The payments industry, despite significant advancements over the past decade, remains plagued by opaque pricing, technical complexity and service issues. At Forward, we want to change that.
Embedded payments is one of the major innovations in the industry. It involves integrating payment processing capabilities directly into software applications, platforms, or services that are not primarily focused on payments. Users can complete transactions within the context of the service they’re using, without being redirected to external payment gateways. This is made possible through APIs (Application Programming Interfaces), SDKs (Software Development Kits), Boarding tools, Merchant Accounts, and Payment Gateways.
The Advantages of Embedded Payments
For both merchants and customers, embedded payments offer several benefits:
- Seamless User Experiences: Transactions occur within the same environment, enhancing convenience.
- Efficiency: Reduces the need for multiple steps, speeding up the transaction process.
- Customizability: Payment solutions can be tailored to fit the specific needs of the business.
- Data Insights: Provides valuable data that can be used to improve services and increase revenue.
E-commerce companies, Uber, fintech platforms, and SaaS businesses are increasingly relying on this development. According to JP Morgan research, integrated payments could account for 50% of the $8 trillion US market by 2030. However, the pricing models for these services are often unclear and unfair.
Technological Advancements and Transparency
At the same time, advancements in technology aren’t slowing down. The development of low-code and no-code tools, for instance, is making it easier for software companies to integrate payment solutions quickly and efficiently. This reduces the time to market and lowers the technical barriers for adoption.
The key consideration for SaaS platforms is the ability to extend their products to include payments WITHOUT their customer leaving their brand. This is easier said than done, and requires thoughtful design to ensure on-going day-to-day payments operations can be facilitated by the payments brand without disjointed hand-offs. Forward solves this problem.
Traditionally, processors “acquired” merchants/payment traffic one by one, which is VERY expensive, especially when dealing with long tail SMBs. Integrated payments leverages the fact that the software company has already acquired the customer to lower the cost of acquisition. Those savings should be passed along to the software platform as revenue, but oftentimes they are not.
Additionally, the essence of being a PayFac is owning the backend infrastructure, where merchant fees are applied and funds are split between multiple parties and settled. Many PayFac enablers take a short cut and rely heavily on a legacy backend, which gives companies like Forward a significant advantage, enabling features like embedded lending, where merchants can receive loans based on their transaction history, with repayments automatically deducted from future sales.
Transparency in the payments industry is becoming increasingly important. Traditional payment processors have:
- Charged merchants fees that software companies do not share in
- Assessed “schedule a” costs that take proceeds off the top before revenue shares
- Most recently, some payment software providers have assessed 25-40 bps on every dollar settled (or paid out) to merchants
These tactics often double or triple the cost of payments to a SaaS platform. Because of these games, they rely on contractual lock-in to make leaving difficult when their business practices are discovered.
On top of payments, embedded financial products such as lending, insurance, and payroll are becoming more common. These products provide additional revenue streams for software companies and improve the overall service offering to their customers. While some offerings like issuing and treasury services have not seen widespread adoption, others like embedded lending are gaining traction due to the need for accessible capital among small and medium-sized businesses.
Challenges and Considerations
If you’ve been following fintech for the past few months, you’ll know that the industry is facing a number of challenges, the most notable being security, compliance, and competition.
Security and Compliance: As payment integrations become more sophisticated, ensuring security and compliance with regulations like PCI-DSS will remain a critical challenge. Companies must invest in robust security measures to protect sensitive payment information.
Market Education: There is a need for education and strategic services to help these companies optimize their payment solutions and maximize revenue.
Competition and Market Dynamics: The competitive landscape includes both traditional payment processors and newer PayFac enablers. The key differentiator will be the ability to offer transparent, partner-centric solutions that align with the business goals of software companies. Collaboration and “coopetition” (simultaneous cooperation and competition) are common in the payments industry. For example, Stripe has partnered with Fiserv for certain backend processes despite being competitors in other areas.
Long-term Vision
The ultimate goal for companies like Forward is to bring transparency to the payments industry, eliminating opaque pricing and other practices designed to benefit the payments industry over the software platform. This will level the playing field for software companies and allow them to fully capitalize on embedded payment opportunities. In five to ten years, the industry should see a significant shift towards more equitable and efficient payment processing solutions, with software companies playing a central role in driving innovation and growth.
Embedded payments are set to revolutionize the way transactions are processed across various industries. The focus on seamless integration, transparent pricing, and strategic partnerships will drive this transformation. Companies that can navigate these changes and leverage the latest technological advancements will be well-positioned to lead the future of embedded payments.
At Forward, most of the software companies we’re adding each week are converting from legacy or DIY platforms because the business side of “integrating payments” failed to meet their and/or their investors’ expectations.
We are a team of ex-SaaS founders/builders that learned the complicated world of payments while inside of a Fortune100 behemoth and we are now leveraging that know-how to help you – SaaS founders – succeed. Reach out to get a no obligation, no strings attached assessment of your current payments set-up.
