Five Considerations When Developing an Embedded Payments Strategy

Before engaging a payments partner, software companies should develop a payments strategy

Cloud technology, code-programming developments, the COVID-19 pandemic, and general cultural shifts are driving the world’s merchants to increasingly leverage embedded software solutions that bring together a variety of operational functions within a central place.

Increasingly, payments companies are looking to embed more value-added solutions, such as inventory management, scheduling, and more, to their offering. Software companies are looking to embed payment processing capabilities into their platforms. Both entities have the same goal; create more value for the merchant by providing streamlined solutions. This goal is driving closer cooperation and integration between software and payments.

Making a Plan

Getting involved in the payments space requires careful planning. Software companies must determine their risk tolerance, the amount of resources they are willing to dedicate, the type of payments partner that would fit their operation, and more.

Below is a general framework for software companies to consider:

Get organizational buy-in
- Software companies need to understand how payments and payments monetization fit into their strategy, and to what extent. Going a long way involves ensuring that management aligns and implementation leaders fully grasp the vision.
  - Example: TSG analyzed 130+ software companies serving the field services set of industries (e.g., landscaping, plumbing, pest control). Finding that 67% have a payment processing feature or expect to add one soon. Software companies in this category without a payments offering may need to consider one to remain competitive.

Define goals
- Software companies will want to determine what metric(s) define success as it relates to monetizing payments. Is there a revenue goal, a customer retention rate, and a greater desire to control the user experience further for operational singularity and efficiency?
  - Example: TSG’s AIM analytics platform shows that merchants integrated into a software company for payment processing have ~5% less attrition than non-integrated merchants when comparing annual payment volume attrition.

Determine risk appetite
- Software companies will need to determine the levels of risk they are willing to take on. Since payments monetization can bring in a variety of risk aspects, ranging from merchant underwriting, transaction fraud, chargebacks, reserves, regulatory awareness, and more. There are payment processing monetization models for software companies that involve low risk, and others that involve high risk, each with unique levels of reward.
  - Example: Twice per year (Spring and Fall), Visa and Mastercard update their regulations and fee tables which can impact payment processing and risk activities.
  - The need to underwrite or clearly understand a merchant’s financial health is critical in managing ongoing risk.

Define resources
- Once the initial groundwork has been laid, software companies will want to determine their needed resources, including software tools and staffing.
- Payment processing partners that support software companies ideally have programs to optimize payment processing opportunities for their software company partners.
  - Example: Software players will want to dedicate time and staff and connect with their payment processing partners so they can continually adapt to new payment methods in the market, enhanced experiences (such as smooth mobile payment functionality, text to pay, and more)

Lay out internal and external processes
- Clear and communicated processes can go a long way in avoiding pitfalls in payments. Details on eligible merchants, application processing, developer documentation, etc. must be defined. More broadly, determining which aspects of operations are managed by the software company vs. their payments partner will be key. It is recommended that software companies and their payments partners have regular status meetings marked by transparency in conversation.
  - Example: Selling payments can require expertise in positioning the features and benefits to prospective merchants. Staff members must understand ongoing costs, authorization and settlement processes, timing of funds deposits, support model, point of sale hardware, among other things. Some software companies do not want to dive into payments as it is not their core competency. Instead, they wish to outsource as many payment processing activities as possible to a trusted partner.
  - Once a merchant gains approval to accept payments through a software company’s system, they must initiate a new process. The software company must collect key account information to satisfy fund transmission, tax-reporting rules, and compliance checks. Collection of this information can take place in several ways. Payments partners are working to move from traditional lengthy paper processes to streamlined, web-based collection methods.
  - Merchants will always have problems and questions. Beyond the core functionality of a software system, payments can bring its own set of unique support challenges. Questions around transaction fees, deposit timelines, and remittance challenges are potentially regular support discussions to work through with merchants. Many software companies work hard to develop their brand and create a consistent user experience within their platform. Good processes make this happen.

Software companies are monetizing payment volume into meaningful revenue streams via stickier users, resulting in higher profitability and valuations. As software companies, private equity firms, and other stakeholders continue to take on more traditional payment roles, education and collaboration between individuals from these groups will become ever more important.

Payment processing is an industry full of nuances, regulations, and changing technologies. Understanding trends, participant roles, and regulations will ease the transition to a connected future.

Software companies come to TSG when they seek to enter payments and uncover new revenue streams from their merchant customers. For example, TSG helped an ISV serving the manufacturing industry create $1.7M in new annual revenue. Looking to drive revenue? Let’s start the conversation.

The ETA community is here for software companies. Upcoming events such as the Strategic Leadership Forum and TRANSACT Tech in NYC actively bring together leaders, innovators, and investors in payments to discuss trends and explore new opportunities. Paired with the Transactions Trends publication, ETA provides a wealth of support for those on their journey to payments.