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Why optimize payments margin?
If you’re looking at payments to drive significant revenue this year, payments margin should be one of your KPIs.
Assuming volume stays the same, doubling your margin will double your payments revenue.
- 3x margin → 3x payments revenue
- 5x margin → 5x payments revenue
- 5x margin and 2x volume → 10x payments revenue
To optimize margins, there are three key levers you can pull.
I’m assuming net revenue recognition on payments. This blog post explains the payments revenue recognition models and how to calculate payments margin.
1. Provider model
Referral-based payments partners pay the software company a percentage of revenue. These rev shares are usually < 30 basis points (and sometimes < 15 basis points).
Embedded payments providers are more likely to use a “passthrough plus” pricing model. This means the software company pays actual passthrough costs (interchange and network costs) plus a negotiated buy-rate to the payment provider.
Software companies materially increase their margin just by switching from a referral model (rev share) to fully embedded (passthrough plus buy-rate), even if no other changes are made.
Margin can increase from < 30 basis points to 30-50 basis points or more.
Embedded payments also puts you in control of your merchant relationship, contracting, sales, and support.
Which empowers your team to drive adoption (amplifying your gains), and gives you access to the other margin-optimizing levers.
2. Sell price
The big payment processors advertise 2.9% + $0.30 for online payments.
But big payment processors don’t create as much value for SMBs as vertical SaaS products do. So big payment processors have to think about pricing like gas stations sharing an intersection with their arch nemesis.
Software companies are different. An end-to-end business management solution with embedded payments, in-context reporting, and one-stop support isn’t competing against big processors.
And 2.9% isn’t an upper limit for these products.
Software companies with a sticky core product often find they can charge 3.2%, 3.5% or more.
Bundled pricing lifts the ceiling even higher, without inviting a direct comparison against big processors.
Is increasing the sell price necessary? No.
Are there other ways to increase margin? Yes.
But sell price is one variable to test when you have embedded payments, a direct relationship with your merchants, and control over the contract terms.
And you might find you can earn an extra 20 or 30 basis points (or more) without any impact to adoption or volume.
3. Interchange
Interchange fees paid to the issuing bank are the biggest cost driver in card processing.
We tend to think of these rates as immutable. But it’s really the rules and rate tables that are immutable.
Software platforms can get lower interchange rates on certain transactions, within the established rules and rate tables, by optimizing security and data.
Platforms with a lot of B2B payments have the largest cost reduction opportunity here.
We’ve seen platforms reduce overall interchange cost by 20-25 basis points, and greater reductions are certainly possible.
This resource explains the most common opportunities for interchange optimization.
What about payment provider fees?
With embedded payments and buy-rate pricing, provider fees are a small portion of the overall cost.
For a mid-sized software platform in an average (not interchange-advantaged) vertical, interchange can easily be 10x as much as payment provider fees.
That means a 5% reduction in interchange fees would drive the same cost savings as a 50% reduction in payment provider fees.
Because payment provider fees are such a small portion of overall cost, you’d have to reduce them by a much larger percentage to get a noticeable increase in margin. And a cut that deep can incur other indirect costs. This article explores the tradeoffs.
Grow your payments revenue
To sum up, if you want to grow payments revenue in 2025, start by optimizing:
- Provider model (if you’re earning a rev share on referrals, consider switching to an embedded provider with passthrough-plus pricing)
- Sell price (if you have a sticky product, add a winning merchant experience… then test your sell price)
- Interchange (determine if a significant portion of your volume can qualify for lower interchange and optimize for the best rates)
And if you want expert eyes on your payments strategy, request a free payments strategy review with one of our in-house experts here.
