Taking A 360-Degree View Of Payments Monetization

Payments, done well and done seamlessly, can open up additional revenue streams for marketplaces and software companies – a new avenue of growth that can flow quickly to the bottom line.

“The monetization piece is what SaaS companies and platforms are really intrigued by,” Christopher Connor, chief client officer at Payrix, told PYMNTS.

And, as Connor stated, getting to a successful – and rewarding – level of monetization involves taking a holistic look at those firms’ operating environments, owning sales and pricing and managing the data and risk that is associated with payments.

It’s likely no surprise that data is key, and is the tailwind that has been driving the evolution from traditional ISO/merchant services providers to value-added resellers to SaaS.

In the past, according to Connor, SaaS businesses were typically part of front-end processes for merchants and did not manage the end-to-end payments flow holistically. When those firms enlist Payrix to examine payments monetization, he said, “part of the conversation is understanding what their [merchant] customers are paying these days for merchant services – and especially for payments processing.”

The consultative aspect of Payrix’s relationships with the software firm can illuminate market pricing in particular verticals for services such as payments processing and facilitation.

“It’s becoming an ever-evolving conversation,” said Connor. “As PayFacs partner with software firms, the level of engagement can be extremely beneficial to the SaaS platform in terms of asking and answering, ‘how are we going to grow, and where do we want to grow?’”

Modeling The Spread

In order to get to a monetization model, he said, it’s important to understand not just merchant pricing, but also what the market will bear moving forward.

From there, Connor said, a pricing strategy must also factor in an effective rate tied to the MCC (merchant category code), which determines the interchange rates and fees paid by the merchant to issuing banks for card payments. The key is to maximize basis point spread, said Connor, which becomes part of the monetization strategy.

“We model that one to three years out – a waterfall model, if you will – and this shows the software firm at a high level what monetization opportunity may exist within that platform,” he noted.

Drilling down a bit, there are different monetization opportunities across verticals. Connor gave the example of the fundraising space versus the salon industry. There are published interchange rates associated with the different cards that make up the payment mix.

Verticals with a higher volume of debit cards – as might be seen with fundraising – interchange fees tend to be lower than might be seen across other verticals, which means the spread can be larger, impacting margins in a positive way.

Regardless of vertical, said Connor, it’s important to model the payments mix to get a sense of how they increase or decrease spreads.

Data As Intelligence

Data, of course, plays a role in spread optimization. Connor stated that nimble software platforms have granular levels of reporting that start at the transaction level, and create monthly analytics that can help spot trends among card mixes. “Having that data at the transaction level makes it possible to model and understand what the customers are ‘pulling’ to make the purchase,” he said.

Insight into the consumer’s spending behavior can provide insight into the risk associated with that end customer – and extrapolating that insight, including chargeback data, to the MCC level can help calibrate risk management.

Used holistically, data is also critical in streamlining other business processes, said Connor.

The PayFac platforms that own the end-to-end experience – from onboarding to risk underwriting and payments – can increase operational efficiencies and strengthen a firm’s financial positions.

“You start to see, from a product and inventory perspective, what’s selling and not selling well,” said Connor. “It allows you to take a step back and re-examine target markets and strategies.”