The Journey from Software Company to Full-Scale Financial Service Provider

Software companies are in a great position to capitalize on payments. Your users want the convenience of managing transactions right from your software, and providing them with a total solution helps you retain customers and grow revenues. However, if the user experience with that solution is disjointed and frustrating, you’ll see declining performance metrics. To have more control over merchant experiences, many software companies have decided to become more involved with payments, even expanding their businesses to become full-scale financial service providers and payment facilitators (PayFacs).

What Are Software Companies’ Options with Payments?

Software companies can offer payment solutions and services to their users in several ways, including;

• Retail ISO: Retail independent sales organizations (ISOs) partner with an acquirer, wholesale ISO, or financial service provider to sell merchant services to their software users.
• Financial Service Provider: Full-Service Providers (FSPs), in the payments context, are platforms that manage all aspects of merchant payment processing, including onboarding, underwriting, compliance, and risk, typically under a sponsor bank.

• PayFac: Payment facilitators take on more responsibility and risk related to payments but also receive greater rewards. PayFacs have more control over merchant approvals, onboarding, fund transfer schedules, and the margins they make from payments.
• Wholesale ISO: Wholesale ISOs often negotiate buy rates with processors, set their own pricing for merchants, and may assume partial liability for the accounts they manage.

Remember that a software company’s decision on how to provide payments doesn’t have to be permanent. Involvement with payments can evolve over time to give software companies more control — and more revenue.

What to Consider When Integrating Payments

When software companies first offer solutions that give merchants the ability to process payments, they often integrate their software with a payments platform and take the role of retail ISO.

This takes an investment of time and resources. A retail ISO needs to train or acquire a sales team familiar with payments, as well as their software, to close deals. Success as a retail ISO also depends on a close relationship with the acquirer, wholesale ISO, or financial service provider partner.

Communication between partners is essential to getting on the same page with terms of their agreement, schedules, customization options, and payments infrastructure requirements.

Integrated payments partnerships are a win-win for software companies and their partners. Software companies have the opportunity to provide a total solution, and payment companies build their merchant portfolios. The Strawhecker Group has found that customer attrition decreases by 5 percent when merchants are integrated with an acquirer through a software provider.

Making the Move to Embedded Payments and Financial Services

The next step in a software company’s evolution with payments is often embedding them. Embedded payments make experiences seamless for the user. If payments are required at any point in the user experience, they’re simply part of the workflow. This approach elevates payments to a customer experience-enhancing tool. EY reports, however, that 70% of non-financial services companies still see payments only as a utility. This creates an opportunity for software companies that recognize the impact payments can have on user experiences.

By partnering with a white-labeled solution or embedded payments provider, software companies can offer payments under their own brand—delivering a unified experience where users see the platform as the payment provider. McKinsey & Company reports that 50 percent of small businesses use ISVs as their payment providers.

Challenging the Status Quo as a FinTech

Software companies can expand their solutions’ capabilities to offer financial services beyond card-present and card-not-present payments. You can create a FinTech solution that gives users the option to use buy now, pay later (BNPL) or other loan, create a savings account, or take a cash advance.

FinTech offerings have appeal for consumers, particularly younger, tech-savvy users who prefer a modern approach to banking and financial services. Boston Consulting Group reports that FinTech has only about 6 percent penetration into the global banking and insurance markets, suggesting an opportunity for software companies to expand into this space.

PayFac or Managed PayFac

When software companies want more control over user experiences with payments and the revenues they receive from them, they can evolve into PayFacs. They establish a MID and process their customers’ payments through it. They need to have sponsorship from a financial institution, register with card brands, establish a cash reserve, and comply with regulations, including Know Your Customer (KYC) and Anti-Money Laundering (AML) laws.

Operating as a PayFac takes expertise to manage underwriting, merchant approvals, reporting, fund schedules, and customer support. For many software companies, this requires hiring new resources. The PayFac model also requires the software company to invest in infrastructure to manage payments.

To decrease this burden, a Managed PayFac or “PayFac as a Service” is becoming a popular option for software companies. This service allows software companies to use their payment partner’s infrastructure and customer management tools, minimizing upfront investment. It also includes access to resources with risk assessment, security, customer support, and compliance expertise. This model decreases time to market, helping software companies build revenues from payments faster.

Wholesale ISO

Wholesale ISOs focus on providing payment services to enterprises or particular industries at a very high volume threshold. Wholesale ISOs can offer credit card services, cash advances, loans, and other market needs, accessible through their software. Rather than competing with other ISOs or PayFacs, wholesale ISOs begin to compete with banks for companies’ business.

Wholesale ISOs need to hire or acquire expert resources and invest in infrastructure and product development to meet market needs. Wholesale ISOs develop apps or other tools that their customers use for payments and financial services and facilitate payment processing.

Wholesale ISOs assume risk for transactions, either fully or in part, requiring internal risk assessment, policy development, and auditing capabilities. However, this model also enables complete control over underwriting, schedules, and customer experiences.

Take the Next Step in Your Journey

The right strategy for your evolution from software company to payment provider depends on your maturity as a company and your business goals. Becoming a PayFac or wholesale ISO may or may not be on your roadmap.

But wherever the next step is for your business, we can help. Contact us to discuss your plans and how Paystri can help you achieve them.