The concept of Embedded Payments isn't entirely new. It has evolved from traditional methods where payments were separate, cumbersome steps in the buying process. Over time, the need for smoother, more integrated payment solutions led to the birth of Embedded Payments, which allow transactions to be completed within a single, unified platform.
But what exactly are Embedded Payments? And why are they so crucial in today's fast-paced, digital commerce landscape? At the heart of these innovations are Independent Software Vendors (ISVs) and Software as a Service (Saas) companies, playing a pivotal role in bridging the gap between technology and commerce.
No group in fintech has in fact benefitted more than software platforms that are successfully capitalizing on Embedded Payments and other forms of Embedded Finance on a large scale. This trend is particularly prominent in the US, where numerous technology platforms now derive significant revenue from payments. Monetization typically begins with payment acceptance (pay-ins), but areas like payouts, lending, and card issuing have also become highly profitable for many of these platforms.
Examples of platforms thriving in Embedded Payments and Finance
Payments, however, remain a highly regulated industry and the moment a software company embeds payments into its platform, it must comply with the local regulatory framework. This requires companies to undergo a process leading to the issuing of they payment facilitator (PayFac) status. And the process can be more or less stringent depending on the country the software company applies for.
Why Payments Companies Partner with ISVs
Appetite of SMBs for Embedded Payments
The image below (credit: Adyen) shows the interest of small and medium-sized businesses (SMBs) in business accounts, cash advances, and issued cards on software platforms, by country and vertical. It is clear that SMBs are increasingly interested in these products and services, with a majority of respondents in most countries and verticals expressing interest.
Benefits for Payments Companies
Payments companies collaborate with ISVs to expand their reach and offer more comprehensive solutions to their clients. It allows them to tap into the existing customer bases of these software vendors and provide added value through enhanced payment solutions. By embedding payment functionalities into ISV software, they create a more integrated user experience, driving higher engagement, retention and satisfaction.
Benefits for ISVs
ISVs benefit from these partnerships by adding valuable payment features to their software, making their solutions more attractive to clients. This integration can lead to increased customer loyalty and a competitive edge in the market.
Market Demand and Trends
The demand for Embedded Payments has surged, driven by the growing expectation for user experience and speed. Businesses and consumers alike prefer payment processes that are quick, secure, and seamless. Some of the most common examples of Embedded Payments and Finance use cases include:
Payment processing: Payment processing companies (a.k.a. acquirers) are offering their services through non-financial businesses, such as e-commerce platforms and mobile apps. This allows businesses to accept payments from their customers without having to set up their own payment processing infrastructure.
Buy now, pay later (BNPL): BNPL services allow consumers to purchase goods or services now and pay for them later, often in instalments. BNPL services are offered by a number of non-financial businesses, such as retailers, travel companies, and furniture stores.
Cash advance: A cash advance, within the context of Embedded Finance, refers to the inclusion of instant or short-term cash advance services within a non-financial platform. For example, a retail platform may embed a feature that allows users to access cash advances directly through the platform, eliminating the need to use a separate financial institution. This integration streamlines the process, offering users quick and convenient access to funds without navigating external financial channels
Card issuing: A retail platform or a technology company can embed card issuing capabilities into their services, allowing users to obtain and use payment cards seamlessly within the platform. This integration facilitates transactions, payments, and financial activities without the need for users to go through a separate banking institution.
Comparison between US and EU/UK
North America remains the leader in integrated payments. 43% of the registered PayFacs today are ISVs or SaaS companies.
In the EU and UK, only 8% of registered PayFacs are software companies. While embedded payments are gaining traction in these regions, the registered PayFac model is still in its early stages.
North American PayFacs tend to be specialized by industry. As of 2024, 31% of North American PayFacs provide general consumer-to-business and e-commerce payment services, while the remaining 69% are specialized by vertical. Key sectors for North American ISVs include government and education, healthcare, fundraising, property management, membership services, mobility and vending, and hospitality.
PayFacs in the EU & UK are less vertically specialized and diversified, whereby 61% of PayFacs are consumer-to-business and e-commerce payments generalists, and 20% of PayFacs are financial services providers; the rest of verticals have < 4% of the PayFac list.
U.S. PayFacs are more commonly vertical software providers than European PayFacs because in Europe PayFacs are also required to be registered payment institutions whereas in the U.S., PayFacs are not required to have any form of banking license.
Models of integrations for ISV/Saas and Payments companies
The industry is moving towards a deeply Embedded Payments framework, where software and payment functionalities are intricately combined and controlled either by a singular entity or through closely woven partnerships between software and payment providers.
The amalgamation of integrated or embedded payments also presents an outstanding value proposition for merchants. An unified software plus payments platform evolves into a comprehensive solution for merchants, offering a singular point of service, data management and valuable business insights.
As depicted in Figure 2, the United States stands at the forefront globally in terms of product adoption rates for embedded and integrated payments (approximately 75-90% of Small and Medium-sized Business merchants are utilizing embedded or fully integrated payment solutions). Conversely, the United Kingdom and Europe lag behind in the fusion of software and payments at Point of Sale (POS), although e-commerce platforms in Europe are generally incorporating payments deeply.
As ISVs grow in size, they typically transition from basic referral partnerships to more sophisticated integrated operating models. In the U.S., larger SaaS companies have already adopted PayFac Lite or Full PayFac models, while smaller ISVs often stick to referral models due to the complexities involved in managing more payment-related operations.
Most ISVs in Europe and the UK still primarily utilize straightforward referral models to monetize payments. However, there's a growing trend towards implementing PayFac Lite operating models, where the SaaS providers are not directly involved in the money flow or regulated as payment institutions.
Strategies for Payment Companies to Partner with ISVs
Identifying Potential ISV Partners
Successful partnerships begin with identifying the right ISV partners. Payments companies need to look for ISVs whose software aligns with their payment solutions and whose customer base can benefit from integrated payment features.
Developing a Value Proposition
Once potential partners are identified, developing a compelling value proposition is crucial. Payments companies must clearly articulate how the partnership will benefit the ISV and its customers, emphasizing the added value and competitive advantage. This also comes in the form of bundled products. Beyond the unique features and value prop offered by the software company, commonly bundled products between ISVs and payment companies include payment gateways, fraud detection tools, invoicing systems, and analytics platforms. These bundles provide customers with a seamless experience, addressing multiple needs through a single provider.
Creating a Partnership Framework
Establishing a solid partnership framework involves outlining the terms of the collaboration, including revenue sharing models, integration processes, and support mechanisms. This framework ensures both parties are aligned and committed to the partnership's success. Revenue models include referral fees, revenue share, buy rate and even sales margin on the Saas price.
Regulatory and Compliance Considerations
Embedded Payments are subject to various regulations, including data protection laws, anti-money laundering (AML) regulations, and payment card industry (PCI) standards. Compliance with these regulations is essential to avoid legal repercussions and build customer trust.
Ensuring compliance involves staying updated on relevant regulations, implementing stringent security measures, and conducting regular audits. Both payments companies and ISVs must work together to maintain compliance throughout their partnership.
Adopting best practices such as encrypting sensitive data, using multi-factor authentication, and regularly training staff on compliance requirements can help mitigate risks and ensure that embedded payment solutions are secure and trustworthy.
Conclusion
Embedded Payments have fundamentally transformed the way businesses and consumers handle transactions, providing a seamless and integrated experience within various software solutions. ISVs and SaaS companies are at the forefront of this shift, capitalizing on the growing demand for faster, more efficient, and secure payment processes. As partnerships between payments companies and ISVs continue to evolve, both parties stand to benefit from new revenue streams, enhanced customer satisfaction, and increased market competitiveness.
However, while the U.S. leads the charge in the adoption of embedded payment solutions, Europe and the UK are gradually catching up, particularly as ISVs move from referral models to more sophisticated PayFac models. Compliance with regulations remains a key concern, requiring both payments companies and ISVs to stay vigilant and proactive in ensuring secure and compliant transactions.
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