{"id":23387,"date":"2025-09-16T05:41:20","date_gmt":"2025-09-16T10:41:20","guid":{"rendered":"https:\/\/reformingretail.com\/?p=23387"},"modified":"2025-09-16T05:41:21","modified_gmt":"2025-09-16T10:41:21","slug":"every-iso-agent-can-now-offer-embedded-payments-part-1-of-2","status":"publish","type":"post","link":"https:\/\/reformingretail.com\/index.php\/2025\/09\/16\/every-iso-agent-can-now-offer-embedded-payments-part-1-of-2\/","title":{"rendered":"Every ISO, Agent Can Now Offer Embedded Payments (Part 1 of 2)"},"content":{"rendered":"\n

We have to start this series with an understanding of business cycle.<\/p>\n\n\n\n

Because if history doesn’t outright repeat itself, it sure as hell rhymes. <\/p>\n\n\n\n

Business cycles are just bundling and unbundling.<\/a><\/p>\n\n\n\n

Bundling<\/strong>: aggregating solutions under one banner so customers need only manage one vendor relationship.<\/p>\n\n\n\n

Unbundling<\/strong>: breaking apart solutions into best-of-breeds so customer can choose what works best for them.<\/p>\n\n\n\n

Let’s use a recent – and very accessible – example of bundling as our case study: television (TV).<\/p>\n\n\n\n

When TV stations first started (1950’s), you had all these programs competing for ways to get into homes.<\/p>\n\n\n\n

Think of the below graphic for a visual.<\/p>\n\n\n

\n
\"\"<\/figure>\n<\/div>\n\n\n

Cable companies looked at the market and decided it would be highly profitable to bundle all these channels together. TV viewers would get access to a broader array of choices and the model would be economically favorable for the cable companies, who in fairness were fronting the capital to build distribution into the homes of millions of viewers.<\/p>\n\n\n

\n
\"\"<\/figure>\n<\/div>\n\n\n

This was the normal course of business up until 2010’s, when the internet became powerful (i.e. fast) enough that independent providers could economically reach end consumers without the need for the cable provider.<\/p>\n\n\n\n

Now the bundle started unbundling.<\/p>\n\n\n\n

Companies (streaming services) like Netflix started producing their own content for direct consumption and shortly thereafter the original networks (ABC, NBC, Fox, et al.) began unbundling their content from the cable companies an offering their own streaming services.<\/p>\n\n\n

\n
\"\"<\/figure>\n<\/div>\n\n\n

Over the past five years, however, the unbundled streaming providers have started bundling themselves<\/a>:<\/p>\n\n\n\n

\n

Verizon bundled telecom with Disney+, Hulu, and ESPN+. Amazon offers Showtime and Max subscriptions, for additional monthly fees, through Prime. You can now bundle Disney+, Max, and Hulu for $30 a month. Bundling, which underpinned the traditional cable package, is now streaming standard practice.<\/p>\n<\/blockquote>\n\n\n\n

Why does this happen?<\/p>\n\n\n\n

The simplest explanation is economics. <\/p>\n\n\n\n

Check this out.<\/p>\n\n\n\n

\n

In 2019, Disney launched Disney+ for $6.99 [per month]. Netflix was $11 [per month]. HBO Max, soon to be rebranded to MAX, launched at $14.99 [per month]. Peacock cost just $4.99 per month. Hulu had a $5.99 (ad) and $11.99 (ad-free) tiers. Prime Video cost just $8.99 [per month].<\/p>\n\n\n\n

That\u2019s $59 a month to own them all.<\/p>\n\n\n\n

Now, five years later, those streaming TV subscription costs have risen by 73% on average. The ad-free tiers now cost $13.99 for Disney, $15.49 (or $22.99 for premium) for Netflix, $16.99 for Max, $13.99 for Peacock, $18.99 for Hulu, and $14.99 for Prime Video.<\/p>\n\n\n\n

That\u2019s $102 per month, total. Roughly the same as the average cable bundle at $110 dollars a month. And expect future increases; each firm has either announced or already enacted price hikes in 2024.<\/p>\n<\/blockquote>\n\n\n\n

The supporting graphic follows.<\/p>\n\n\n

\n
\"\"<\/figure>\n<\/div>\n\n\n

And by the way, these streaming services now force you to consume adds, too.<\/p>\n\n\n\n

If this is reminding you of what cable was like before the streaming services launched in the 2010’s, no, you’re not going crazy.<\/p>\n\n\n\n

The market has basically just moved cable to the cloud. <\/p>\n\n\n\n

That’s it.<\/p>\n\n\n\n

This follows the innovation cycle to a tee:<\/p>\n\n\n

\n
\"\"<\/figure>\n<\/div>\n\n\n

Now we get to payments.<\/strong><\/p>\n\n\n\n

Payment processing was not natively integrated into merchant softwares. But having the payment data was important: not only could you own the absurdly lucrative acquiring line of business, but you could also control the rest of the finance stack if you were smart enough (few were): insurance, lending, banking, issuance, payables, etc..<\/p>\n\n\n\n

In the early 2000’s payment companies realized that merchant churn would decrease if payment acquiring was<\/em> integrated into the software. This led payment companies to work with or build\/buy gateways to integrate to softwares. <\/p>\n\n\n\n

This further evolved into direct partnerships with softwares so that the software could offer a preferred payments partner and receive a higher kickback from the payments company.<\/p>\n\n\n\n

This was popularized with Mercury Payments, who first convinced POS resellers that they should participate on the payments revenues. 50% “profit” share ended up being like 10% of the actual net revenue once you peeled back the agreements, but it whet everyone’s appetite to payments.<\/p>\n\n\n\n

In the early 2010’s software companies realized that they could make a lot<\/em> more money on financial tools<\/span> (not just the acquiring) since they already owned the merchant relationship, and software was pretty damn sticky. Software companies were already doing all the work to acquire and support the customer, so why not just offer the payments themselves?<\/p>\n\n\n\n

The first – and most obvious – financial tool to start with was payments acquiring.<\/p>\n\n\n\n

Why?<\/p>\n\n\n\n

It requires negligible R&D and is ridiculously accretive.<\/p>\n\n\n\n

Nearly 100% margin, in fact (we don’t subscribe to the idea that interchange is COGS: just book net revenue as the actual revenue and subtract the minuscule cost of your servers\/support as the COGS against this if you want to see how lucrative it is).<\/p>\n\n\n\n

Further, nearly all merchants MUST accept credit cards, so the odds of the software company winning the payments business were basically 100% depending on the aggressiveness of the software vendor (e.g. software vendors can make competitive payments uncompetitive with additional fees or refuse to support alternatives altogether<\/a>).<\/p>\n\n\n\n

So software companies started embedding acquiring, removing the need for a traditional payments partner. Popularized as the payfac model, software companies usurped (or took what was theirs?) the payments stream from everyone else and became payfacs or ISOs themselves. <\/p>\n\n\n\n

Sometimes this was done with an API (Stripe), sometimes will more hand holding (early days of Infinicept). There were (and still are) all sorts of flavors in between the two.<\/p>\n\n\n\n

(Unrelated, but software companies later recognized that payfacs don’t make sense until you’re at a few billion in volume, so payfac lites<\/a> are more appropriate for the majority of software companies.) <\/p>\n\n\n\n

The larger acquirers realized that they could never compete with companies that could spell R&D so they decided their best strategy was to buy software companies outright, strip out all the R&D, and turn the payments crank on the software’s merchants until the merchants bled to death and attrited. <\/p>\n\n\n\n

Hello Shift4 and Global Payments!<\/p>\n\n\n\n

As of the early 2020’s we’re seeing the data from the first wave of embedded-finance software companies who have now gone public.<\/p>\n\n\n\n

And guess what?<\/p>\n\n\n\n

It’s playing out just like everyone with a brain expected.<\/strong><\/p>\n\n\n\n

In the US, embedded acquiring (payments) are about to reach the zenith of maturity, meaning that every software that wants<\/em> to embed payments can<\/em>.<\/p>\n\n\n\n

Here’s the curve<\/a> of the diffusion of innovation for reference. <\/p>\n\n\n

\n
\"\"<\/figure>\n<\/div>\n\n\n

Bain agrees with us<\/a>.<\/p>\n\n\n\n

\n

ISVs [softwares] with integrated payments have been taking share in merchant acquiring, or the acceptance and settlement of credit card payments on behalf of businesses. ISVs accounted for one-sixth [16.7%] of 2020 US merchant acquiring payment volume, and that figure is growing at a mid-teens percentage rate. <\/p>\n<\/blockquote>\n\n\n\n

Extrapolating out that ~15% CAGR to 2030, we’d estimate that 70% of US payments that can<\/em> be integrated with a software will<\/em> be integrated with a software.<\/p>\n\n\n\n

In other geographies, embedded payments are earlier in their journeys: we know several ISVs in LatAm, for example, that have yet to monetize payments. In the Middle East and Africa, Ernst and Young estimates <\/a>integrated payments to reach somewhere around 50% by 2030. <\/p>\n\n\n\n

But payments is not the only part of the embedded finance stack: there’s lending, payroll, insurance, and a ton of other financial products that can and will eventually be offered.<\/p>\n\n\n\n

These non-payment embedded finance tools are in the early innings, and will take another decade to play out, at least in the US.<\/p>\n\n\n\n

But this article series is really about the first<\/em> embedded finance solution: payment acquiring.<\/p>\n\n\n\n

Embedded payments made a ton of sense theoretically:<\/p>\n\n\n\n

    \n
  1. One throat to choke. Payment acquirers would often point all support calls to the software provider, even if the payment acquirer was at fault. Slimming down to one vendor meant that the merchant would legitimately call one party in the event of any issue.<\/li>\n\n\n\n
  2. Cost reduction. As the software winnowed its payment partners to one (their own), the cost to support features, etc. for other payment partners disappeared. In theory this would show up in reduced costs.<\/li>\n\n\n\n
  3. Data consistency. This is over the heads of 99.9% of merchants, but there are some really useful insights that are unearthed when you pair the payment data<\/a> with the merchant POS\/operating system. Too bad most merchants are too dumb to understand why this even matters, let alone take action with this information.<\/li>\n\n\n\n
  4. Improved software. Follow us here, but as the software provider offered high margin payments on top on an existing sales and support infrastructure it would mean that the payments revenue was basically all EBITDA. So long as the software provider wasn’t greedy, that would be free money to reinvest back<\/em> into the software to improve features, etc..<\/li>\n<\/ol>\n\n\n\n

    But here’s the problem:<\/strong><\/p>\n\n\n\n

    Payments are too<\/em> easy.<\/p>\n\n\n\n

    Software companies were built on suffering. <\/p>\n\n\n\n

    Endless investment. <\/p>\n\n\n\n

    Terrible margins. <\/p>\n\n\n\n

    Abusive customers. <\/p>\n\n\n\n

    Irrational sales cycles.<\/p>\n\n\n\n

    Then all of sudden comes an addictive drug called payments.<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    From the perspective of a developer, payments:<\/p>\n\n\n\n

    Takes nothing to build.<\/p>\n\n\n\n

    Takes nothing to support.<\/p>\n\n\n\n

    Is 100% margin.<\/p>\n\n\n\n

    And we’ll be goddamned if every merchant you talk to doesn’t HAVE to use it. It might not be from you<\/em>, but relative to your software the TAM for payments is infinite.<\/p>\n\n\n\n

    Software people are rational: they look at the amount of work it takes to grow revenue from software and then compare that to the amount of work it takes to grow revenue from payments and they come to some pretty obvious conclusions.<\/p>\n\n\n\n

    We’ve gone ahead and laid out a juxtaposition in the following table.<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    Gee, wonder what a software provider would choose, especially if they needed to show growth as a public company…<\/p>\n\n\n\n

    And this is why Toast POS is 2.6x the price of previous contemporaries<\/a>, and why Shopify will make 50% more<\/strong> from net<\/strong> payments<\/strong> than they will from total software revenue <\/strong>by the end of the decade.<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n
    \"\"<\/figure>\n\n\n\n

    Once given this supreme knowledge of payments, why would any software vendor ever make more software if they could make as much or even more money (at way higher margins, mind you) on payments?<\/p>\n\n\n\n

    The strategy transforms from building good software to doing the bare minimum required to own the payments stream.<\/strong><\/p>\n\n\n\n

    And what you get is a monopoly. <\/p>\n\n\n\n

    You know what happens to customer pricing in monopolies?<\/p>\n\n\n\n

    Let’s look at our two favorite monopolists (technically duopolists): Visa and Mastercard.<\/p>\n\n\n\n

    Here’s what’s happened<\/a> to interchange pricing over time EVEN THOUGH the costs to run these businesses have nosedived (and no, the card schemes didn’t need to hire more people: they have tens of thousands of people on their payrolls for the sole purpose of avoiding<\/em> anti-trust scrutiny.)<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    Let’s compare this with cloud storage costs<\/a>, where there exists a free market with lots of competition:<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    The trend line for cloud costs are what the card networks’ costs look like as well, and what SHOULD happen to interchange pricing, but there’s no need to pass along savings when you’re a monopoy, proving our point.<\/p>\n\n\n\n

    So you know what? The rational software company reaches for payments.<\/p>\n\n\n\n

    It’s just logical: <\/p>\n\n\n\n

    Software requires a lot of work.<\/p>\n\n\n\n

    Payments relatively zero. <\/p>\n\n\n\n

    And payments is way, way, way more lucrative.<\/p>\n\n\n\n

    But the irony, of course, is that the software company has now gone full circle and become the payments company that they loathed.<\/strong><\/p>\n\n\n\n

    The innovator has grown fat and entitled.<\/p>\n\n\n\n

    Their merchants are are devoid of choice, locked into a software with high switching costs, and payment rates keep going up as the software company needs to hit revenue goals.<\/p>\n\n\n\n

    Support dithers because who needs support when your customers are hostages?<\/p>\n\n\n\n

    Feature development stalls because who needs modern features when your customers are prisoners?<\/p>\n\n\n\n

    The abuse is so bad, in fact, that embedded payments FROM THE SOFTWARE PROVIDER is becoming non-sensical.<\/h4>\n\n\n\n

    The merchant is getting reamed. <\/p>\n\n\n\n

    Alternative payment vendors can’t provide options because they’re blocked out by the software.<\/p>\n\n\n\n

    And the software vendor is happy, booking private jets to wherever it is that these people go.<\/p>\n\n\n\n

    Right now, the payments market is still focused on the shift of software-led embedded payments.<\/p>\n\n\n\n

    Let’s show you how that’s playing out. <\/p>\n\n\n\n

    We’re going to lean on some excellent research by the payments team at JP Morgan for the following data and analysis.<\/p>\n\n\n\n

    If we think of the history of payments, acquiring banks farmed out the distribution to ISOs. <\/p>\n\n\n\n

    Over the past ~2 decades that has changed as software companies verticalized payments acquiring themselves.<\/p>\n\n\n\n

    So it should come as no surprise that payment entities that aren’t software companies are shrinking.<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n
    \"\"<\/figure>\n\n\n\n

    Large processors are being relegated to backend utilities and making significantly depressed revenues on the payfac volume. <\/p>\n\n\n\n

    Toast, for instance, is priced at $0.007 per transaction. Worldpay would make literally 10x that amount if it were supporting the merchant directly @ 20 bps of margin (a fair rate for Toast’s average merchant, not the 60 bps nonsense that Toast earns), and 5x that amount if they had a referral partnership with a software provider instead.<\/p>\n\n\n\n

    The analyst argument of “Yea but the processors don’t have all the costs they used to have so they should be higher margin under a payfac support model” is going to fall on deaf ears if processor revenues fall by 90% as the end-distribution transitions to payfac.<\/p>\n\n\n\n

    No amount of EBITDA will save these processors then.<\/p>\n\n\n\n

    Which means these processors will either need to verticalize by acquiring software themselves so they can reap the margins that come with owning the merchant accounts directly (has yet to sustainably work thanks to payment bro cultures), or find an entirely new model (keep reading).<\/p>\n\n\n\n

    On the whole, the conventional payments market is on the outside looking in.<\/strong><\/p>\n\n\n\n

    The large processors are losing share, their agents are quitting, and their ISOs are wondering what the hell they can do.<\/p>\n\n\n\n

    Worse, though, they’re losing without even being given a chance to compete:<\/p>\n\n\n\n

    A conventional acquirer could offer a merchant payments for FREE, but the merchant’s software provider won’t even let the merchant take it.<\/h4>\n\n\n\n

    That’s not business: that’s a hostage situation.<\/p>\n\n\n\n

    That’s not doing what’s best for the merchant.<\/p>\n\n\n\n

    That’s not in the ethos of transparency, fairness, and the things that this periodical stands for.<\/p>\n\n\n\n

    See if this story from one of our ISO friends sounds familiar.<\/p>\n\n\n\n

    \n

    Five years ago I could walk down the street and knock on 10 doors. Of those 10 doors, I could place payments at 9 of them. Today, I’m lucky if 4 of those 10 merchants aren’t using an embedded payments provider.<\/p>\nISO perspective on the state of the market<\/cite><\/blockquote>\n\n\n\n

    And you know what?<\/p>\n\n\n\n

    We’d bet a non-trivial percentage of those 6 merchants on embedded payments are paying more for payments – and getting worse support and antiquated features – than our ISO friend would provide.<\/p>\n\n\n\n

    So what now?<\/p>\n\n\n\n

    Now comes an industry transformation, swinging the pendulum in the other direction.<\/p>\n\n\n\n

    That’s not to say embedded payments will end; far from it.<\/p>\n\n\n\n

    Instead, software companies that embed payments will have to do what they long criticized payments companies for not<\/em> doing:<\/p>\n\n\n\n

    Be honest.<\/strong><\/p>\n\n\n\n

    The only way to make a hostage-taker behave honestly is to turn the tables through force.<\/p>\n\n\n\n

    Enter software.<\/p>\n\n\n\n

    Fighting fire with fire.<\/em><\/p>\n\n\n\n

    Software that reads the payments data in the software, routes it to the merchant’s preferred payments partner, and writes the reconciliation back into<\/em> the software.<\/p>\n\n\n\n

    Imagine offering merchants embedded payments that doesn’t require approval from the merchant’s software vendor.<\/h3>\n\n\n\n

    And it provides the merchant choice.<\/p>\n\n\n\n

    Choice on rates.<\/p>\n\n\n\n

    Choice on features.<\/p>\n\n\n\n

    Choice on support.<\/p>\n\n\n\n

    Choice in a partner.<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    Part 2 will lay it out. <\/p>\n\n\n\n

    <\/p>\n\n\n\n

    <\/p>\n\n\n\n

    <\/p>\n\n\n\n

    <\/p>\n","protected":false},"excerpt":{"rendered":"

    We have to start this series with an understanding of business cycle. Because if history doesn’t outright repeat itself, it sure as hell rhymes. Business cycles are just bundling and unbundling. Bundling: aggregating solutions under one banner so customers need only manage one vendor relationship. Unbundling: breaking apart solutions into best-of-breeds so customer can choose […]<\/p>\n","protected":false},"author":1,"featured_media":23396,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"image","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[5,4,3],"tags":[],"class_list":["post-23387","post","type-post","status-publish","format-image","has-post-thumbnail","hentry","category-solutions","category-merchants","category-pos","post_format-post-format-image"],"jetpack_publicize_connections":[],"jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p81nA2-65d","jetpack_featured_media_url":"https:\/\/i0.wp.com\/reformingretail.com\/wp-content\/uploads\/2025\/03\/Screen-Shot-2025-03-26-at-12.15.32-PM.png?fit=1212%2C750&ssl=1","_links":{"self":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/23387","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/comments?post=23387"}],"version-history":[{"count":11,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/23387\/revisions"}],"predecessor-version":[{"id":25954,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/posts\/23387\/revisions\/25954"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media\/23396"}],"wp:attachment":[{"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/media?parent=23387"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/categories?post=23387"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/reformingretail.com\/index.php\/wp-json\/wp\/v2\/tags?post=23387"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}