Demystifying Digital Payments for your ISV and SaaS Platform

Payment methods today look a lot different than 20 years ago when cash and hard-copy checks were still king. Digital payments (also called electronic payments), such as credit and debit cards and eCheck / ACH, eventually unseated cash and checks. Today, digital payment solutions have grown to include digital wallets, mCommerce and BNPL.

Not surprisingly, COVID was a huge catalyst for the surge in digital payment adoption globally. McKinsey’s 2021 Digital Payments Consumer Survey found that more than four in five Americans used some form of digital payment in 2021, while Visa saw its tap-to-pay transactions grow over 30% year-over-year.

In low and middle-income economies (excluding China) globally, the World Bank found that over 40% of adults who made an in-store or online payment using a credit card, mobile phone or the internet did so for the first time during the pandemic. The high proliferation of smartphones enabling mobile commerce, internet penetration and an increase in paying online are driving the increase in digital payments.  

If you are an ISV that serves many customers, you need to understand the types of digital payments available to you, their pros and cons and which is best for your business. Today we review some of the most popular forms of digital payments and considerations for adoption.

Primary Payment Methods

The first thing to know is “how” digital payments can be used. The three primary methods are at the point-of-sale (typically a brick-and-mortar store or restaurant), online or over the phone. Online purchases can be made through a computer, tablet or laptop (Ecommerce) or through a mobile phone (mCommerce).

  • POS: Point-of-sale (POS) typically refers to the customer paying for a purchase in a physical location via a payment terminal (and can also be called card-present payments). Payment terminals should be equipped with chip card acceptance for credit and debit cards and near-field communication (NFC) technology for contactless credit and debit card payments (also called tap-to-pay) and mobile wallet payments.
  • Online (Ecommerce and mCommerce): These are typically payments initiated via a computer or a mobile phone. These two pieces of hardware act as the “virtual” point-of-sale but because you are not purchasing goods in a physical location, they are card-not-present transactions. Credit and debit cards can both be used online, as well as mobile wallets, mobile apps, bank transfers (also called Automated Clearing House transactions or ACH) and alternative credit solutions, such as buy now, pay later (BNPL).
  • MOTO (mail order / telephone order): These are payments initiated by the cardholder over the phone with a call center attendant or via physical mail. While the card is still not present with MOTO transactions, the difference here is that the merchant is keying in the data themselves and the cardholder is only speaking the number over the phone or writing it down on paper and mailing it in.

The Different Types of Digital Payments

The payment industry has no shortage of offerings for ISVs to provide their merchants. But adding too many digital payment options can be confusing for customers. It’s important to consider your vertical (government would be different than retail), your average transaction size, the frequency of transactions (whether they are one-time, recurring or a mix) and your demographics (millennials love mobile payments). 

Credit and Debit Cards

Credit and debit cards can be used both online and at the POS and remain one of the top forms of digital payment. Credit cards are issued by Visa, MasterCard, Discover and American Express, while debit cards are issued by banks. Credit cards extend credit to the consumer whereas debit cards deduct purchases directly from the consumer’s bank account.

What has changed with credit and debit cards is how they can be used at the POS and online. Customers can now use contactless payments at the POS so they don’t need to touch the payment terminal, and credit and debit cards can also be loaded into a consumer’s mobile wallet, which can work both at the POS and online.

Mobile (Digital) Wallets

Mobile payments are one of the most popular forms of digital payment. Consumers can load more payment methods (credit, debit, ACH, payment apps, etc.) into their mobile wallet without having to carry physical cards. These wallets can also manage rewards cards, memberships and even IDs. This flexibility in payment and document types is a prime motivator driving digital wallet usage. 

The most popular mobile wallets include PayPal, Apple Pay, Google Pay and Samsung Pay, and all can be used both at the POS and online. However, for ISVs to accept mobile payments at the POS, a payment terminal with NFC capabilities is required and the ISV’s processor must also be able to transact mobile payments. For online usage, the onus is on the processor to be set up to accept digital wallet payments.

ACH Payments

ACH payments are an important part of the digital payment mix in many industries such as government, utilities, higher education and healthcare. ACH payments are directly debited from a consumer’s checking or savings account for things like electric or water bills, tuition payments and large healthcare payments. ACH can also be used in B2B commerce for very large transfers between vendors and payers. Almost all processors today offer ACH payments but typically at an additional cost outside of standard merchant account fees.

Buy Now, Pay Later Solutions (BNPL)

Buy now, pay later (BNPL) solutions provide a type of short-term financing that allows consumers to make purchases and pay for them over time, usually with no interest. 

BNPL is popular in retail and industries where high-ticket consumer goods are sold, such as jewelry, electronics and furniture. Additionally, millennials and Gen Z make up the highest proportion of BNPL users – a demographic most interested in alternative and mobile payments (and least interested in traditional credit cards).

Mobile Payment Apps

Mobile payment apps can often be defined to include mobile wallets but also include a segment of mobile payment “cash” apps that facilitate the transfer of money between a provider and a customer, or for P2P (peer to peer) payments. There are a variety of mobile cash apps including PayPayl, Venmo, Zelle, Cash App and more. Transactions are conducted using a mobile or smart device (a phone, a tablet or a watch). Whether you want the ability to take cash app transactions will largely depend on your industry, your demographics and whether your processor offers cash app acceptance at the POS or online checkout.

Ensure the Right Digital Payment Mix

The key takeaways for choosing the right payment mix for your POS or Ecommerce checkout are evaluating your products, considering your industry, understanding your customer – as well as their buying habits – and ensuring that you have the right integrated payment processor for your business.

At Payfactory, we offer a variety of digital payment methods through our payment facilitation platform. Integrated directly into ISV and SaaS software, our platform provides fast onboarding and funding for your merchants, with white-glove customer service and a flexible revenue sharing program for all of our partners. Learn more about our platform or contact us directly for a free payment consultation.  

6 Factors for ISVs to Consider When Choosing a Payment Processor

Whether your software platform services accountants, doctors, retailers, or gyms, your organization will need to process consumer payments. There are a variety of ways to pay for goods and services, but some of the most popular include credit cards, debit cards, ACH (Automated Clearing House) and mobile / digital wallet payments. 

When it comes to choosing a payment processor for embedded payments, ISVs should consider several factors. These will include what kind of payment options you will ofer (in-person and/or Ecommerce), what types of customers you are serving, your business size and more. Today we look at how each of these help determine the type of payment processing model to choose. 

Payment Transaction Type

As a first step, it’s important to consider what types of payment transactions your merchants will accept. Transaction types can include in-person payments, online payments (also called Ecommerce payments), keyed payments, contactless payments and payments made with a mobile phone (whether tapped or in-app).

A mobile payment solution might be necessary if you want to accept payments outside of your storefront – for example, at an event or a festival. If you’re launching an Ecommerce page, look for a payment processing solution that offers secure online transactions and accepts all major credit cards, as well as ACH, particularly if you are in the utility or government space. Also evaluate whether they support recurring billing for subscriptions and card-on-file payments.

More consumers than ever are adopting electronic / digital wallets, so it’s important that your potential payment processor supports GooglePay and ApplePay for in-person tap and both in-app and web-browser. These e-wallets make payments a snap for the cardholder since they can easily select which card they want to pay with, and they don’t have to key in their card each time they want to make a payment.

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Payment Processing Pricing

Some payment processors may be very transparent on transaction pricing for smaller merchants, but in other situations, such as enterprise, government, and higher education, pricing may be quite complex. What’s worse is that some processors will force the go-to-market (GTM) price on the ISV, making them uncompetitive with other options in their marketplace. Setting the GTM price for your customer should be a cooperative process with your payment processor, since ultimately neither party wins if the merchant chooses a competitor’s software because their embedded payment option costs less.

The total cost of payment processing is made up of a number of fees, including interchange fees, transaction fees, monthly fees, chargeback fees, and less obvious costs such as membership fees, setup fees and Payment Card Industry (PCI) compliance fees. You should consider the one-time fee and the monthly costs when comparing services, since most modern embedded payment acceptance offerings do not charge monthly fees or PCI non-compliance fees.

Transaction fees can vary depending on what types of cards your merchants are accepting (debit vs. credit cards, consumer vs. commercial cards, etc.), where the transaction is taking place, whether the transaction is made in-person, over the phone, or online, and more, but the typical cost is between 2-4% per transaction and is highly dependent on the vertical. Your payment processor should provide you pricing unique to your vertical, since the major card brands offer many programs that have lower back-end costs for certain verticals such as charity, government, higher education, insurance and services.

Pro Tip: With Payfactory, you get credit card processing services at different price points and risk levels to fit your organization’s budget and business needs.

Payment Terminals

A payment terminal, also called a payment device, and associated applications are necessary if you will be processing in-person credit card payments. The terminal should accept magnetic stripe cards, EMV chip cards and contactless payments – and could also be countertop, mobile or a combination of the two.

If considering a mobile payment terminal, ensure that you can use it across iOS and Android devices, while also accommodating mobile card readers with the option to enter payment data on the fly manually. 

For both countertop and mobile payments, ensure that the payment processors you are evaluating support your preferred technology and card acceptance method. Otherwise, you might have to pay extra fees or settle for less functionality than expected. We strongly recommend choosing a processor that offers your merchants fully PCI-validated P2PE (point-to-point encryption) to protect the cardholder and mitigate breach risk. For many larger entities like government, education and healthcare, PCI-validated P2PE has become a requirement on their RFPs.

Point-of-Sale Hardware

While some processors offer payment processing and point-of-sale (POS) systems, the two do not have to work together. A POS system is excellent for processing card transactions, but it can also track and store cash payments, track inventory, generate sales reports, integrate with accounting software and much more.

If you want to combine credit card processing and POS options, evaluate the equipment required and the cost. You may also be able to keep an existing POS system with your new payment processor if it is compatible with the processor’s current integrations. 

Deposit Timing

Merchants expect the funds processed from a card to be deposited into their bank account as fast as possible. But in the traditional payment processing model, the soonest you might get your funds is by the end of the next day. And most of the newer, trendy processors take a minimum of two business days to deposit funds. You should choose a processor that can offer true next-day funding or even next-morning funding like Payfactory does for certain verticals.

Pro Tip: Payfactory offers fast payouts and deposits. For example, transactions closed in the evening can be deposited the next morning for approved industries.

Payment Security

No discussion about payment processing would be complete without considering security for your customers’ transactions. Any business that processes payment transactions must be PCI compliant, but security goes beyond PCI and should include technologies such as encryption and tokenization for payment card data.

Encryption and tokenization replace actual payment card data with letters, numbers and symbols that would be meaningless to a fraudster. This ensures that if your system is hacked, no valuable information is found that can be resold on the Dark Web or used to commit fraud.

There are various types of encryption and tokenization solutions depending on how you are accepting payments, so make sure to ask potential processors about their internal security systems and the security vendors that they use. We also strongly suggest that you work with a provider that offers 3D Secure 2.x for your digital transactions (Ecommerce, mobile, etc.) in order to shift liability for chargebacks and disputes back to the card issuer for fraudulent purchases.

Pro Tip: Payfactory is one of the only payment facilitators to provide the option of PCI-validated point-to-point encryption (P2PE), the highest level of security for card-present transactions.

Get the Right Payment Infrastructure for Your Business

At Payfactory, we empower ISV platforms and their merchants with fast onboarding, payment acceptance and payouts through restful APIs. We offer competitive rates with no monthly fees, all backed by top-notch customer service, an easy application process and transparent pricing. Security is also at the core of our platform, with our CEO, Ruston Miles, serving on the PCI Board of Advisors and architecting leading encryption and tokenization solutions for payments and sensitive data.

Contact us today to get a free consultation on how Payfactory can take your payment processing to new levels. 

Payment Facilitators Versus Payment Processors – What Are the Differences?

The trend of ISVs and software platforms enabling payment acceptance through their SaaS (software-as-a-service) and installed software systems is exploding. In fact, McKinsey has found that 50% of small businesses now run payment processing through their ISVs, and 15% are in the process of transitioning their payment processing to an ISV provider. 

Embedded payments is a multi-trillion dollar opportunity for ISVs but choosing the right payment processing partner can be a challenge. With traditional payment processing options, the signup process can be time-consuming and frustrating, the merchant approval process can take up to 7 business days, and pricing is confusing and fraught with hidden and recurring fees. The problem for enterprises is that traditional merchant service offerings lack the dynamic funding and flexible billing options needed to access new markets while supporting existing business processes.

Software companies are in an optimal position to embed payments into their offerings to unlock new revenue and improve customer experience. We review the two primary integrated payment options – traditional merchant acquiring offered by a payment processor and payment facilitation offered by a payment facilitator (payfac).

Traditional Payment Processors (Merchant Acquirers)

ISVs want to provide a user experience that is simple, convenient, and consistent – making the most difficult of back-office processes non-evident to the point of invisibility. Businesses sign up for practice management software to simplify and manage their business processes, thereby rewarding the ISV with subscription revenue and loyalty. 

However, merchant acquiring – which can be considered the traditional payment processing model – requires significant time and effort to open an account and can be expensive. Payment processors provide the systems and technology that actually processes the payment transactions, routing them to the card networks and the banks, receiving authorization and declines, and settling funds. 

Because of the way traditional processing was built, it takes time, effort, and money by the payment processor to enable and support merchants. Considerations include:

  • Onboarding (Underwriting and Account Setup): Full merchant onboarding can take 3-7 business days for enrollment, which includes an application form, supplemental paperwork (merchant financials, voided checks, driver license, etc.), and human underwriters.

  • Flexibility of Funding: Payment processors will offer a variety of digital and payment types, but typically only the largest merchant acquirers can offer split payments, convenience fees, service fees, multi-account, fast funds, and dynamic funding. 

  • Monthly recurring fees: There are many parties in the payment processing flow – the payment processor (which can also be the payment gateway), the card associations, the acquiring bank, and more. A payment processing statement can contain upwards of 10 different fees charged to the merchant on a monthly basis, which can be difficult to decipher.

All this being said, in the merchant acquiring model, the processor almost always shares merchant revenue with the ISV. There are a host of factors that go into determining revenue share, from payment volume to transaction size to who is selling the account and providing first-level support. 

Payment Facilitators (Payfac)

Payfacs offer payment processing to companies, known as sub-merchants, through their own links with payment processors. Payfacs serve as an intermediary, gathering sub-merchant transactions and passing them to a payment processor for completion. Payment facilitators provide three primary services to their customers:

  • Onboarding (including instant signup and underwriting) services

  • Payment processing services

  • Back-office functions (including settlement and reconciliation)

The Payfac model simplifies the merchant account enrollment process and provides increased levels of control to ISVs. Seamless and paperless underwriting is at the heart of this model, accelerating standup times for merchants.

Payfacs wrap all these services into APIs that software companies can integrate to, automating the entire provisioning process into a seamless merchant enrollment experience that can be completed online by a merchant in minutes. This API-centric integration and automation is very different from the traditional payment processing enrollment experience.

There are additional considerations when choosing a payment model, including transaction types, pricing, hardware, and compliance and security. Check out 6 Factors to Consider When Choosing a Payment Processing Model to learn more about features and functionality across models.

The Different Payfac Models

Payfacs create a more dynamic user experience for ISVs. But like any payment option, there are different payfac models to choose from. 

Software Platform as the Payfac

Some ISVs have opted to become their own payfac to gain complete control of the payment process and all payments revenue. However, this is the most aggressive payfac model typically only adopted by the largest ISVs since:

  • The time to become a Payfac can range from 12-18 months.

  • The cost can reach into the millions due to software buildout, integrations, bank sponsorships, PCI compliance, AML compliance, financial reserves, registration fees, and more.

  • The ISV assumes 100% of the risk and liability for their sub-merchants.

  • Payment industry experience is required to run underwriting, transaction risk monitoring, and daily financial settlement. 

  • All merchant account sales and customer support must be provided by the ISV.

Without these pieces already in place, an ISV could risk becoming distracted from their core software business.

Payfac Direct Providers

Some larger providers now provide payment facilitation as a direct service to sub-merchants. Here, the ISV can integrate to the payment platform and provide the platform’s payfac services to their merchants directly. However, this is considered more of a “pay to play” model where the ISV is leveraging their processing only. Considerations can include:

  • Margins: Many direct payfac providers will not offer revenue sharing and impose a high buy rate, which can lead to limited margins for the ISV and more costly processing for the sub-merchant (the ISVs’ clients).

  • Merchant Ownership: In the direct model, it can be extremely difficult to support the portability of sub-merchants or transaction data to another provider, if the ISV decides to go with a new payfac or payment processor.

  • Support: A complaint among merchants and ISVs with direct payfac providers is the lack of “human” support, with companies directing SMBs to chatbots or online forms for questions.

While ISV clients will enjoy the benefits of payfac with the direct model – fast onboarding, payment experience control, a variety of funding options – it could come at a higher price and lower margin for the ISV.

Payfac as a Service

Payfac as a Service is the newest entrant on the payfac scene. In this hybrid payment facilitation model, the payfac payment service provider becomes a payfac with Sponsor Banks; they act as a master merchant account and are able to set up sub-accounts for merchants same-day. Payfac as a Service providers differ from traditional payfacs in that they:

  • Offer aggressive revenue shares.

  • Allow portability of merchants and transactional data.

  • Assume all merchant risk and liability.

  • Provide flexible ISV and sub-merchant contracts to support specialized sub-merchant business models and state requirements.

  • Can provide human support to the ISVs and rapid merchant service support.

This model can be ideal for software providers that want to offer their clients same-day onboarding, provide fast funding, and control the sub-merchant experience, while making payments revenue and increasing margins.

Check out our Embedded Payfac FAQs to get frequently asked questions and answers on embedded payment facilitation, plus definitions of payment processing terms.

The Payfactory Solution for ISVs

Software companies increasingly view fully embedded payment functionalities as complementary to their platforms. A payment offering not only enables software companies to capture a larger portion of the economics of a given payments transaction, but also comes at nearly zero customer acquisition cost as it is a logical cross-sell to their existing customer base.

Payfactory specializes in embedded payfac services for ISVs and SaaS companies. Our gateway-friendly platform integrates with software systems to provide seamless payment facilitation with little to no development required, allowing our partners to minimize integration costs and quickly gain a new revenue stream. Founded by payment industry veterans, we believe that integrated
processing should be simple, frictionless and fast – while also maintaining the highest level of security, customer service and human
support.

Access our API documentation and sandbox to see why Payfactory is the easiest and fastest way to enable merchant payments and to start making revenue today. 

Integrated Payments and Embedded Payments: a Trillion-dollar Opportunity

Ten years ago, it was novel to have a SaaS, CRM or EHR platform that offered core business and operational functions while also allowing customers to pay for services within the platform itself. 

Shoot to 2023 when payments integrated or embedded within software systems are not only the new normal but are expected by consumers – regardless of industry. You prepay for an appointment with your doctor through their EHR system, you order an Uber or Lyft and pay within their mobile application, you visit your salon and tap to pay through their CRM. 

According to Bain & Company, Independent Software Vendors (ISVs) have the potential to address $35 trillion in payments, or 15% of the worldwide total, by integrating payments into their platforms. Not only do integrated payments meet consumer demand but they also offer ISVs and SaaS platforms a lucrative revenue stream while creating stickiness with clients.

But navigating the world of payments can be a challenge for software companies. Let’s look at exactly what integrated payments are, the benefits of integrated payment systems and considerations when choosing an integrated payments partner.

What are integrated payments?

Integrated payments – also called embedded payments – is payment acceptance built directly into the software systems that businesses use to conduct commerce. Virtually every company now uses one or more software platforms as part of their day-to-day operations. Many are consumer-facing, where individuals are directly interacting with the SaaS platform, whether in healthcare, higher education, retail or government. For consumers, paying within the platform is convenient, efficient and can enhance brand loyalty.

The terms “integrated payments” or “embedded payments” also encompass any kind of payment method – and there are many to choose from, including:

  1. Credit & debit cards

  2. Automated Clearing House (ACH) transfers

  3. Electronic checks

  4. Mobile wallets (Google Pay, Apple Pay, Samsung Pay)

  5. Buy Now, Pay Later (BNPL)

While accepting credit cards is standard for almost all ISVs, what additional payment methods are offered will depend on the size of your company, your vertical or industry, your customer profile and a host of other factors. A knowledgeable integrated payments partner will help you determine which options are best for your business. 

The benefits of integrated payments

While integrated payment and embedded payment solutions significantly benefit consumers, the benefits to ISVs and SaaS providers are numerous.

  • Additional source of revenue: The software platform will gain a portion of processing revenue with their integrated payments partner. Revenue share will vary by company size, payment processing model and transactional volume, but can reach millions of dollars per year for larger ISVs. 
  • Elimination of manual reconciliation: Integrated payments eliminates the process of manually entering and reconciling transaction data into the software system. Not only is manual accounting time consuming, but it is also prone to errors and is not scalable with your business.
  • Cost savings: Many small to medium-sized software platforms don’t have dedicated accounts receivable departments to review payment information. Integrated payments create operational efficiencies, leading to decreased overhead and cost savings.
  • Client stickiness: Let’s be honest – there is fierce competition in today’s ISV market. It can be difficult to win business but once won, keeping it is crucial. When clients enable integrated payments through your software, there is less likelihood of attri

Choosing an integrated payments partner

There are many factors to consider when choosing an integrated payments partner, which will vary by what you want out of the relationship. Questions to ask yourself can include:

  • What is my desired revenue share from a partnership?
  • What kind of payment methods do I want to accept?
  • What level of payment security compliance do I want from my partner?
  • What kind of customer relationship management and support will I, and my merchants, receive from my partner?
  • How involved do I want to be in the sales process?
  • How quickly do I want to board merchants for payment processing? 

Starting with these questions will help you determine the best integrated payments partner for your business – whether that is a traditional payment processor or a payment facilitator, also called a Payfac.

The Payfactory difference

Formed by payments industry veterans, Payfactory enables ISVs and SaaS vendors to effortlessly integrate or embed payment acceptance into their platform. A true Payfac-as-a-Service, Payfactory provides immediate onboarding, digital payment acceptance and is gateway-agnostic, meaning that you can quickly enable Payfactory on your current payment platform, or partner with Payfactory’s preferred payment gateway, Bluefin.

We believe that merchant processing for ISVs can be simplified without sacrificing support. Partnering with Payfactory means white-glove, human-centered service for our partners and their merchants. That’s the Payfactory difference. Learn more about our platform.