Learn about payments and the payment facilitator model from our team of experts
Take Merchant Payments Without Losing the Profits
How Becoming a Payment Facilitator Contributes to Revenue and Valuation Growth
In April last year, when the economic effects of the pandemic were just beginning to unfold, leading payment facilitator Stripe announced it had raised $600 million. The round brought its valuation to $36 billion, which CNBC said made the company “by far” the most valuable private company in the fintech sector.
Then in September, CNBC reported that Payment Facilitators (PFs) PayPal and Square were becoming worth more than some of the biggest banks in the U.S.
But this success is not limited to the PFs that are also payments giants. Smaller PFs are continuing to show financial strength, even in an economy that has been difficult for many segments.
Payment facilitator Fivestars announced in October that it had raised $52.5 million early last year. RealPage, a PF that serves the real estate industry recently announced its pending acquisition by a private equity firm with a valuation of about $10.2 billion.
What is it about the payment facilitator model that makes many of them attractive investments?
One primary factor is the recurring and scalable nature of payment processing revenue.
Payment providers make money on every transaction they process. Because software providers operating as payment facilitators manage their customers’ payment processing, they collect revenue from every payment transaction those merchants process – revenue that would otherwise go to third party providers.
As companies so tightly integrated with their customers’ businesses, payment facilitators have a distinct advantage when selling payment processing. They are able to eliminate the need for their customers to set up payments with those third parties in a separate process. Their status as trusted partners and vendors – and the simplicity of a payment offering that is embedded within a business’s software – makes them attractive payments partners for the entrepreneur or small business owner, who often has limited resources for dealing with multiple vendors and business processes.
The payment processing revenue then stands to grow as the PF’s base of payment-accepting merchants grows. This valuable and reliable revenue stream contributes to the solid business fundamentals that attract investors and increase valuations.
Another factor is the potential for growth in the fact that so many small and micro businesses do not yet accept card payments. Most larger businesses are already accepting payments with the help of legacy payment companies, but a significant number of smaller ones are still up for grabs. Bringing small and micromerchants into the digital payment fold makes the digital payments pie itself bigger.
There are reasons those smaller businesses are still so reliant on cash. Historically, they have found accepting card payments to be out of their reach, and traditional payment providers have found them challenging and expensive to reach.
Payment facilitators have found the secret to reaching many of these businesses by addressing their needs in ways that legacy providers simply didn’t. As noted before, they’ve created value by bundling payments with software the businesses are already using to manage other aspects of their operations. They’ve streamlined underwriting and onboarding to make the process of accepting payments much simpler.
By doing so, they have unlocked a huge market.
The Pandemic and Beyond
Small merchants’ shift to digital payments with the help of payment facilitators has been taking place over the last several years, but it has accelerated rapidly because of the pandemic. As their business customers pivoted to different ways of doing business, PFs were able to react quickly and provide valuable support to the industries they served.
Many businesses found an urgent need to go online or to accept digital payments for the first time, or to expand their online and contactless offerings. This need has once again demonstrated the strength of payment facilitators’ ability to do payments their way, likely solidifying their position as payment providers of choice for their customers.