How does Payment Processing Work? How SAAS Companies Monetize Payments

Introduction to Payment Processing Flow

To effectively monetize payments through software integration, it's crucial to understand how payment processing works and where the revenue opportunities lie. In this blog post, we’ll walk through the process of payment transactions, breaking down the flow of money, associated costs, and potential profitability for your SAAS or ISV company.

Recap of Key Terminology

Before diving into the flow of payment processing, let’s quickly revisit the essential terms:

• Cardholder: The individual making the payment.
• Merchant: The business accepting the payment.
• ISV (Independent Software Vendor): The software company facilitating the transaction.
• Payment Processor: The company providing the APIs and backend processes to ensure secure and accurate payment processing.

The Payment Processing Flow

Imagine you’re a cardholder renting a self-storage unit. You receive a link to a secure portal from the self-storage company, allowing you to add your payment details. When the first of the month arrives, your card is charged $100. While it may seem straightforward, multiple processes occur behind the scenes:

1. Tokenization: When you enter your card details, the information is immediately tokenized by the payment processor, ensuring that sensitive data isn’t stored on the ISV’s servers.
2. API Communication: The payment processor confirms the transaction by communicating with the bank and credit card networks, ensuring that the $100 is correctly charged and routed to the merchant’s account.
3. Fee Distribution: While the merchant receives $100, a portion of that amount—typically 2% to 4%—is deducted as processing fees, which are shared among the payment processor and other parties involved.

Understanding the Costs and Profit Margins

The fees associated with payment processing are primarily determined by the type of card used:

• Credit Cards: The average cost is about 2%, with B2B transactions slightly higher at 2.5%.
• Debit Cards: The cost is around 0.8% (or 80 basis points).
• ACH Transactions: These usually have a lower, per-item fee.

The bulk of these costs comes from interchange fees paid to the issuing bank, and card brand fees charged by networks like Visa and MasterCard.

The Profit Potential for Software Companies

By integrating payment processing into your software, you have the opportunity to capture a portion of the processing fees. For example, if your software handles $50,000 in monthly transactions and you’re earning a 2% margin, that’s an additional $1,000 in revenue—on top of your regular software fees. This is why payment monetization is such a valuable strategy for software companies.

Conclusion and Next Steps

Understanding the flow of payment processing and the associated costs is key to maximizing profitability in your software business. The next step is to explore how to integrate payment processing into your software effectively, which we’ll cover in the next video.

To continue learning about monetizing payments, check out the full YouTube playlist here.

By mastering the flow and cost structure of payment processing, you can unlock significant revenue opportunities for your SAAS or ISV company. Stay tuned for more detailed insights in the next post.