While becoming a payment facilitator appears an obvious choice for SaaS businesses, there are factors to consider with respect to pursuing aggregation or facilitation. Each business profile is different and distinctive around levels of maturity, client profile type and cash flow should all be weighed.
Here are the five key components that make payment facilitation a viable option:
1. Available capital.
Facilitation is a development intensive effort. Associated payment facilitation costs, including engineering, due diligence and maintenance, can easily exceed $50,000 annually.
Risk mitigation and compliance requirements mean devoting full-time headcount to focus on ongoing payment infrastructure maintenance.
3. Payments understanding.
Pursuing payment facilitation means taking on additional obligations. Companies need to intuitively understand what can go wrong. They also need to know what comprises their financial costs (and what can be done about them!). Finally, they need to know where they are exposed to financial risks.
4. Critical mass.
To clear the setup and ongoing maintenance expenses of facilitation, you need to generate enough offsetting revenue. Without enough clients (at least a couple of hundreds) and subsequent volume, you’re unlikely to have the revenue needed to cover the costs involved.
Consider this example. As merchant of record, let’s say you are able to net .4% on every credit card transaction processed. If your base processes $10,000,000 per year in aggregate, you would drive $40,000 in revenue. If the average business processes $5,000 per month you need 170 clients to make the $40,000.
So if your ongoing annual costs related to payment facilitation are $100,000, you can see why there is a need for a sizeable, active base or the growth prospects to justify the investment.
5. The right client base.
For a SaaS provider, payment facilitation may have a cost basis of 2.4% or more. To sustain the facilitation process, you need to sell your clients at a reasonable margin – likely 2.*% or more. For more sophisticated businesses, the incremental payment processing fees may be material and become reason to stick with a traditional merchant account.
On the other hand, for smaller businesses the convenience of the application makes paying higher payment processing fees worthwhile. Rationalising your decision should take the nature of your client base into account. As you begin to explore the payment facilitation process, keep in mind the above factors.
If costs, risks and compliance are concerns, you may consider hybrid payment facilitation or aggregation. While your cost basis will start substantially higher, upfront investment costs are lower and revenue generation potential remains strong.
And if you may have a client base more disposed toward higher fees or strong subscription revenues to offset the reduced margin, the hybrid approach may be attractive.