One of the phrases we use a lot is “Building a payments business is hard – we make it easy.”
Fundamentally, building a payments business is the problem PayEngine is trying to solve. So what makes payments hard? For starters, it’s the complexity of card networks, processors, gateways, acquirors, software tools, APIs, data collection, KYC (Know Your Customer), and the like. This becomes overwhelming very quickly. But it’s also doable with a bit of time and breaking down the problem.
That being said, this is only part one. A credit card is fundamentally a promise to pay; to fund the transaction. There is risk here regarding the money actually coming through. And then the networks and banks offer their own level of guarantees – mostly to the consumer – allowing for disputes and merchant chargebacks. The businesses themselves may be risky, they may underdeliver on their promises and services – so that adds underwriting risk. Coming back to vertical SaaS for a moment – who should underwrite the risk? The vertical SaaS software company? The merchant? The bank? The processor? If you don’t know who is holding the risk for your SaaS company, that may mean you are. Ouch. This is hard indeed.
Handling many merchants. Traditionally the merchants themselves would apply with their bank, an ISO, or directly with a processor. They would need to provide all the necessary information, demonstrate their track record, and get underwriting approval. Software companies, in their desire to simplify this process, often try to skip a few steps here, making it easier for the merchant, and making onboarding seamless. Good in theory, and good for their user experience. But underwriting is real. Regulatory requirements are real. Each merchant is unique and the level of data needed is beyond what a typical software company would be gathering.
Risk in your merchant client base. Not all merchants will be great businesses. It’s normal. Many are fine. Many will be low risk. Some will not. A software company is not in the business of saying no. Underwriting is often new. Most software developers operate in a very un-regulated field, with HIPAA and software in the medical field being the most common exception, and even those companies typically try to very much limit their exposure and decide to stay mostly on one side or the other (marketing / non-HIPAA tools or only authenticated HIPAA messaging). Building all of this yourself is a lot of work. Hence most software companies outsource this to a big, easy to use processor. In doing so, they become hostage to that same big name payment processor.
Expanding across geographies and categories. The beauty of software comes in its ability to scale. Write the software once, have many clients use it - even across country lines. Some work to localize – and then viola, another market. Throw payments or fintech tools into the mix, and suddenly there’s another large obstacle. The processor you used for one country might not work in the next. Or, rates will get limited in each. Or that new category you move into has higher risk / lower quality merchants – and now your process is lowering your rates across the board. Worse, some merchants will be denied, and then what?
Dealing with Operations. The challenges above start as software issues, but quickly turn into customer support and operational issues. Your payroll will feel the pain. It’s a lot of hours getting each and every merchant onboarded. The revenue percentages are small, and now your team is spending a lot of time researching chargeback issues or helping finesse KYC documents for approvals. Oh, and now you need multiple fee schedules, rate schedules: by company, by card, by country, by category. The operational headache here can quickly outweigh the margin with the rev share rates offered by those major processors.
Onboarding and Scaling. The more you try to grow here, the more these problems come up. Payments businesses have higher operational costs than most software businesses and lots of unique use cases. At PayEngine, we often play a tier 2 or escalated support role for any of the payments or fintech features you offer. We have the dedicated team and knowledge to help, that often the smaller vertical SaaS company doesn’t. Also, we deal with every major processor all the time. We know what each offers, and the challenges required by each. We also know when you should look at a different processor altogether.
The Risk and Reward of multiple processors. This happens to every vertical SaaS company. You get into payments because you know it’s extra revenue, it helps lower churn. You invariably choose Stripe or some other big name, as they have the tools, it sounds easy. You don’t pay much attention to risk or revenue share. The numbers are small, after all – for now. You pick one, and get up and running. Operational challenges strike first. Then you start to get the hang of it. The numbers go up. Wait, the rev share you are getting is paltry. You need to switch processors. You get offered a better deal. Now what? Do you rip out processor 1? Do you build in logic and code to both? Wait, that big name processor is holding you hostage because they did the tokenization. What now? This is where we come in. We have answers to all of these questions.
Accounting Integration and Reporting. This one deserves a much longer post. Reporting is always an issue. And the reporting here is on fractions of pennies – which can cause reporting headaches given the volume. We have direct integrations with your accounting provider, much better tools than the processors themselves. You’ll need this too.
The Main Goal: Growing Revenue from Your Payment Processing
The trick? Get a great buy rate. Don’t get stuck on one processor. Don’t let your processor do the tokenization and eventually hold you hostage. Scale. Do more yourself - or use PayEngine so you can do it yourself but without having to build it.
So there you have it! Running a payments business is hard. That is why we exist. We want to simplify all of this, while giving you – the SaaS company – back control. Don’t be held hostage. Don’t settle for too small a piece of the pie. Get the buy rate you deserve. And get the right support so you don’t lose all that extra margin to your own payroll.