Finix cost of embedded payments

Payment Facilitation, Payments

The True Cost of Embedding Payments

One of the first questions companies will inevitably have when they're thinking about transitioning away from third-party payments service provider reliance and becoming payment facilitators is what the process will cost them. It's a valid question, and the simple answer is that there is a significant, necessary investment in terms of both money and development time.

Why, then, would a company embed payments? If your software organization has reached a critical processing point and is already processing a large volume of transactions on behalf of merchants, the most costly thing to do would be not to embed payments. Large software organizations entrusting their payments processing to a third-party integrated service are missing a highly profitable opportunity to turn an expense into a revenue stream.

What expenses do you pay when you don't embed payments?

Working with a third-party payments service provider (PSP) is a common choice for software companies. The requirements associated with building payments infrastructure, from ensuring PCI-DSS compliance to solutioning a variety of feature-sets and fee options that allow customers to use the vast array of advanced payment options, are daunting. Outsourcing this work to a third party is understandably tempting — but there are a few reasons this may be unwise.

First, a significant amount of revenue is lost when companies turn to external providers. For example, PayPal charges 2.9%, plus a fee based on the currency a customer uses, for a domestic online transaction in the U.S. When used as an in-store payments processing solution, PayPal takes 2.7%, plus the same currency-based flat fee.

Second, organizations that use third parties for processing don't own the merchant contract. With an outsourced payments model, merchants rely on an external system that ultimately becomes a vital part of their customers' experience. This lack of ownership can be problematic if merchants decide to leave for a competing platform — there are fewer reasons to stop them from searching for a better solution if they don't like the one provided by your PSP.

There are additional complications associated with running transactions through a third-party process, such as the fact that when customers are issued refunds, there is no refund of the transaction fees. The percentages paid on every transaction are especially notable for companies that process a large volume of business. These are the organizations that should consider making the leap and becoming payment facilitators.

How does embedding payments earn money for your business?

Companies that control their payments stacks can begin seizing some of the revenue flowing through the payments industry. The McKinsey & Co. 2019 Global Payments Map Report pointed out this opportunity, explaining that processors and networks situated between end consumers and issuing banks are poised to claim a stake of the market. Though 91% of payments revenue goes to credit cards, issuers and acquirers, there's a catch. In essence, the market totals $171 billion in the U.S., meaning even 9% is an enormous amount that large companies can claim by becoming payment facilitators.

A company that oversees $50 million or more in transactions is in a good place to take control of its payments stack. At this scale, the reclaimed revenue that no longer goes to an integrated third-party solution becomes a source of value for the organization.

Today, a variety of software platforms achieve that size and scale. Companies that aspire to be the Uber or Airbnb of their respective verticals can see a strong return on investment by becoming payment facilitators. For every $100 million processed, businesses can realize an additional $3M - $4M in revenue, according to current payment processor rates. Furthermore, they can offer their merchants a level of customization, performance, and transparency that may have been impossible with an integrated third-party tool.

Should Companies Seize the Payments Opportunity?

Of course, just because a company is large, that doesn't mean it can or should use its resources irresponsibly. There is an economical way to build out payments infrastructure - namely, working with an expert partner that can deliver a bespoke solution without the escalating expenses associated with self-directed in-house design.

A company that wants to build an in-house payments solution will have to cope with challenges such as finding personnel who are capable of creating a secure and functional infrastructure that is PCI DSS compliant while providing reliable performance. Companies are unlikely to already have these highly-skilled and in-demand employees on their teams, which means re-allocating resources to pay high salaries to those with the necessary experience. Building out a solution with expert partners ensures the team has the right skills, without the massive spend otherwise required to hire in-house workers.

Software companies expanding their operations and seeking new sources of value and revenue should consider becoming payment facilitators. From the potential revenue reclaimed by replacing integrated third-party solutions to the merchant relationship benefits that come from offering a fully functional payments stack, embedding payments is a significant potential differentiator.

It takes time and effort to create a bespoke payments infrastructure. Deployment times can range from 12-18 months for organizations that work with expert partners, more for businesses that attempt to go it alone.

In a highly competitive software market, for companies becoming heavyweights in their particular niches -- from accounting to inventory, point of sale to customer relationship management and beyond -- the search for differentiators and diverse revenue streams will inevitably bring some companies to choose payment facilitation for their path forward. These organizations have an opportunity to transform their identity within their respective markets. The real cost associated with payments is the revenue these organizations miss out on by not making the leap.