We just won the ETA Top 10 Payments ISV Award!

We are excited to receive this distinguished award!

How to Monetize Payments for SaaS Businesses

In the current SaaS market, savvy businesses monetize payments to earn an additional revenue stream. Offering payment features to customers in order to earn revenue has proven to be highly lucrative. Research from Bain and Company reveals that there are $35 trillion worth of global payment monetization opportunities for SaaS providers.

So, what does payment monetization entail, and how can software companies monetize payments to reap the benefits? In this article, we’ll dive into the specifics of payment monetization: how it works, its benefits, and how software companies can get started. 

What Is Payment Monetization?

Payment monetization is the strategy of integrating payment processing features within a non-payment platform to earn profits. These profits are primarily derived from the payment processing fees that are charged to merchants. 

The Benefits of Payment Monetization

Like every SaaS monetization strategy, earning potential stands apart as the top benefit of payment monetization. However, it is not the only benefit. Here are three major advantages:

1. Revenue Diversification

SaaS companies that monetize payments can enjoy an additional income stream that’s separate from subscription revenue.

2. Improved Customer Retention

Software providers that monetize payments by offering payment features bring users a frictionless experience that improves product stickiness and combats churn. Rather than having to use a separate payment solution, users of integrated solutions can manage payments alongside their software’s other core features.

3. Increased Customer Lifetime Value (LTV)

Payment monetization is uniquely profitable for its ability to generate more revenue per customer. According to A16z, monetizing payments can increase customer value by 2-5x per month, vastly increasing the lifetime value of each customer!

How SaaS Companies Monetize Payments

Software companies that monetize payments do so by marking up baseline processing costs — similar to the approach taken by merchant services providers (MSPs), as we will later discuss.

SaaS companies that monetize payments typically charge their users a flat-rate, per transaction fee for payment processing. This fee is actually the sum total of three subcategories: interchange fees, payment provider fees, and SaaS markup fees.

  • Interchange Fees

Interchange fees are the costs to process every transaction, and they are paid to the credit card brands and banks. Each transaction qualifies for a specific interchange fee based on unique factors, such as the type of credit card used and the merchant’s industry. 

  • Payment Provider Fees

The payment provider that the SaaS company partners with to monetize payments — typically either an independent sales organization (ISO) or PayFac-as-a-Service provider (PFaaS) — marks up the above baseline interchange rate to earn a profit. The SaaS company must collect this amount, at a minimum, from its customers. 

  • SaaS Markup Fees (Profit Margin)

On top of the interchange and payment provider fees, the SaaS adds its own markup fee. This is where monetization comes into play. For example, instead of charging merchants 2.7% +.20 per transaction — which would cover interchange and provider fees — the software company charges 2.9% + .30 per transaction. The difference between these two rates is the profit margin.

Case Study: Payment Monetization Revenue Potential 

By partnering with a provider that offers competitive pricing and marking up this rate, software companies who want to monetize payments can achieve incredible revenue-earning potential. The below example is of a SaaS company whose customer base collectively processes 1 million transactions per year, with an average ticket price of $100 per transaction.

monetizing payments

In this scenario, the SaaS provider’s merchant base pays a total of $3,200,000 over the course of one year. However, the baseline costs of processing all these transactions was actually just $2,900,000. So, the SaaS company that monetizes payments is able to keep $300,000 in revenue!

Payment Monetization Models for SaaS Companies

For many years, independent sales organizations and other merchant services providers were the only payment industry players that monetized payments. These companies resell payment processing services and technology from banks and fintech companies, adding markup costs to earn a profit.

Thanks to advances in payment technology, software companies that want to monetize payments can now easily integrate payment features and earn profits from their own processing fee markups. As mentioned above, the two primary approaches to SaaS payment monetization are partnering with an MSP — like an ISO — or becoming a payment facilitator.

monetize payments

ISO Referral Partnerships (third-party payment integrations)

Software companies that want to monetize payments using this approach partner with an independent sales organization (ISO). The ISO handles all merchant account onboarding for the SaaS company and signs up clients with processing accounts. The ISO also provides necessary payment technology that the SaaS company can integrate and upsell to clients. 

It’s important to note that these integrated payment features are third-party solutions, which means that customers are typically redirected to non-native apps or checkout pages. While convenient, third-party integrations are not as frictionless as fully embedded and customized payment features. 

Payment Facilitation (embedded payments)

Rather than partnering with a merchant services provider, the software company can become one. Among the various types of merchant services models, payment facilitation is emerging as the most lucrative option for SaaS companies to monetize payments. By operating as a payment facilitator, or PayFac, the software provider is able to enroll its users with payment processing accounts and upsell embedded payment features.

Companies that want to become PayFacs can either build a full-fledged PayFac infrastructure in-house or partner with a PayFac-as-a-Service provider. For the vast majority of SaaS providers, partnering with a PFaaS is a more realistic and cost-effective option.

The Growth of Embedded Payment Monetization

Why has embedded payment monetization risen to the forefront in recent years?

Faced with growing SaaS competition and customer churn challenges, it has become more challenging for software companies to sustain revenue growth from subscription profits alone. Fortunately, embedded payment monetization has empowered software companies to combat declining customer retention and onboard more customers.

monetize payments

Advances in Payment Technology

The latest generation of fintech APIs and software integrations have made it that much easier for non-payment SaaS companies to add payment features to their software.

Expectations for a Frictionless User Experience

As payment technology has evolved, customers and businesses have come to expect fast and seamless payment options. Embedded payment features enable software users to quickly process payments in just a few clicks, rather than having to pay in-person or use a third-party payment application.

Growing SaaS Competition

With a burgeoning number of software companies on the market, SaaS providers today have a harder time growing their customer base. This has made it necessary to embrace strategies that enhance product value, such as payment features.

Customer Churn Challenges

With businesses under pressure to reduce software licensing costs and simplify tech stacks, software providers have been dealing with increased customer churn in recent years. For Saas companies that heavily rely on subscription revenue, losing subscribers is a tremendous threat to revenue. 

The History of SaaS Monetization

Software companies have employed a range of monetization tactics over the years. While embedded payment monetization is the newest strategy on the scene, SaaS providers continue to embrace earlier strategies. 

monetize payments

Let’s take a look at the progression of SaaS monetization, as this will help us understand the current approach to revenue growth:

Early 2000’s: Subscription Strategy

The first SaaS companies had minimal competition, enabling them to easily tap into a sizable target market. They could depend upon reliable, recurring revenue from customer subscriptions to earn a profit.

2010’s: Pricing Strategy

As competition increased, SaaS companies had to find a way to boost customer acquisition. New pricing models, such as tiered pricing plans and usage-based plans, offered more competitive upfront pricing and encouraged upselling.

2016: Product-Led Growth 

With startup funding at its peak, SaaS companies poured resources into positioning the customer experience at the forefront of sales and marketing efforts. Free trial options became ubiquitous as companies sought to expose their application upfront and convert warm leads faster. Additionally, a robust focus on user experience testing and development helped SaaS companies create stellar user experiences that boosted retention.

2020’s: Embedded Payment Monetization

Since pricing strategy arrived on the scene over a decade ago, SaaS companies have been monetizing payments by reselling payment processing features. More recently, however, software companies have begun to embed payment technology and act as payment facilitators. By operating as PayFacs, SaaS companies can enjoy a much higher revenue-earning potential than is possible with the traditional resell approach.

The Lucrative Power of Payment Monetization 

We know that marking up payment processing fees is how SaaS companies earn revenue from payments. However, what makes payment monetization particularly powerful is that it can be layered on top of other monetization strategies. 

SaaS companies that embed payments are able to monetize using subscription strategy, pricing strategy, and payment monetization all at once. In other words, they are simultaneously earning revenue from:

  • Subscription fees
  • Add-on charges for access to payment features
  • Processing fee revenue

This layered approach results in a revenue potential that greatly exceeds that of subscription revenue alone. It increases the lifetime value of each customer, ushering in a revenue stream that can grow even if one’s customer base doesn’t significantly increase.

Monetize Payments With Exact Payments

As a PayFac-as-a-Service provider, Exact Payments equips SaaS and ISV companies with all the tools and infrastructure they need to embed payments and act as payment facilitators. You’ll get up and running fast and start earning reliable revenue from payments! To learn more, reach out to a member of our team. 


Access Resource

Form cannot be loaded, please try refreshing the page or disabling any ad or cookie blocking tools.
You can review our commitment to protecting your privacy and our privacy practices in our Privacy Policy

Download our Free Whitepaper NEW

How to choose an integrated payment model for your software platform. Get the details you need to make the right decision.