The e-commerce sector is rapidly growing; independent software vendors (ISVs) and merchants are looking to capitalise on this through the use of payments technology. However, this can prove to be challenging as maximising returns from growth often comes down to convenience.
While merchants and ISVs are focused on delivering a seamless digital experience for their customers, they should be equally focused on generating revenue from integrated payments.
There are a number of factors for merchants and ISVs to consider in monetising the payments journey. First, how easily they can adopt the necessary components of a rejuvenated ecommerce offering into their own payment stream. Second, the amount of friction in basic hygiene factors, such as payments integration and transaction tracking. Third, how seamlessly will the ISVs toolkit or platform integrate with their branding, workflows, data management and financial processes.
One way they can generate revenue is by minimising shopping cart abandonments, which in most cases occur due to payment friction when customers find payment processes too complex. However, low buying intent or technical issues can also be reasons for this. Streamlining payment procedures, supporting a range of payment options and enhancing user experience – for example via clear progress indicators on checkout pages – may all help.
ISVs, meanwhile, have a trump card; overt measures such as collecting platform fees can be another way for them to successfully monetise the payments journey. “The fees and rates need to be competitive and in line with what other platforms are charging, unless there is justification why they fees are more expensive,” explains Liam Turner, PayFac specialist at PayFac partner Pay360. “The software platforms need to meet the needs and requirements of their sub-merchants. For the software platforms quick payouts of funds is essential.”
According to GlobalData, the digital payments market was valued at $2,476.8 trillion in 2023 and is expected to grow at a compound annual growth rate (CAGR) of 14.3% between 2023-2026. Opportunities abound for merchants and ISVs to monetise this expansion.
The PayFac opportunity
As the ecommerce sector evolves, brands increasingly want a fully integrated ecommerce offer or the option to adapt it to circumstances and innovation at speed. Therefore, a PayFac model is becoming a must-have for ISVs and platforms hoping to manage the complexity of payments processing.
Payment facilitators (PayFacs) were popularised in the 1990s, created to enable small and medium-sized enterprises to accept payments online. They help customers take payments, ensure that relevant due diligence checks are carried out on all new customers (including anti-money laundering checks) and monitor customer accounts to mitigate risk.
In the past, many small and micro-merchants would rely on cash-only commerce due to friction in the onboarding process. However, they are now being supported by PayFacs who have made it simpler so small retailers can accept credit card payments across retail and online.
“PayFacs allow software platforms to effectively offer a cohesive payment experience to their customers without the arduous processes typically associated with acquiring a merchant account,” explains Turner.
“The software platform or ISV is earning revenue for having a payment component as part of their software. For example – our rate may be 1% and £0.10. The software platform adds their margin 0.5% and £0.05. This would be their commission or mark up,” they add.
Yet, according to Turner, one of the key challenges in monetising the payments journey is for the software platform to strike a balance between offering competitive rates and earning a commission.
“If the software platform offers extremely high rates for the sake of earning a large commission, this may put off sub-merchants who will be paying the fees. If the platform is market leading then it justifies having higher rates and fees,” Turner explains.
The emergence of new technologies is transforming the payments industry. Well-established companies are investing heavily in new solutions through mergers and acquisitions to ensure they maintain their market share and can compete with fintech startups disrupting the sector.
Amid growing competition among industry players, merchants and ISVs are increasingly seeking to future-proof their solutions. Capitalising on the payments journey can enable them to do just that.
Pay360 is one PayFac partner that is focused on supporting ISVs in payments processing through its payments solution. It helps them earn revenues via payment streams, segment customers to set different fees and start generating new cashflow quickly.
The company’s Evolve solution, a licensed and regulated payment facilitator platform, gives companies control over the customer journey and enables them to acquire new clients. Companies can monetise their payments by earning revenue for every payment through the Evolve platform.
Further, Evolve allows ISVs to earn a commission from payment processing revenue depending on their business model. It also enables them to set bespoke payment fees for different customers and segments. As a result of this, ISVs have the option to charge a platform fee on every transaction by setting the fees at the point of transaction – providing them with a brand new revenue stream.
Payment providers need to understand that every touchpoint and transaction creates an opportunity for monetisation. Payments being viewed as a commodity bolt-on risks fragmenting the customer experience and could lead to missed revenue opportunities. “Payment providers should own the payment experience by offering a unified payment journey for all sub-merchants and their customers,” says Turner.
Payment networks continue to heavily invest in the growth of PayFacs globally. Through owning more of the customer’s payments process, merchants and ISVs can expect to see a significant increase in payments revenue by adopting the PayFac model.