Time to Go Big(ger)

A burgeoning opportunity awaits payments firms that can integrate with software houses to serve mid-market clients.

Mid-market businesses are increasingly faced with the need to execute on multiple priorities at once, from enhancing customer experience to increasing back-office efficiency to finding ways to drive additional revenue. As a result, they need a comprehensive and differentiated approach to commerce, particularly amid a critical stage of growth for their organization.

Integrated payment functionality within the core software of the business has emerged as the preferred way to accomplish these goals in a dynamic and increasingly online business climate.

One of the most important decisions that a business makes after graduating from the small-and-medium-size-business category is the software it will use to manage operations and fuel continued growth. The payments module, and how it enables revenue collection and workflow, is a critical component of this strategic decision.

The integration of payment functionality into software allows a business to invoice customers electronically (either business-to-consumer or business-to-business), populated with data directly from the software; accept multiple and diversifying methods of payment; and reduce the overall complexity of revenue collection and accounting.

This brings a number of tangible benefits, including the potential for increased revenue, shorter accounts receivable cycles, and enhanced decision-making from transaction data and business analytics.

Additionally, on the payor side, integrated payments significantly enhance flexibility and convenience. They do this by giving business and consumer payors the ability to pay invoices directly from an email or portal, offering more choices both in terms of payment method (e.g., credit card, debit card, virtual card, automated clearing house, etc.) and medium (e.g., computer, phone, tablet, etc.).

Growth Tailwind

For software providers, the middle market represents a massive greenfield opportunity to offer and monetize payment solutions. A number of high-growth industries—such as health care, local governments and municipalities, nonprofit, manufacturing and distribution, and education—have been slow to adopt electronic payments due to the level of complexity involved in serving these verticals.

Because these verticals have traditionally been underserved, software providers that offer a differentiated bundle with integrated payments are experiencing higher win rates and customer retention. For the software provider, integrated payments also introduce an incremental revenue stream by monetizing the transaction volume of their customers, in addition to their software-as-a-service fees.

Further, software providers in the middle markets look to partner with a provider of integrated payments rather than build these solutions themselves. That’s because they are often highly focused on enhancing their own product rather than building payment functionality.

These providers also quickly realize there are a number of barriers to entry associated with building payments capabilities themselves, including lack of industry-specific regulatory knowledge, the costs of developing proprietary IT infrastructure, and the risks associated with the movement of funds and sensitive payment information.

This late adoption presents a handful of attractive opportunities for software providers and their payment partners. First, the majority of commerce in these markets is still done through paper checks and cash, which can result in costly errors and inefficiencies. High-quality payment modules are effective in converting these transactions to electronic forms of payment.

These modules are successful by reducing the complexity in making these payments through invoicing electronically, offering recurring payments, and storing cardholder information securely. This offers tangible benefits to the business and their customers.

Further, the majority of prospects and clients that a vertically focused mid-market provider targets do not currently have an integrated payments partner. As a result, there is often a large base of existing customers running the partner’s software, into which the provider can sell payments. This offers a meaningful growth tailwind benefiting the customer and the software vendor as well as the integrated-payments provider.

The Covid Effect

A good example of the power of integrated payments can be seen in the municipal vertical. More than 50% of water bill and property-tax payments nationwide are still being made in paper form, typically in person at the municipality. As a result, local governments are left with burdensome accounting and reconciliation processes and a high percentage of delinquent or missed payments.

This trend is driven, in large part, by a lack of effective electronic payment offerings that are focused on this market, particularly those integrated into the existing software that powers the municipality.

By incorporating payments into the core software of the municipality, local governments can send water and tax bills with critical data to their residents via email. This also gives residents the ability to pay securely from their home and set up recurring payments and reminders to help them better manage future payments.

Though businesses were realizing the benefits of integrated electronic payments before the pandemic, Covid-19 accelerated this trend. With the possibility of in-person payments eliminated, businesses have needed to turn to digital means to collect revenue quickly. While this has resulted in a short-term surge in adoption of integrated electronic payments, the abrupt shift toward online commerce is unlikely to revert to pre-pandemic behavior, given the clear benefits for the payor, the business, and the software provider.

As electronic payments continue to surge, the adoption of payment functionality inside of business-management software will become increasingly critical. This combination benefits businesses and their customers through enhanced workflow and improved customer experiences, while differentiating the software provider by offering the bundle to its customers.

This trend is becoming increasingly important for businesses in the middle markets given their heightened need for efficiency through continued growth and evolution.

—Ben Weiner is chief strategy officer at Paya.