A Look at Complex Funding for SaaS Platforms

Payment Basics: How Merchants Are Funded

Understanding Merchant-Centric Payments

Most payment companies and their solutions focus on merchants. They help businesses set up merchant accounts to accept payments through various methods, often using a payment gateway. After processing payments, the acquiring processor handles funding by transferring payments to merchants. This transfer, called net settlement, deducts applicable transaction fees before depositing the remaining balance. This simple, streamlined process has long been the foundation of payment systems.

The Growing Complexity of Payments

The payment ecosystem has become more intricate as businesses adopt more advanced technology models driven by higher-value experiences for their “users”. Embedded payment solutions, adopted by ISV (Independent Software Vendor) or  SaaS (Software as a Service) platforms, have changed what payments entail. These solutions involve three key customer groups:

1. SaaS Platforms: Providers of technology infrastructure that enable payments.
2. Merchants: Businesses and or service providers—often specialized in verticals like healthcare, senior care, or real estate.
3. Payors: End customers who pay merchants for goods or services.

Money movement can extend across all three groups in evolving business models, necessitating more sophisticated funding capabilities. It is vital to remember that there are individual people on each end of these flows of funds. In Must Pay industries, these fund flows often create access to vital products and services or provide someone’s livelihood. Some examples include:

• Payments to SaaS platforms from Merchants or Payors for subscription or service fees.
• Payouts to Merchant partners like marketing affiliates or distributors.
• Marketplace SaaS platforms that both accept payments from their customers, like a hospital, and pay out funds to service providers, like healthcare professionals. 
• Payments for rent or resident fees get routed through management companies in industries such as senior care or property management.

Only Payment Facilitators (PFACs) and core acquiring processors have the infrastructure to manage these complex fund flow experiences. However, each comes with its challenges:

• Core Acquiring Processors: While highly capable, they can be difficult to integrate with newer platforms.
• Vertical PFACs: Typically designed for specific industries, which limits their flexibility for broader applications.
• Horizontal PFACs: Modern, highly flexible processing solutions that provide payments infrastructure to industries with broader common needs.

Two Types of Funding ModelsModern funding strategies can be divided into managed funding and instructional funding.Managed Funding

• Straightforward and consistent.
• Fixed funding amounts at regular intervals.
• Limited flexibility in how transaction fees are structured.

Instructional Funding

• Highly flexible, allowing customization of funding amounts, fee attribution, timing, and reserve management.
• Supports gross or net settlement models, adapting to various business needs.
• If a SaaS or Merchant customer wants to direct daily funding at specific times and/or to various parties or if a processor needs to set up a reserve requirement for risk management purposes, Instructional Funding is the only way to accomplish these use cases. 

Split FundingSplit funding is a flexible way for businesses to manage their sales money. Instead of sending all the money from a transaction to one bank account after deducting fees, split funding allows businesses to divide the money into different percentages and send it to multiple accounts. This means that a portion of the sales can automatically go to various accounts, making it easier for businesses to handle funds how they prefer.We have Event Promotion and Logistics business customers who use split funding to deliver more flexible, more valuable user experiences. In the events case, they use split funding to pay out ticket sales partners who help market and sell tickets to their events. In the Logistics case, split funding is used to pay out drivers who complete jobs that have been paid for by customers. In both cases, these are solutions that these SaaS platforms did not have from their prior providers that have materially improved the funds movement experiences in their ecosystems. In ClosingThe payment industry is evolving to meet the demands of modern commerce. While PFACs and core acquiring processors provide the necessary infrastructure, the real challenge is integrating these solutions into flexible, customer-focused systems. Advanced funding models, whether supporting split payments, managing reserves, or handling multi-entity ecosystems, are essential for delivering the seamless experiences businesses and customers expect.