Breaking Down Embedded Payments: The $75 Billion Market Opportunity

Embedded Finance Series, Part 3

By Michael Bradley, Senior Vice President of Growth, Infinicept

The embedded payments conversation right now is downright confusing.

Part of the reason for that is the sheer volume of terms used to describe some of the approaches to the space, like PayFac^®, payment facilitator, merchant of record (MOR), embedded payments, software-led payments, just to name a few.

And then there are a few guys out there touting “PayFac-as-a Service”. Say what?

So, let’s use this space to break it down more simply into what you really need to understand.

Definition:

Embedded payments is the seamless integration of a payments function and process into a software application, whether B2B or B2C. And right now, it represents an enormous and growing market opportunity as seen in this diagram below.

Historically, software platforms that wanted to provide their customers with access to payments would commonly refer them to outside payments providers, either as referral partners or as “integrated payments”. Increasingly, however, payments are being embedded into software with a variety of approaches that can be seen as a continuum. We break that continuum down primarily into the following:

• Branded payments, sometimes known as payment facilitator lite (PF Lite)
• Hybrid payments (act like a full payment facilitator, and share in some risk/operational responsibilities))
• Payment facilitators

Understanding these models fully requires an understanding and appreciation of the core payment operations required to support any model in embedded payments:

• Merchant Onboarding
• Underwriting
• Risk & Compliance Monitoring
• Funding Operations

And choosing the right model for you depends on the answers to these three fundamental questions:

• How much of the customer experience do you want to control and integrate into your offering?
• How much risk and responsibility for operational processes will you undertake in exchange for control of that experience and richer economics?
• How strategic is payments as a value driver for your business, in both the short and long term?

A simple rule of thumb would be: The more you answer “a lot” to the above questions, the farther you will travel along the continuum to literally embed payments into your business. If these considerations are important to you, you would consider:

• The Payment Facilitator (PF) model. The Payment Facilitator is an official designation acknowledged and regulated by the card brands (and their affiliated payment processors). The PF model provides the most latitude for an organization to market, sell, underwrite and manage payment processing services. In effect, becoming a Payment Facilitator means you are an acquirer and control your destiny (mostly, if you have some foresight!).
• A hybridized PF model. Looking back in time, we could make the argument that wholesale ISOs have enabled this sort of “hybrid” model, but today leading payment companies such as Stripe and Adyen are at the forefront of enabling flexible software led payments businesses. For the most part, when thinking of a hybridized model you exchange key elements of merchant control and experience to the payment company, for less complex operations management. Adyen is unique in that it enables both full Payment Facilitator and hybridized models.
• Or even a channel model, sponsoring other software partners and becoming a “PF lite” enabler yourself. We are observing this channel enablement as a growing strategic driver in both established payments companies as well as software platform companies making aggressive inroads into payments. (You need to be a payment facilitator but contact us for the details).

The more you answer “We’re not sure,” or “We might get to it in the future,” the more you would consider embedding payments using options on the “lite” end of the spectrum:

• The branded payments (PF lite) model. As a software platform company, you leverage “new school” interfaces to present a branded, seamless experience to your merchants. However, your processing partner – what we call a “PF Lite Enabler” or “Managed PF”– owns the operations related to underwriting, risk monitoring and funding. A PF lite approach means you may have some discretion in pricing, and enjoy a decent revenue share, but you will have no control over the merchant experience other than marketing and first level relationship management.
• The referral model (old-school, but certainly still appropriate for some businesses) enables software companies to make a commission with respect to those merchants who utilize the payments services which are pre-integrated into its platform. For simplicity’s sake, we’ve included the “integrated payments model” into this category; the main distinction in our view is that with either the referral or integrated payments approach, there is a clear division a merchant needs to navigate between the software platform and the payments provider when it comes to UX and supporting payment processes such as: reporting, reconciliation, funding etc.

As the emerging embedded payments space has matured, new concepts have been introduced and defined while some in the industry continue to use outdated terms from models that no longer serve the market well.

This can make sorting out the options feel even more challenging. But it doesn’t have to be. Ultimately, the question of embedding payments into your software application comes down to clarifying the role of payments in your business strategy and outlook and then finding the best fit for your business model. Building optionality into both your platform and operations is really at the foundation of any successful, scalable embedded payments strategy.

® PAYFAC is a trademark of FIS and its subsidiaries. Used with permission.