Integrated Payments
How to Boost Your Payments Revenue Share (hint…don’t focus on revenue)
Jonathan Arst ● January 1, 2022 ● 6 min read
Payments can be a key driver of recurring revenue for any software platform. That’s why it’s important to understand the ins-and-outs of this revenue stream to maximize its potential. Missing the opportunity to do so risks losing hundreds of thousands of dollars (perhaps even millions) in Annual Recurring Revenue (ARR).
I’ve personally seen software executives cut the number of months needed to recover Customer Acquisition Costs (CAC) in half by gaining a better understanding of payments revenue before extending integrated payments to their customer base. This is equivalent to doubling ARR across an entire customer portfolio. In some cases, software platforms rolled out payments to 100% of their customers, an effective way to reduce churn and drive revenue.
I’ve also seen software executives prioritize their product roadmap in favor of new functionality instead of focusing on improving payments features and revenue. However, improving payments through the right integration and optimized revenue sharing can generate the surplus funds needed to pay for future product rollouts.
In this blog post, I’m going to share five steps to assess your payments revenue share and make sure it’s as good as it sounds.
Step #1: Remember that a higher revenue share isn’t necessarily a better revenue share.
Most people would think that a 95% revenue share is better than 60%. However, in payments, that might not be the case. In this blog post, I’ll illustrate that a 60% revenue share can be better than a 95% revenue share in some cases. There are many (sometimes hidden) expenses in a payment revenue stream that can negatively impact value. These expenses are the focus of this blog post.
Start by reviewing your contract with your payments provider to see what percentage of revenue they are sharing with you. If you’re at 95%, congratulations may be in order. But the devil is in the details. Luckily, the details here are manageable.
Step #2: Use this formula to calculate your integrated payments revenue share.
Whether you partner with a small startup, a legacy payment processor, or an established fintech, payment-related fees will be deducted before the revenue share percentage is applied. These fees are often listed in a full page or multiple pages within your contract. However, your payments revenue share can be calculated using this simple formula:
(Fees Charged to Your Customer – Expenses) x Revenue Share = Recurring Revenue
We’re going to dive in to the expenses portion of this formula. I’ll follow up in a separate blog post about the revenue side of this formula.
Step #3: Understand your expenses.
Not all contracts with payments companies are created equally. I’ve seen many contracts that provide a revenue share percentage with no detail about how payments revenue is calculated. This type of contract may be a sign that you are missing out on valuable revenue or getting expensive fees deducted from your payments revenue. Conversely, some contracts have an extensive list of fees and costs that go into calculating the payments revenue share. This type of transparency is better and, although it may still not result in the best financial outcome, it’s a great starting place for evaluating the payments revenue stream and where improvements can be made.
If your payments contract does not have a minimum of fourteen line items of cost details, reach out to your payments partner and ask them to provide full details on how they calculate your revenue share. Make sure they give you a list of all revenue streams and all expenses that impact it. In my experience, the following list of expenses is the minimum level of acceptable detail:
Sample: Schedule of Fees
- Risk / BIN Fee
- Amex Risk / BIN Fee
- Transaction Fee
- PIN Debit Transaction Fee
- Monthly Fee (aka Statement Fee or Account on File Fee)
- AVS Fee
- Batch Fee
- Revenue Share
- PCI Annual Fee
- PCI Non-Compliance Fee
- Chargeback Fee
- Retrieval Fee
- Monthly Minimum
- Early Termination Fee
Step #4: See it in action.
The foundation of the payments revenue share includes the fees billed to your customer, the revenue share percentage, and the schedule of fees. Now let’s apply these in a real-world example.
In your opinion, which of the following three options will result in the best financial outcome for your software platform?
| Option #1 | Option #2 | Option #3 | |
|---|---|---|---|
| Revenue Share | 95% | 85% | 60% |
| Transaction Fee | $0.05 | $0.04 | $0.02 |
| Risk / BIN Fee | 0.03% | 0.02% | 0.0075% |
| Monthly Fee | $15.00 | $15.00 | $5.00 |
Many software executives will guess that one of the first two options are best. I’ll show you why the third option results in the highest payout of payments revenue. Consider this scenario:
Number of Customers: 1
Transactions Processed: 1,500
$ Value of Transactions Processed: $12,000
Amount Billed to Customer(s) by Payments Partner: $135.95
Revenue Share Calculation by Option
| Option #1 | Option #2 | Option #3 | |
|---|---|---|---|
| Revenue Share | 95% | 85% | 60% |
| Transaction Fee | $0.05 | $0.04 | $0.02 |
| Risk /BIN Fee | 0.03% | 0.02% | 0.01% |
| Monthly Fee | $15.00 | $10.00 | $5.00 |
| TOTAL REVENUE | $135.95 | $135.95 | $135.95 |
Expense Calculation by Option
| Option #1 | Option #2 | Option #3 | |
|---|---|---|---|
| Transaction Fee | $75.00 | $60.00 | $30.00 |
| Risk / BIN Fee | $3.60 | $2.40 | $0.90 |
| Monthly Fee | $15.00 | $10.00 | $8.00 |
| Total Expenses | $93.60 | $72.40 | $38.90 |
| NET REVENUE | $42.35 | $63.55 | $97.05 |
| REVENUE SHARE TO PARTNER | $40.23 | $54.02 | $58.23 |
In this scenario, the transaction fee is the biggest expense driver. Therefore, Option 3 with a 60% revenue share is most profitable despite having the lowest revenue share. This example shows how valuable it is to use a spreadsheet or profitability tool to evaluate your options. Understanding your customers and the amount they process helps you determine which expenses have the biggest impact on cash flow. The 95% revenue share in Option #1 may be the best fit for some software platforms and the 85% revenue share in Option #2 may be the best fit for others. However, in this scenario, Option #3 results in the most profit.
Step #5: Complete your own analysis.
If you’ve made it to this paragraph, you’ll likely benefit from evaluating your payments revenue share and finding the best revenue-generating and API options for integration to your software. It’s exciting to consider the possibilities that exist by increasing ARR by 20%, 50%, or even 100%
Feel free to email me at jarst@paystri.com if you have any questions, or if you would like a copy of the evaluation spreadsheet from this blog post. We also have an easy to use tool that helps software firms compare various revenue share plans.
Jonathan Arst is Founder and CEO of Paystri. He loves crunching numbers and finding solutions to both simple and complex problems. If you have a product roadmap, Jonathan would love to hear about it. Connect with Jonathan on LinkedIn to share your ideas.