photo of Caleb Avery

Integrated Payments 1.0 vs. 2.0

In the world of payment processing, the turn of the decade represented a massive transition for the industry. With companies like Stripe, Square and PayPal pioneering the payment facilitator or “PayFac” model, the era of Integrated Payments 2.0 began. 

The PayFac model was defined by the idea that one company could register as a “Master Merchant,” with an unlimited number of sub merchants underwritten beneath them. Unlike the 1.0 era, where every small business was required to apply with a bank (often through hard-copy applications) and be approved for their own merchant account, these new Master Merchants were able to approve sub merchants nearly instantaenously. Because these PayFacs were willing to take on the risk for their sub-merchants, they were also able to create a fast and frictionless set up process that has driven millions of businesses to sign up for services powered by these master merchants.

For SaaS businesses and B2B software companies, the instant signup aspect and easy technical integration of Stripe, Square and Braintree is a major reason why these services are often the first choice for modern software businesses.

Integrated Payments At Scale

But, as many SaaS and B2B software companies begin to scale, they quickly realize they can no longer afford to pass through all their payments processing costs — and profits — to providers like Stripe, Square, and Braintree. At a certain point, monetizing payments isn’t just a nice idea — it’s a necessity. There is simply too much volume, and too much potential revenue, to let these managed PayFacs take all the margin. More on that revenue potential here: How to add $500k in revenue.

It’s at this point that many software companies are forced to make a choice: stay in the Integrated Payments 2.0 world and begin the long process of becoming their own Payment Facilitator (which, even with the help of the many PayFac-in-a-Box providers, could take months, millions of dollars and may not even be worth it for years), or return to the era of Integrated Payments 1.0.

Return to 1.0

Unfortunately, many software companies reach this dilemma and decide to take a huge step backwards in their customer experience by returning to Integrated Payments 1.0 in order to start monetizing payments. 

The first step in that process is to find a gateway provider like NMI or they can integrate their product into. This can take months of interviews and negotiations to ensure they have the right combination of technology and capabilities for their specific business. Once that is done, you then must find a legacy processing provider or ISO that can handle the payments and connect with your chosen gateway. This process will also require negotiations over your referral relationship and Schedule A, which means more time and more money (lawyers are not free). 

Once that is all set up, the software company can start making some money off their payments. Unfortunately, they are passing the same long, arduous signup process they just went through on to their customers. In order to set up a merchant account under an Integrated Payments 1.0 model, customers are required to fill out paper applications, provide substantially more information in order to complete the full underwriting process, and go through a manual review and possibly even a site survey in order to be approved. It is far from an automated process, and can take days if not weeks to complete. 

For customers used to the streamlined and frictionless onboarding experience of Stripe, Square and Braintree, this process can be a dealbreaker.

Costs of Integrated Payments 1.0

For software companies that go down this route, it can also cost them more than customers. Often, because they are not experts in payment processing, ISVs and software companies may not know what “fair rates” or a “fair schedule A” are when negotiating with their chosen gateway provider and legacy processor. Without knowing the industry, it’s entirely possible even large companies with more than a billion dollars in payments volume per year negotiate a revenue share below 50 percent (we have actually met a company in this situation). For all the work and sacrifice in product experience, many of the companies that go with an Integrated Payments 1.0 model don’t even end up making nearly as much money as they hoped they would. 

Past the signup process, they may also be passing along poor UI and UX to their customers as well. Many gateway processors haven’t updated their customer experiences in a decade or more. Customers may lose access to the customized reports and receipts they were used to with Stripe, Square and Braintree. 

Yet another sacrifice these companies are forced to make is to their cash flow. Often, legacy processors’ payouts for revenue commissions are the 25th of the following month. Meaning, any profit they make on transactions from July 1st aren’t paid out until August 25th. Compared to the payment facilitator model, where commissions from transactions on July 1st are in their bank account by July 3rd, it can cause major cash flow challenges.


A final note of caution for any software companies currently facing this choice: consider portability

Often when making this decision, companies are not forward thinking or taking into account what a future transition may look like. If, for instance, they are considering using an Integrated Payments 1.0 model as a short-term option that will start them making money off payments while they grow enough volume to justify becoming their own PayFac, you could run into several pitfalls if you’re not careful.

The first one is data. While working with a legacy processor will require more data than managed PayFacs, many software companies do not retain a copy of the application data for their merchants. If you ever decide to switch processors or become a PayFac yourself, your customers will likely have to go through yet another sign up process. This can cost you time, money, and even customers if you don’t handle the transition properly.

Depending on your processing agreement, your merchants may also lose access to their historical processing data. Or be forced to maintain logins for two separate dashboards just to access this old data. Suffice it to say, this is less than ideal.

All of this only matters if your agreement with your processor allows you to switch your merchants to another processor in the first place. 

With most legacy processors and ISO referral relationships, the processor or ISO is the one who actually owns the merchants accounts and the data. This can mean that software companies are either unable to move their merchants, are forced to pay a ridiculous (arbitrary) portability fee, or wait years to move their merchants.

Oftentimes, these contracts with processors will include a tail period to handle moving accounts at the end of the relationship. Often, that portability window doesn’t match up with the residual window. If, for example, your residual window is two years, but your portability window is three, a company could lose a full year of income (or pay the processor an extortion fee) before they are able to move accounts. 

Even once you do secure portability, it can be very difficult to make a switch without data. Processors will often retain their rights to tokenized payments information and transaction data, which can be hard to recollect and, especially for businesses that rely on a monthly subscription model, cost customers. 

If you think we’re being a bit too harsh on legacy payment processors, recognize that we have been them ourselves, and we know how they work. They write their contracts this way because that’s how they want to, and your business will be no exception to their rules. As you scale and your volume becomes larger, they’ll fight even harder using these means to keep you. 

So Why Try Tilled?

With our years of experience in Integrated Payments 1.0, we truly believe that payment facilitation and Integrated Payments 2.0 is the future. We know that returning down the antiquated road of legacy processors and gateway partners is not what software companies are looking for, and not what they need in order to succeed. We also recognize that it takes a lot of payment volume to justify becoming your own PayFac, even with the help of PayFac-in-a-Box companies. But we reject that these two options are the only choice. 

At Tilled, we are proud to provide SaaS companies and ISVs the experience of Integrated Payments 2.0 with the economics of Integrated Payments 1.0. With our easy-to-implement API,  modern UI/UX,  and frictionless customer experience, we have all the benefits of Stripe, Square and Braintree, along with a significant revenue share and no additional overhead, liability or hassle that can beat out many legacy processors. With Tilled, we have bridged these two eras, allowing companies to achieve their economic goals without sacrificing their product.  

We also allow all of our partners the ability to move your accounts, at any time. Your data is yours, and if you decide to take it somewhere else, we’ll happily facilitate that transition. If you ever feel like you need to move on from Tilled — though we can’t imagine why — we won’t hold you hostage. 

Software companies shouldn’t have to choose between the frictionless experience of a PayFac and the economics of working with legacy processors. That’s why we created Tilled.

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