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Can Payment Facilitators Claim Processing Fees as Top-Line Revenue?


Can Payment Facilitators Claim Processing Fees as Top-Line Revenue?

By Todd Ablowitz, co-founder and co-CEO, Infinicept

For many startups, the way revenue is claimed is an issue with important implications. Top-line or gross revenue is a factor that investors often use to determine a company’s valuation. Maximizing that number has a tangible impact.

When they enable payments for their customers, software companies must determine how to account for payment processing fees. While merchants pay a certain percentage of each sale or transaction for payment processing, the software company itself retains only a portion of those funds.

Can the software company claim the entire payment processing fee as their top-line revenue while accounting for the portion that goes to other companies as their costs? Or must they claim only the portion they retained as their gross revenue?

How do processing fees break down?

Let’s start with an example transaction. To keep things simple, we’ll use the sale of a $100 product or service and assume that the merchant is paying 3% for payment processing.

In this example, the merchant keeps $97 from the sale and the remaining $3 goes to the entities involved in enabling the payment. This $3 is split among the software company and the companies that enable the payment processing.

$100 sale = $97 to the merchant + $3 for processing fees

Breaking down the $3 in our example further, $2 is paid to entities involved in the transaction, including the card brands, the issuing bank, and the payments processor, for interchange and other fees. This leaves $1.

When a software provider is enabling the transaction as a payment facilitator, it retains that remaining $1 as its net revenue on this transaction.

So, can the software provider recognize the $3 as top-line, or gross, revenue?

To recognize the $3 as top-line revenue, the provider must set the payments pricing and must take the transaction risk.

Software companies that become registered payment facilitators are able—but not required—to take that entire $3 as their own gross revenue, because they do both – they set pricing and accept the risk for the transaction. The $1 they keep after paying the remainder to the other players in the transaction becomes their net revenue.

What is the impact on valuation?

Because valuation is based on total revenue, we’ll broaden our example to assume $100 million in annual processing volume.

At the 3% processing rate, the payment facilitator in this case could claim $3 million – the entire 3% –   as top-line revenue. This would result in a higher valuation than claiming the 1% they retain – in this case, $1 million – as their top-line revenue.

One common way to value startups is by multiplying their gross revenue by an agreed-upon multiplier, which varies but often falls within a range according to industry. (The actual multiplier used to determine the value will also depend on other business factors. For example, it may be on the higher end of the industry range for companies that own their own merchant portfolio or those experiencing rapid growth.)

Of course, the impact of top-line revenue on company valuation is just one factor to consider when choosing how to recognize revenue. Companies should always consult with their own accounting experts to determine the best path forward for their situation.

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