In brief: Nearly half of US small businesses now process customer payments through the software they use to manage their business. Software providers that do not enable this capability, but have a use case to do so, risk losing market share to competitors with integrated payment acceptance. This article provides information on the benefits integrated payments deliver to software companies, what to look for in a payment partner, and why now is the time to pull the trigger.
Software providers are continuing to disrupt the traditional payments ecosystem. According to a survey conducted by management consulting giant, McKinsey & Company, nearly one half of small businesses in the United States now use independent software vendors (ISV) to accept customer payments. The survey also revealed that another 15 percent are in the process of transitioning their payments to their software provider. Additionally, ISV integrated payments was reported to be the overwhelming preference of newly formed businesses. All of these insights suggest that the ISV slice of the payment processing pie will continue to grow even larger in the coming years.
One of the key drivers of this growth may be attributed to the desire of businesses to streamline and simplify their operations – even reduce the number of vendors they work with. Running customer payments through the same software they use to run their business is more efficient and theoretically more cost-effective. I use the word “theoretically” because it often doesn’t turn out that way for businesses, but more on that later.
This shift in mindset opens the door to numerous benefits for ISVs that offer integrated payments as a part of their solution.
Clearly businesses are transitioning to software integrated payments. As a result, some may even say payments have become table stakes for software platforms that have a use case for them. A question you must ask yourself is “do my competitors have integrated payments?” If the answer is “yes,” and you do not offer integrated payments, it may impede your ability to close new software deals.
Integrating payments in your software allows you to compete more effectively. Competing for business is one thing; winning that business is quite another. With the right strategy, you can actually use integrated payments to win more software customers. It can be your competitive edge. Too often, ISVs view payments as just another feature. But software providers that think differently and use payments as a strategy to solve customer problems are the ones that cash in.
Case in point – a Midwest-based software provider was competing for the business of a fairly large retail chain. Winning this six figure software deal came down to solving one problem – and that was related to payments. While this ISV had payments already integrated in its platform, it had not kept current with the evolving needs and preferences of its users and their customers. If they wanted to close the business, they needed to modernize their program in four short weeks. The ISV was able to win the deal with significant help from a new payment partner. Not only was this deal won, the payment enhancements allowed this ISV to win additional new deals that it ordinarily would not have won. You can read the full case study here.
According to industry consulting firm, The Strawhecker Group and the Electronic Transactions Association (ETA), “software companies can make 10x more revenue by monetizing payments in their systems than from software license fees alone.”
While this is quite an attention-grabbing number, it’s important to note that not all payment partners share payment revenue with their software partners. That’s why it’s important to make sure you have a thorough understanding of specifically what is being shared before deciding on a payment partner for your program.
By all indications, the trend of payment processing through software will continue to expand. Your customers may already be inquiring about integrated payments. If your customers want integrated payments and you deliver it, retaining those customers becomes easier. On the flipside, if customers want it and you do not deliver it, you can expect to lose those customers at some point. It all comes down to customers’ needs and does your software meet those needs.
There are many different payment integration options available. Do you let your customers decide who they want to use? Do you go the Payment Facilitation (PayFac) route? What about a white label program where you actually own the branding of the payment solution?
For software providers with limited or no experience with payments, I do not recommend any option where you are responsible for providing the customer support function. The learning curve would be a bit steep. For this reason, consider avoiding the PayFac or White Label options. Both typically require more than just a cursory understanding of payments and processing.
The next question relates to the number of payment partners to integrate in your program. Integrating with multiple payment vendors can lead to a cumbersome and costly environment. It’s just not sustainable over the long haul. As a result, you may want to limit your partners to one preferred partner – maybe two, depending on your customers’ payment needs.
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There’s a lot riding on your selection of a payment partner. You must consider the modernization of their payment technology, their service and support model, as well as the values and integrity they deliver.
A good resource for understanding what to look for when evaluating a payment partner is this article, Five Things to Look For in an Integrated Payments Partner by Mark Wilson, the founder and CEO of a few different successful software companies. One of the items he specifically calls out is transparent pricing. While this doesn’t directly affect you, pricing transparency affects your customers. Unfortunately, it is not uncommon for a payment provider to take advantage of the customers of their software partners by sneaking in added fees. As your customers’ advocate, it’s important to weed out those payment companies from the get-go.
Key benefits of integrated payments include 1) Software customer growth, 2) Revenue generation, 3) Customer retention. Because businesses are rapidly making the shift to processing payments through software, it is in the best interest of software providers to deliver this capability or risk falling further behind their competition. Now is definitely the time to pull the trigger. A word of caution, select your partner carefully. Choose one whose technology and service meet your customers’ needs and whose values and strategies align with yours. Then, everybody wins.