A New Opportunity for Payfacs to Monetize Payments and Win Over More SMBs

Payment facilitators (Payfacs) are used by millions of small businesses every day to run their operations. In a competitive market, the difference between Payfacs can be as small as a point or two of difference in fees. To stand out, Payfacs need to find differentiated ways to serve their customers to preserve their fees. The good news? Payment processing itself holds the key to creating that value and deepening customer relationships.  

Note: If you’re not a Payfac, but you use one to process payments inside your software for small business customers, this applies to you too.

In the not-too-distant past, the ability to process payments easily was a bottleneck for small businesses and a compelling selling point in itself. With increasing competition in the space, business owners want to see that you understand their industry and unique challenges and that you bring them additional tools to help them manage and grow. 

One of the biggest challenges facing most SMBs is access to working capital. In fact, in a recent Goldman Sachs survey, 70% of SMB owners who had applied for a loan said it was difficult to access capital, and 76% say that difficulty has negatively impacted their business.

Access to capital and other financial services has become the most important value-add Payfacs and vertical software companies can provide, and first-party transaction data creates the perfect opportunity for a win/win situation. Software companies have the chance to increase lifetime value and slash churn by offering financial services right where they’re needed (and often to SMBs who have limited access to traditional financing). SMBs get access to capital that’s based on the revenue and health of the business they’ve built, regardless of credit scores, without the need for years of financial history.

The Benefits of Adding Embedded Financing

Embedded financing is a powerful tool for software companies, enabling the implementation of financial services even if they are outside of your core expertise. While many software companies have the capacity to build financial products, it can be a significant drain on engineering resources and will likely require external expertise in finance and capital markets even if your team already has some of those skills. Embedded financing allows for the launch of capital and other financial products quickly while outsourcing risk and expertise and allowing your teams to focus on delivering value to your customers.

Beyond the ease of implementation, embedded capital is also a powerful way to increase financial access for SMBs. Rather than relying on financial statements, credit scores, and lengthy application processes, embedded capital utilizes the transaction data you are already processing for your customers as underwriting data. This method provides SMBs with the financing they deserve, even if they are not well-positioned to secure financing through a bank or other traditional routes. It’s a powerful way to leverage the data you already have to create additional revenue streams and add more value for your customers.

Setting Yourself Apart

Leveraging first-party data not only helps you monetize the data streams you already possess, but also distinguishes you as a go-to source for services that many of your customers cannot find elsewhere. Since the 2008 financial crisis, businesses in various industries, including immigrant-owned businesses and many deemed too young or too small, have struggled to access capital through traditional channels. By integrating embedded capital into your software, you position yourself as potentially the only source of working capital for these business owners.

Providing financial access to businesses that have been excluded from the financial system can significantly impact your lifetime value. This not only creates a new product offering for your customers but also greatly reduces churn and improves customer loyalty. Financing based on transaction history on your platform encourages customers to migrate more of their payment processing from competitors to your software.

Growing by Helping Your Customers Grow

This brings us back to our starting point: a lack of access to capital is one of the biggest pain points for SMBs. Embedded finance provides a simple, easy-to-implement solution to this problem. Solving customer problems is likely why you got into this business and is a huge part of what you do every day. Adding an embedded capital product is a straightforward next step to solve even more problems and create even more value. It's a win-win for both you and your customers.