated payments referral model. It was built really as a different distribution model to disrupt the old bank or the merchant acquirer referral models. So, I think if we go back to like the early 2000s, this was started by companies like, Mercury Payment Systems. It was a heavy ISV developer focus; referrals came out of these developers. You have an inside sales team that’s doing all the selling and the merchant boarding, basically all that legwork. So back then, this payment became part of the software sale and overall application process. And it was a great solution. I think really back then, and even today, I would say that we still see some of our large partners that want to stay out of the merchant servicing side of it. They want to stay out of the merchant sales side of it. So they just continue to use that referral model. And kind of lastly, I’d say on referral, when you think about revenue, and we’ll talk a lot about revenue as we go through this, doing the merchant servicing and doing the merchant boarding, you’re gonna get the lion’s share of the payments revenue. So that’s why that was such an attractive model many, many years ago.

I think on the other side of that spectrum, is the payment facilitator model. Definitely more sophisticated, definitely not for everyone, it’s certainly gained a lot more traction in terms of mindshare, I’d say over, like the last six years, where everybody’s kind of saying, you know, if you’re a SaaS software company, we want you to become a payments company, we want you to monetize payments. Or if they happen to be monetizing payments to a small degree, they want to monetize them even more. So, we’re seeing this model working today. And it’s where software companies make that decision, that they want to be a full blown PayFac® company. And a lot of times, they’re ready to be a full blown PayFac, or they’re not. I think the appeal, however, is that they want to increase their overall market valuation. And that’s a good thing, we want to help them overall see that market valuation go up. They’re trying to get what I characterize as exponential revenue growth, and at the same time, they’re trying to get these sticky relationships, that’s going to lead to this higher valuation. I think, though, in reality, that’s really hard. You have to register. And that’s the super easy part. But then you have to build out your payments infrastructure, you’ve got to manage that payments infrastructure, and we’re talking risk, we’re talking, underwriting, capturing all KYC AML, managing the funding to sub-merchants. You need to be best in class in terms of regulatory risk and overall compliance. Because we all know, if you don’t do these things really well, there can be some really bad losses and overall expensive lessons.

And then as you think about PayFac-as-a-service, I think that it’s like I said earlier. Right smack in the middle, that PayFac-as-a-service option combines kind of the best of both worlds. And I think right now, it’s the sweet spot for vertical SaaS provider software, isn’t it? It just sort of allows them to come in to a solution, you know, that’s not referral, it’s not PayFac® and enter that space a lot faster.

Bob Butler 

Well, I mean, I guess at a high level, Steve, why would a software company pick one model versus the other? The referral model versus the PayFac® model versus the hybrid, which is the PayFac-as-a-service. And I know that you’ve seen some of your legacy referral model customers actually move to both the PayFac-as-a-service as well as full blown PayFac. Why does the company want to choose one or the other?

Steve Wilson 

Yeah, it is a good question. I think I really think it comes down to where they are in their business cycle. As you know, we see a lot of software companies that have a desire to go quickly down a monetization path. And then that may be the desire, and the level of sophistication or the appetite of risk, all may be very, very different. So I think these companies end up asking themselves a lot of questions about one, how to monetize payments, are they willing to invest in terms of building out that infrastructure that I talked about earlier? What is their risk appetite? You know, we see it every day and discussing where that software company is on their payments journey. So it really just depends is probably the answer to your question. But what I can tell you is that we are excited to offer a solution for them, despite where they are in their payment journey. We can meet them where they want to be met, whether it’s with referral, payfac-as a-service or full blown PayFac®.

Bob Butler

Can you tell me a little bit about, can someone start at the referral level? You know, I know the answer to this, but I’d love to hear your take on it and then graduate up the chain.

Steve Wilson 

So that’s the core thesis and the value proposition that we’ve been articulating for the last year and a half. As I just said, we are meeting software companies where they want to be met. So in theory, you could start out as an integrated payments referral partner, you could move to PayFac-as-a-service. And lastly, you could move on to full blown PayFac® if you want to take on the additional responsibility. And I’ve seen various software companies come in at certain points in that payments journey. And we’re all seeing this increased demand for software businesses to monetize payments, whether it’s for full PayFac or PayFac-as-a-service. So, if you think about it, a software company wanting to get into payments or already in payments, they can actually crawl, walk, run. They can stay in one model as long as they want, or as long as they feel comfortable. But at the end of the day, in the hybrid model, we believe there’s a lot of opportunity for these verticalized software providers to scale quickly and achieve that payments outcome they want.

Bob Butler 

Well, I mean, I guess when you’re thinking about it from the software’s point of view, how important is making a decision at the beginning of the process, or when they decide to go down one of these routes, because I’ve seen a couple of companies never monetize payments, never have even a referral relationship, and they want to go full blown PayFac®. Just tell me a little bit about your thoughts on how important that is for the actual software company?

Steve Wilson

Yeah, I think that’s really important. I’d say it’s a huge decision for the software company, because they’re determining right out of the gate, how they’re going to embed payments, how they will sell payments, how they will engage with their clients. This is one of the reasons why even our business development cycles take a long time. It’s because we’re good. We’re good listeners, consulted listeners, and to really do that effectively, and to strategically align on things that overall appetite for risk, or do they have ops management capabilities today? You know, how much do they want to be in control of their customer experience? How much do they want to be in control of funding, or even risk and underwriting? So, I think these are all super important questions. And it doesn’t always just come back to say, financial modeling. It’s really core decision making about how they want to go into the overall PayFac® space. So the other thing that, you know, we asked a lot of questions about whether they’re in this referral, PayFac-as-a-service, or PayFac model is, we do want to guard against the software company picking a solution that isn’t either right for them today, or right for them tomorrow. Because a lot of times, they’ll come into a referral model, but clearly, they want to own servicing. And so they need to move to PayFac-as-a-service, or they started PayFac-as-a-service and they clearly can be a PayFac in one to two years. So those are all conversations and decisions we make early on with software companies. And I will add, one really cool thing, as companies start out, even in referral or PayFac-as-a-service, and they leverage that software suite, the portal offerings, you know, all the things that that we’ve built out, and they want to go down a payment facilitator path, the good news is the software is the same, the portal is the same, the coding is all the same. They will just need to augment their internal infrastructure, they’ll need to be taking on risk and underwriting. And they’ll have to adhere to all the other requirements for registration.

Bob Butler

Now that’s really helpful. I’ve really enjoyed the conversation. I mean, do you have any final thoughts you want to leave with the audience today?

Steve Wilson

Yeah, well first you know, I’ve been doing this for a while. Oh, actually, we both been doing this for a while. And I’ve seen these sort of disruptive moments. Like I said, back in 2000-2014, that was the software referral model disruption timeframe. And then I’d say we started to see a movement to kind of larger players of payment facilitation and say, 2015 and beyond. So we really had the bookends, right, we had referral all the way to payment facilitation. And even though we were all talking about it, and there was a lot of this desire for this middle model, or this PayFac-as-a-service model, there was a lot of talk about it, but there wasn’t a lot of options either to go build it or go acquire it. So, I think the exciting thing is, there’s no shortage of verticalized software solutions for both card-present and card-not-present transactions. And you know, in the last three or four years, we’ve seen a tremendous acceleration of this middle model. And I think that tends to create both leaders and followers, Bob, and I think that keeps us I think it keeps it really exciting. But I also think it keeps us on our toes. So, as I think about growth, I’m also eager to see how this middle model plays out in both the domestic and international expansion. And then if you think about, if you look at what’s happened in the last couple, six months or a year timeframe, you’re starting to see all this other embedded FinTech offering, too. So, issuing, blending, banking as a service, you know, different funding solutions. So not only do we think about the PayFac-as-a-service solution as a high growth solution, or high-growth option for us, but we’re starting to see all these other bolt-ons on top of it, not to mention domestic and international expansion. So, I think with all that, it’s good times ahead.

Bob Butler 

Yeah, I agree with you, Steve. And I really want to thank you for being on this show. Having spent quite a bit of time with you over the past 18 months, I know that we’re both big believers in sharing knowledge and experience. So again, really appreciate you joining us here today.

Steve Wilson 

Yeah, hey, thanks for having me, Bob. Anytime. Let’s do it again.

Bob Bulter 

We want to be a trusted resource for software providers who are out there trying to make sense of embedded payments and finance and to help them get the education they need to make the business decisions their customers and investors will thank them for.

Thank you for joining us today on the PayFAQ embedded payments podcast brought to you by Payrix. For more information about embedded payments, subscribe to our show at Payrix.com/podcast.