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Author: Lewis Arnold

The Payment Processing Partnership

Businesses in search of a payment integration solution often are unaware of the array of payment facilitations available to them, and their respective downsides. Making a decision about a Payment Processing Partnership is a nuanced process with a range of options to explore.

There tends to be two approaches to choosing a Payment Processing Partnership:

  1. The Business Approach
    1. On the business side, a stakeholder with typically little coding involvement at all tends to look more at how a payment integration will affect their user base in the long run, as well as how the integration will enhance their bottom-line.
  1. The Developer Approach
    1. On the developer side, a stakeholder with a great deal of hands-on involvement with the application coding looks towards providing multiple payment integrations – much more of an agnostic approach to payments facilitation. Often an ACH Integration API is of value.

The facilitation possibilities include Utilizing a payment aggregation service, a Payments Partnership, Standard merchant account, Hybrid Aggregation, Becoming a payment aggregator yourself, and Third party processor-to-bank integration.

Utilizing a payment aggregation service

Developers like applications like Stripe or Square because of easy integration, great API, and reduced onboarding friction. Costs will be slightly higher than typical merchant accounts.

Other factors that should be explored such as:

  • How would increasing processing volumes be affected?
  • Account holds
  • What kind of customer service do the users of your application get when they need answers about payments processed?

The Payment Processing Partnership: An agreement with a processing organization to share revenue. In return, the merchant organization shares their leverage by way of their application-using market base. (Learn more about Payment Processing Partnerships)

The processing organization might also participate with:

  • Marketing support
  • Mobile application development assistance
  • Survey creation
  • Tweaking existing systems to meet the needs of the user base

Organizations who choose the Payments Partnership option are often price oriented. The sell price to their user base and/or potential profit to the SaaS organization’s bottom line is most important.

Understanding your Organization’s Leverage:

In general, organizations undervalue their leverage. Leverage is usually measured through application potential and existing transactional volume. Existing volume is easy to measure, but measuring application potential requires taking into account:

  • Market awareness of the potential processing partner
  • Where the application is at in development and a review of it by the potential processing partner
  • Organizational funding
  • Stakeholder history
  • Market data provided by the SaaS organization.

Standard Merchant Account

Choosing a processor who provides a merchant account to process means that every application user interested in processing payments (within the application) must complete a processing application and be underwritten. The amount of onboarding friction faced depends on a number of factors. SaaS application-specific boarding can be arranged, assuming there’s partnership potential.

Despite the friction, there are many pros, including:

  • Lower processing fees
  • Support of the application’s business itself.
  • Recurring revenue to the application stakeholders
  • Superior support
  • Recurring payments adoption plans plus implementation assistance from the processor

Hybrid Aggregation or Hybrid PayFac

Hybrid Aggregation can be looked at as managed payment aggregation. Let’s take a look at the aggregator example above. Imagine eliminating the initial expense, underwriting and risk mitigation concerns, compliance and legal expenses by having a specialized payments firm manage those aspects for you. The benefit is frictionless boarding.

Becoming a payment aggregator

The majority of time becoming a payment aggregator is not the right fit for a business. Businesses are captivated by the thought of frictionless onboarding without taking into consideration the compliance, expense, risk mitigation, legal work and staffing concerns that they didn’t know about.

Third party processor-to-bank integration

This model basically only refers to ACH Payments (e-checks). Employing ACH processing usually benefits software applications whose using companies have recurring payments needs. Costs are lower and bank accounts don’t expire or get closed near as often as credit card accounts. However, underwriting can be harder in this case, and poor underwriting is the leading cause of this model’s failures. By the same token, many ODFI banks have very strict policies that prohibit certain types of transactions, some you wouldn’t think would be considered high risk.

Make sure you understand all available options, and the accompanying pros and cons before choosing a Payment Processing Partnership.