For ISVs, The Lure Of Northern Exposure And Integrated Payments

Payment facilitators (PayFacs) could do with some northern exposure.

In an interview with PYMNTS, Marcus Dagenais, president, Canada, at payment processor Payroc, said that expanding into Canadian markets can boost the growth of ISVs. There are more similarities than differences between the U.S. and Canada, but awareness of the nuances is critical.

And in gaining a sense of the scale and opportunity in Canada, he pointed to Shopify as an example – “a tech darling in Canada.” This story and the numbers are a little dated now, but from 2013 to 2016, Shopify’s merchant base nearly doubled to 200,000 from about 120,000, yet revenues increased almost 10X – all while the average subscription fees per merchant remained essentially flat. Over that same period (roughly the four years leading up to the IPO), the total gross merchandise value (GMV) on the platform grew from ~$1.6 billion to more than ~$15 billion.

“It’s really one of the best examples of the power of the PayFac model,” said Dagenais, whose firm provides processing infrastructure to ISVs and PayFacs.

Gas On A Roaring Fire 

Since Shopify embedded payment acceptance into its core eCommerce infrastructure, it benefited proportionately as its merchant stores sold more, producing an exponential growth rate. “Monetizing their clients’ revenue effectively pours gas on an already roaring SaaS fire,” said Dagenais.

He noted that Canada is an attractive market for ISVs, and can be crystallized in the following hypothetical: “The first question I ask is, if you were a U.S.-based ISV, would you for some reason not want to offer your solutions to the state of California?” It makes little sense for ISVs to exclude a market the size of Canada, with roughly 40 million people. When viewing Canada and the U.S. as simply the North American market, the advantages seem starkly illuminated through the common borders, language and tight economic relationship. It’s an easy choice for the ISV or PayFac that wants to boost its growth and dip its toes into a very easy international market.

“Plus, you have a consumer base that is extremely savvy when it comes to using cards to pay for things … Canadians have been drinking the ‘debit card Kool-Aid’ for the better part of two decades now,” noted Dagenais.

Last September, Payroc’s Caledon platform partnered with NMI, a leading gateway and payments enablement platform, to provide a single-source acceptance solution for ISVs, ISOs and PayFacs expanding into Canada. Dagenais noted that “it’s an active partnership …. our infrastructure in Canada is extremely solid. We’re a full-stack acquirer/processor. We handle everything in-house from soup to nuts: authorization, clearing and settlement funding. But we’d lacked some distribution, and that’s why it was largely an ideal scenario to partner with NMI.”

Headed into the new year, there has been a lot of debate over fees and surcharges (on cardholders) tied to card transactions – that’s certainly the case here in the U.S. Dagenais said that product offerings like RewardPay can enable merchants to choose the amount of credit card fees they wish to subsidize and what amount they wish to pass on to cardholders. For example, a restaurant can decide to subsidize 1.5 percent and pass on a surcharge of 1.5 percent. “It’s not all or nothing, as they don’t necessarily have to pass on the full surcharge,” noted Dagenais. For the end cardholder, paying a surcharge of ~1.5 percent is easier to swallow when they know they’re getting 2 percent or more in loyalty points back on the purchase.

“With all of these small businesses that are reopening as vaccines are being rolled out, it’s a good time for owners to review all of their historical expenses and potentially make some changes for the future. So it’s a good time to look at your credit card acceptance costs,” Dagenais pointed out.

On Indirectly Distributing Payment Processing

New platform integrations can help SaaS companies keep more of the processing revenues, said Dagenais. He cited one 2020 study that found acquirers distributing via ISOs, ISVs and indirect channels relinquish as much as 40 percent to 80 percent of revenue margins (paid as residuals) to channel partners. For many ISV players, monetizing this processing revenue is ancillary or secondary to the software being sold, and so the conversation is not solely focused on pricing.

“If a deal comes through a traditional channel driven by an agent or ISO, it may generate a hypothetical 50 basis points in total margin to be shared by both us and the downstream agent,” explained Dagenais. “Whereas the deal that comes through an ISV channel may generate 100 to maybe 150 basis points, total margin to share. There’s far more haggling over pricing for a deal that originates through an agent channel, because it’s tough to distract the conversation from price.”

So while the percentage that acquirers share with third parties (and ISVs and Payfacs in particular) may seem high, the absolute share of margin they keep has remained reasonable.

Updates In Open Banking

For all stakeholders, on a macro level, challenges and opportunities loom as open banking takes root in Canada. But as Dagenais noted, the very term “open banking” invites discussion. And perhaps the name shouldn’t even be open banking at all: “It really should be consumer-directed finance,” he told PYMNTS. “The idea is that it’s my data. If I’m transacting, I should be able to do it with ABC bank and then share the data with other companies as I see fit. It shouldn’t be on ABC bank to decide whether or not XYZ FinTech can get access to my data and transaction history, for example.”

Dagenais also pointed to the need to change how one views the competitive landscape. “One solution is to stop viewing the conversation as ‘FinTechs versus the banks’ and start viewing it as a much more collaborative process,” he said. “FinTechs can build the products that current-day consumers want, but the banks already have many of those customers today.”