VSaaS Platforms: Why the Time is Now to Embed Payments
Remember a time when consumers were nervous about making purchases online? Those days are long gone.
Today, rather than being skittish about sharing payment information, consumers are impatient and easily irritated by slow purchasing experiences. This is why companies have been able to expand subscription payments, store payment information, and more. It’s also why platforms are now able to offer embedded payments to their customers—creating a B2B and B2C payment experience that helps both the merchant and the consumer.
What are embedded payments?
Embedded payments are financial transactions integrated into a website, app, or platform that allow a user to pay without leaving the site or app. These are also known as in-app payments.
Embedded payment purchase experiences are expected to be seamless, smooth, and ask the bare minimum of the buyer to complete a transaction. The classic example is that of a ride-share app, where the operator simply charges the customer each time they take a ride. One might also consider something like Shopify, a platform that manages customers but makes it easy for business owners to opt into a shared—and embedded—payment system. This eliminates the need for each merchant to integrate payment service providers into their operations, or even collect customers’ financial data.
Benefits of Embedded Payments
Study after study has shown that reducing friction in the buying process increases success rates, leading merchants around the world to focus hard on simplifying the experience for their customers. The simpler the buying process, the lower the rate of abandoned shopping carts.
More importantly, for merchants with limited background in, or resources to devote to, building a payment system, platform-based embedded payments can represent a significant shortcut to getting live. For instance, a merchant on a shared commerce site like Shopify barely has to touch the payments end of their business. It can seem cheaper to use the embedded payments service, because those who opt out are required to pay a surcharge for bypassing the provided capabilities (though in truth, those fees expose the margins the platform is enjoying from being the payment services provider of choice.)
In a technological environment where simplicity is increasingly favored over unit economics and the distinction between capital and operating expenses has blurred, platform providers see embedded payment services as a business opportunity. For providers who are straining to add extra features and capabilities that their customers are willing to pay for, a service with a value-added markup attached can be a new source of revenue.
Imagine, for instance, a VSaaS platform delivering $100 million in services to a thousand customers.
Each of those customers themselves sells $11 million worth of products and services to their customers. If the VSaaS provider can have those customers’ fees flow through their systems, that’s $10 billion worth of throughput—even one-half of one percent (50 basis points) of margin would work out to $500 million in potential new net revenue.
Meanwhile, the VSaaS provider chooses how to recognize this revenue, emphasizing their business plan needs:
- Recognizing the $10 billion as revenue, with a .5% profit, vastly improves the top-line number while reducing overall margins.
- Recognizing only the fees collected (likely in the 3% range, so $300 million) results in a higher margin number (assuming the same 50 basis points, that’s a 17% total margin— and given that average net margins for SAAS range from 10-30% may help bolster the company’s margin story.)
How are platforms adding embedded payments?
Platforms are learning the lesson clearly taught by existing payment service providers: middlemen get a cut, and the more straightforward it looks, the more that can be charged.
Once a VSaaS platform establishes an expected clear revenue stream—let’s say the 3% from the last example—the platform can work to add additional fees (e.g., from currency conversions or cross-border fees) while carefully reducing its own costs.
Costs can be contained through strategies like:
- Adding overseas payment gateways avoids the cross-border fees charged to customers (albeit with the need to set up and maintain carefully monitored treasury functions.)
- Ensuring that lower-cost transactions (such as those paid for with debit cards) are routed to gateways that charge low, federally-mandated fees, while charging customers the same flat fee.
- Ensuring that higher-cost transactions (such as those paid for with AmEx cards) are delivered to gateways that will charge a lower fee, such as the full-service PSPs.
- Uncovering, offering, and promoting alternative payment methods that charge lower back-end fees while maintaining their customers’ flat fee schedule.
For platforms charging flat fees (often in the 2.9% + $0.30 range), every few basis points they can knock off their own costs can have a profound impact. In the example above, 50 basis points on $10 billion delivered $500 million in margin—every 10 basis points of cost that can be removed can deliver millions of dollars.
Of course, operating the payment system has costs associated with it. Still, with these numbers, once the platform reaches a point of scale, the incremental costs of innovating at the back end are essentially de minimus.
Of course, merchants can also gain all the advantages that a platform provider can gain from optimizing their payments system. Building a multi-PSP system that intelligently assigns transactions to the lowest-cost processing provider is a vital strategy for businesses seeking higher-margin growth.
Maintaining PCI-DSS compliance is key to building these systems, an often onerous task for protecting customer data and strengthening relationships with the financial ecosystem. For this reason, merchants are investing in programmable payment vaults: services that securely collect and store customer data—while making it available to the merchant for delivery to the processing gateway of their choice.
These vaults reduce the cost of maintaining compliance, limit the risk of data leaks, and increase the flexibility to choose downstream providers—while having no vested interest in any particular PSP or gateway.
Here is more information on the relationship between VSaaS platforms and Basis Theory.
