When is It Worth Becoming a Payment Facilitator?

For many B2B software companies, the decision to offer a proprietary payments product appears likely in their future. After all, the idea makes sense for many businesses: the deepening relationships with customers, the additional revenue stream, the increased valuations.

But becoming a PF isn’t for everyone. It requires investment and resources that are outside of the existing expertise of many software companies. 

So how do you know when it’s worth taking the steps necessary to become a payment facilitator? When are you big enough, well-funded enough, or at the right point in your business’s life cycle?

Becoming a PF offers many benefits – particularly surrounding the improved customer experience it can help provide – but the question of the economic impact such a move will have on your company is a critical consideration, according to Rick Oglesby, president of AZ Payments Group. 

“Economic considerations are an entry criterion,” he said. “Few want to step backwards in profitability, even if it does improve customer experience. But if payment processing is profitable (it usually is) and it provides customer benefits (it usually does), it’s a win all around.”

So, while the answer may be different for every ISV, there are some helpful guidelines. The first step is a pretty straightforward calculation: estimate the size of your upfront investment, estimate your revenue potential, and compare the two.

Upfront Investment

According to Oglesby, any company considering the PF path should develop a well-researched budget with realistic estimates for line items including:

• Recruiting payments expertise and customer service staff 
• Completing an RFP to select a payment processor
• Developing policies and procedures for risk mitigation and compliance
• Obtaining or developing customer onboarding and servicing tools
• Training service center staff and sales teams
• Integrating your software platform with a payment processor or gateway
• Registering with the card networks

Oglesby also recommends including an additional 15% of the total budget as a contingency for other needs and expenses that arise. 

“There are always small surprises, as there are with any journey, but there shouldn’t be any big ones. Upfront homework should be enough to prevent those,” he said.

Given the typical expense for each of these items, a software provider with no pre-existing organizational expertise in payments, software that does not currently touch or distribute payments, no pre-existing technical interfaces with payment gateways or processors, and a do-it-in-house strategy may need to invest as much as $500,000 to launch a proprietary payments business, Oglesby said. 

Of course, not all of these items will be necessary for every software provider. Some may already have technical integrations or in-house payments expertise, both of which would help reduce costs. They can leverage outside expertise and services to speed the process and further reduce costs. Software companies should start with a budget that includes the total needed investment and modify downward based on current capabilities and willingness to fill gaps with outside support.

Revenue Potential

The second part of the question involves estimating the revenue opportunity. To determine how much revenue they’re likely to make on a payments offering, companies must look at three things:

• The market value for processing a payment transaction that is typical for that company’s customer portfolio. Lower-risk transactions are of lower market value, while higher-risk transactions generate a pricing premium. Additionally, small merchants pay higher prices than larger ones do. 
• The volume of transactions the software provider will enable
• Transaction expenses, including interchange and network fees

Companies can estimate their gross revenue based on the first two figures, then subtract the expenses to arrive at their expected annual net revenue. They should then compare annual net revenue to the up-front investment to determine whether it’s worth moving forward.

Firms specializing in helping payment facilitators build their payment products and bring them to market, such as Infinicept, can also help guide software providers through determining whether becoming a PF makes sense for their company and calculating their return on investment.