There are a few different ways for software companies to offer end to end payments services to merchants, but they are not all the same in their scope and capabilities. Traditionally, software companies building products for merchants had a few options:
enter into an Independent Sales Organization (ISO) referral deal with a payment processor (sometimes called a merchant acquirer) for access to integrated payments infrastructure
implement a third-party option
build the necessary technology in-house from scratch.
All of these methods have limitations for software companies looking for modern payments solutions.
What are the uses and drawbacks of integrated payments?
The ISO model came to prominence in the early days of the digital payments revolution, as companies of all sizes realized that they needed credit card acceptance capabilities. By creating referral agreements between payment processors (along with their sponsor banks) and businesses, ISOs acted as payment intermediaries. Independent Software Vendors (ISVs) expand on the model by offering both referral agreements and payment portals to the companies they work with.
While beneficial in many ways, under an ISO model, a software company does not truly have control over the payments experience nor own the relationship with their merchants. Consider a software platform which services hair salons. It's likely designed with a feature set unique to the hair salons that will use it. Without a payments layer built into this software, a hair salon, which utilizes this software platform for scheduling and inventory, would have to find a third-party solution to accept payments, likely through an ISO, ISV, or third-party payments provider.
The use of a third-party integrated payments provider or ISO model could mean limitations on the types of transactions that the salon can conduct. The platform may not, for example, be able to pay out tips to stylists when customers submit them. There may be limits on the dollar amount of transactions. And most importantly, there are fees paid to the processor or third party for every transaction the hair salon processes.
The process of onboarding those merchants under such a model is relatively inflexible. Software organizations should want to customize the payments experience to benefit their customers, but with a third-party are unable to, since the payments infrastructure, experience, and merchant contract belongs to the outside party, not the software platform.
What companies need to know about building payment infrastructure in-house
Of paramount concern when building payments infrastructure in-house are security and compliance. Software companies' development teams tend to be comprised of product experts in certain industry domains, not payments. This means challenges for organizations that want to create the infrastructure needed to manage payments successfully. In recent years, the need for secure infrastructure has led developers to work with hosts such as Amazon Web Services rather than building from scratch - the same priority applies even more strongly in the payments space.
A complete build-out of payments processing infrastructure can take from 2 to 3 years and absorb hundreds of thousands of dollars in development costs. Since companies won't typically have payments experts among their IT staff, they're faced with the choice of bringing these personnel in on high salaries or facing the delays and oversights that can come from a lack of expertise.
Development resources aren't the only challenge facing software companies who want to manage their own payments -- there are also complex legal considerations. Processing payments in-house can feel like an unreachable goal for all but the biggest software companies. However, there is a third path - embedded payments.
The basics of embedded payments and why are companies gravitating toward them
By becoming a payment facilitator, processing transactions for sub-merchants is a straightforward process. This is a bespoke, customized, and fully embedded solution, different from the inflexible integrated payment experience of an ISO model or third party. Many companies have made steady progress over the years, working with PayPal for payments, then moving to Stripe to give a better-integrated, user-friendly experience to their merchants. Now, they are embedding their payments to take the next step in their offerings, with customization and onboarding capabilities that outstrip any third-party service.
When a software company controls the flow of funds, merchants get smooth and customized payments experiences and, most importantly, software companies recapture revenue (around $5 for every $1000 it processes) that otherwise would be paid to a third party. Lastly, companies that go the embedded payments route actually own the merchant relationships they establish. Embedded payments set these organizations apart from those that have integrated options or none at all.
The drawbacks of building the infrastructure in-house - namely, the challenges of creating sophisticated payments systems while lacking specialists - are mitigated by working with an expert partner to embed functionality. A timeline of 12 to 18 months, is significantly shorter than what companies may encounter when building in-house.
What kinds of companies should embed payments?
While embedding payments represents a faster and more affordable approach to building out card acceptance and processing functionality, it's still suited to larger software companies, namely those that handle $50 million or more in processing volume from their merchants every year.
As for the types of software companies that can become payment facilitators, the field is wide open. Companies providing B2B software for budgeting, inventory, point of sale, enterprise resource planning, or other internal functions are all prospective users of embedded payments. Software companies that are seeking to boost their competitiveness - from retail, health care, or any other type of targeted offering - can stand out by embedding payments.
To find out if embedding payments is the right move for your company, reach out to Finix and learn more.
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