January 10th is “Quitter’s Day,” when most New Year’s resolutions die. Our resolution? To deliver payments 101 content every month this year. Here’s installment one.
Everyone in software investing knows that income can and should be generated from payment volume flowing through their platforms. Beyond that statement, consensus diverges about how to achieve that objective, what success looks like, the order of operations, or even how to structure the initiative.
The revenue opportunity exists because of what we call 3/2/1. Customers of a software platform pay 3% of total payments to have them processed and deposited into their bank accounts. The raw cost of payments (from networks, issuing banks, etc.) is roughly 2%. This leaves 1% of total payment volume being processed through the software platform as a revenue opportunity.
Here’s what that looks like in practice:
If you have 5,000 customers and charge each $200 per month for your software, you’re generating roughly $12M in annual recurring software revenue (5,000 × $200 × 12). Your ARPU (annual revenue per user) is $2,400. The monthly software cost × 12 months.
If each of those customers collects $500,000 in annual payments from their customers (using your software to run their business), that business is generating another $5,000 in ARPU to a third party (bank, ISO, processor) that the software company could capture.
The software company could 3X its ARPU by simply internalizing what their customers are already paying for payments rather than allowing a third party to capture it.
But it gets even better for all parties. For the software company, they’ve increased revenue per customer without increasing the “price,” simply by replacing another vendor in their customer’s payables. They’ve also made customers stickier, lowering churn (according to Tidemark’s annual Vertical & SMB SaaS Benchmark Report). From the customer’s perspective, the software company has simplified their operations. They no longer have to reconcile between their “business operating software” and payments provider. More often than not, they’ve also saved the customer processing expenses by cutting their rate.
From Insight to Execution
Now you know (a) a prize exists and (b) the size of the prize. But knowing the opportunity exists is very different from capturing it. Implementation requires navigating technical integration, compliance requirements, customer migration strategy, and pricing architecture. This is where most initiatives stall or underperform.
At Forward, we specialize in this exact challenge. We’ve helped over 1,200 software companies successfully implement and scale embedded payments, and we’ve seen what works and what doesn’t. We know which priorities are shiny objects and which requirements are must-haves to actually print volume and payments revenue.
Large private equity funds leverage our expertise in two ways: (1) to underwrite new opportunities and determine payments revenue upside in target investments, and (2) to execute implementations for their portfolio companies.
If you’re a PE shop providing “best efforts” on payments, let’s talk about how we can help you deliver measurable results.
If you’re a software company, let’s have a conversation about substantially increasing your revenue this year. Is there anything else on your roadmap that will deliver this kind of impact in 2025?
