PayFac-as-a-Service

How SaaS & ISVs Are Evolving From Platforms to Processors

Seventy-five percent of the processing margin once paid entirely to their gateway.

That single statistic represents the most significant transformation in embedded payments since Stripe pioneered seven-line integrations in 2010.

While payment professionals debate the technical merits of various processing architectures, a more fundamental shift is occurring: software platforms are systematically capturing payment economics that were historically owned by traditional processors.

Consider the numbers driving this evolution.

Shopify’s payments revenue grew 110% year-over-year in Q1 2021, which directly contributed to a 5,700% stock increase from IPO to peak, and continues to be one of the key metrics investors look at when evaluating Shopify’s continued success.

Lightspeed Commerce reported $8.8 billion in gross payment volume in Q4 2024, a 34% year-over-year increase, while their embedded lending product achieved 96% year-over-year revenue growth.

Meanwhile, traditional ISOs, which once dominated a $7.5 trillion total addressable market, now control just 19% of payment processing, down from 60% in 2018.

The logic is economic before it is technical.

A software platform processing $10 million monthly through PayFac-as-a-Service can generate $57,500 in net revenue, compared to $5,000-$8,000 through traditional referral arrangements, a 700-1,000% improvement.

Yet the true transformation isn’t measured solely in basis points.

It’s in how payment monetization has evolved from a break-even utility into the primary engine for platform growth and valuation expansion.

In this edition of Payments Strategy Breakdown, I’ll dissect the PayFac-as-a-Service model through three maturity tiers: the Stripe Connect generation, leveraging existing infrastructure; growing platforms utilizing custom PFaaS implementations; and enterprise processors building full-stack capabilities.

We’ll explore how companies, from Shopify to Lightspeed, have transformed their business models and examine how providers like Tilled, Stripe Connect, and Fiserv are enabling this evolution.

Let’s dive in…

The Platform Payment Revolution: Learning from the Leaders

The transformation of software platforms into payment companies didn’t happen overnight. It required pioneers willing to challenge the conventional wisdom that payments should remain separate from core software functionality.

Shopify: The Embedded Finance Blueprint

Shopify’s evolution from e-commerce platform to financial services powerhouse illustrates the transformative potential of strategic payment integration.

Starting with basic payment acceptance through third-party processors, Shopify recognized that controlling the payment experience was essential for platform differentiation and merchant retention.

By partnering with Stripe for Shopify Payments and expanding into adjacent financial services, Shopify Balance for banking, Shopify Capital for lending, and card issuance for expense management, the company fundamentally altered its revenue model.

What began as subscription-based software became a comprehensive commerce platform where payments drove both revenue growth and customer stickiness.

The results speak for themselves.

Nowadays payments has become the primary differentiator separating Shopify from pure-play e-commerce platforms.

More importantly, embedded payments created the foundation for additional financial services that now generate 40-60% of total platform value.

Lightspeed: The Strategic Pivot

Lightspeed Commerce demonstrates how established software platforms can successfully transition to payment-centric business models.

Initially relying on traditional payment processor partnerships, Lightspeed faced the classic challenge of fragmented customer experience and limited revenue participation.

The company’s strategic pivot began in 2019 with the launch of Lightspeed Payments using traditional PayFac infrastructure.

However, by January 2020, Lightspeed pivoted to Stripe Connect integration, enabling rapid geographic expansion and unified payment experiences across retail and hospitality verticals.

The transformation accelerated through 2020-2024 with a unified POS and payments initiative across all markets.

The results: $8.8 billion in gross payment volume in Q4 2024 representing 34% year-over-year growth, while Lightspeed Capital achieved 96% year-over-year revenue growth from embedded lending capabilities.

The Common Pattern: From Cost Center to Profit Center

Both Shopify and Lightspeed followed a similar evolution path that’s becoming standard for successful software platforms:

1. Recognition Phase: Understanding that payment processing represents their largest addressable revenue opportunity

2. Integration Phase: Implementing embedded payment capabilities through strategic partnerships

3. Optimization Phase: Capturing increasing shares of payment economics through direct relationships

4. Expansion Phase: Leveraging payment infrastructure for adjacent financial services

This pattern reveals why traditional software-plus-referral models are becoming obsolete.

Companies that view payments as a utility rather than a strategic asset leave millions in revenue on the table while creating competitive vulnerabilities.

The Three-Tier Maturity Framework

The market for payment monetization naturally segments into three distinct maturity tiers, each with specific economic models, implementation approaches, and graduation criteria.

Tier 1: The Stripe Connect Generation ($10M-$100M ARR)

Early-stage platforms typically begin their payment journey with managed PayFac solutions, primarily Stripe Connect, Square’s platform offerings, or similar solutions from established processors. This tier encompasses companies processing $50 million to $2 billion annually, substantial volume that justifies payment monetization but insufficient scale to warrant the complexity of traditional PayFac registration.

Economic Model: Revenue sharing typically ranges from 10-30% of processing margin, generating $20,000-$100,000 monthly for platforms at meaningful scale.

Stripe Connect, for example, offers competitive revenue sharing while handling all compliance, underwriting, and operational complexity.

Implementation Benefits: Speed to market represents the primary advantage, with platforms typically launching payment capabilities within 30-60 days.

The model eliminates regulatory risk, reduces technical complexity, and provides immediate access to modern payment infrastructure including digital wallets, alternative payment methods, and global processing capabilities.

Limitations: Revenue sharing remains constrained by the provider’s economic model, typically leaving 70-90% of processing margin with the managed PayFac provider.

Customization options are limited, and platforms often lack granular control over pricing, underwriting, and merchant experience.

When to Graduate: Companies typically outgrow managed PayFac solutions when processing volume generates sufficient revenue to justify dedicated payment infrastructure, usually $100-200 million annually, or when product requirements exceed the flexibility of managed solutions.

Tier 2: The Custom PFaaS Players ($100M-$1B ARR)

This tier represents the strategic sweet spot for PayFac-as-a-Service, encompassing growing platforms that have achieved sufficient scale to justify payment infrastructure investment but lack the volume or appetite for full PayFac registration.

Economic Model: Revenue sharing typically reaches 75-90% of processing margin through providers like Tilled, Fiserv’s PFaaS offerings, or custom Stripe implementations. At $10 million monthly processing volume, this translates to $57,500 in monthly net revenue for platforms using solutions like Tilled’s 75% revenue share model.

Provider Landscape: Multiple options exist in this space:

• Tilled: Offers 75-90% revenue share with comprehensive white-label capabilities and 8-16 week implementation timelines

• Fiserv: Provides enterprise-grade PFaaS solutions with extensive banking relationships and compliance infrastructure

• Stripe (Custom): Delivers tailored implementations for larger platforms requiring specific functionality or economics

• Traditional Bank Partners: Major banks increasingly offer PFaaS solutions leveraging existing compliance infrastructure

Implementation Requirements: Custom PFaaS implementations typically require 8-16 weeks for full integration, involving API development, merchant onboarding flows, and white-label payment experiences.

Platforms maintain control over pricing, underwriting criteria, and customer experience while outsourcing compliance, risk management, and operational support.

Breaking Point: Companies typically graduate from PFaaS to enterprise solutions when processing volume exceeds $1-2 billion annually, or when they develop sufficient payment expertise to justify building proprietary infrastructure.

Tier 3: The Enterprise Processors (Multi-billion ARR)

Enterprise platforms with multi-billion dollar processing volumes eventually develop the scale and expertise to build comprehensive payment infrastructure, either through direct network relationships or proprietary processing capabilities.

Economic Model: Direct network relationships enable interchange-plus pricing models with total processing costs approaching interchange plus 10-20 basis points.

Companies like Toast (restaurant-specific optimization), Amazon (Amazon Pay), and Uber (multi-vertical optimization) demonstrate successful transitions to enterprise payment infrastructure.

Infrastructure Requirements: Enterprise payment operations typically require dedicated compliance teams (3-5 FTEs), risk management specialists (2-4 FTEs), and technical infrastructure supporting real-time transaction processing.

Initial investment often ranges from $5-15 million with ongoing operational costs of $3-5 million annually.

Strategic Advantages: Full infrastructure control enables enterprise platforms to optimize every aspect of payment economics, from interchange optimization and direct network negotiations to proprietary risk models and custom merchant experiences.

The PFaaS Economic Model: Breaking Down the Mathematics

Understanding the true economics of PayFac-as-a-Service requires examining both immediate revenue generation and long-term value creation across different implementation approaches.

Traditional Payment Economics: In conventional payment processing, revenue flows from merchants to processors through interchange fees (typically 1.8-2.4% for credit cards), network assessment fees (0.1-0.2%), and processing markup (0.5-1.0%).

Software platforms historically captured 10-30 basis points through referral arrangements, leaving the majority of value with payment processors.

PFaaS Revenue Distribution: Modern PFaaS models redistribute payment economics by enabling platforms to capture 75-90% of processing margin while eliminating operational overhead.

For every $100 transaction, merchants pay approximately $3.00 in total processing costs, with $2.20 covering interchange and network fees and $0.80 representing gross margin available for distribution.

Scale Economics: The PFaaS model demonstrates increasing returns to scale as fixed costs are amortized across growing transaction volume.

A platform processing $1 million monthly generates approximately $5,500 in net revenue, while $10 million monthly processing yields $57,500, more than 10x revenue growth for 10x volume increase.

Hidden Value Creation: Beyond immediate revenue capture, payment integration creates platform stickiness that reduces customer churn by 15-25% according to industry studies.

Embedded payments also enable adjacent financial services, lending, banking, insurance, that can generate additional revenue streams worth 40-60% of total platform value.

Benefits and Drawbacks: The Strategic Trade-offs

Like any business model, PayFac-as-a-Service involves strategic trade-offs that platforms must carefully evaluate.

Primary Benefits:

Revenue Optimization: PFaaS enables platforms to capture 75-90% of payment economics versus 10-30% through traditional arrangements, representing 250-900% revenue improvement at scale.

Speed to Market: Implementation timelines of 8-16 weeks compare favorably to 12-24 months for traditional PayFac registration, enabling faster competitive response and revenue generation.

Risk Transfer: Compliance, underwriting, and fraud management responsibilities transfer to specialized providers, eliminating the need for dedicated payment expertise and regulatory oversight.

Operational Simplicity: Platforms avoid hiring payment specialists, managing bank relationships, or handling PCI compliance while maintaining control over customer experience and pricing.

Scalability: Modern PFaaS platforms handle transaction processing, settlement, and reporting automatically, enabling platforms to scale payment operations without proportional operational overhead.

Key Drawbacks:

Vendor Dependency: Platforms become dependent on PFaaS providers for critical revenue streams, creating potential risks if service quality degrades or relationships change.

Limited Customization: While more flexible than managed PayFac solutions, PFaaS still constrains customization options compared to fully proprietary payment infrastructure.

Revenue Sharing: Platforms forfeit 10-25% of payment economics to PFaaS providers, which can represent millions in foregone revenue at enterprise scale.

Integration Complexity: Despite improved APIs and documentation, PFaaS implementation requires significant technical resources and ongoing maintenance.

Competitive Exposure: Using common PFaaS infrastructure may limit differentiation opportunities compared to platforms with proprietary payment capabilities.

Strategic Decision Framework: When and How to Evolve

For software platforms evaluating payment monetization, the decision framework encompasses four critical vectors: current scale, technical capability, market positioning, and growth trajectory.

Volume Thresholds: Companies processing less than $50 million annually typically benefit from managed PayFac solutions that prioritize speed to market over margin optimization.

The $50-500 million range represents the PFaaS sweet spot, where the revenue opportunity justifies the implementation complexity without requiring a full infrastructure investment.

Above $500 million to $1 billion, platforms should evaluate direct PayFac registration or hybrid approaches.

Technical Readiness Assessment: PFaaS implementation requires API integration capabilities, webhook management, and multi-service monitoring expertise.

Companies lacking dedicated engineering resources should build internal capabilities before adding payment complexity. Successful implementations typically require 2-4 full-time engineering staff members for integration and ongoing maintenance.

Market Positioning Considerations: Vertical SaaS companies benefit most from payment integration due to specialized compliance requirements, industry-specific payment flows, and opportunities for adjacent financial services.

Horizontal platforms may find fewer opportunities for differentiation unless payments enable unique customer experiences or operational efficiencies.

Provider Selection Criteria: The PFaaS landscape includes multiple viable options:

• For rapid deployment: Stripe Connect offers proven scalability and comprehensive documentation

• For maximum revenue share: Providers like Tilled enable 75-90% revenue retention with full white-label capabilities

• For enterprise features: Fiserv and traditional bank partners provide comprehensive compliance infrastructure and established processor relationships

• For specialized verticals: Industry-specific providers offer tailored underwriting and compliance frameworks

Looking Forward: The Future of Platform Payments

The evolution from payment acceptance to payment ownership represents a fundamental shift in how software platforms create and capture value.

As embedded finance continues expanding, projected to reach $251.5 billion by 2029, payment monetization will increasingly determine platform competitiveness and valuation.

Regulatory Tailwinds: Emerging regulations including CFPB Section 1033 and European PSD3 implementation create standardized API requirements that reduce integration complexity while opening new competitive opportunities.

These frameworks favor platforms that view regulatory requirements as opportunities for innovation rather than compliance burdens.

Technology Evolution: Advances in AI-powered risk management, real-time payment processing, and blockchain integration will continue expanding PFaaS capabilities.

Platforms that establish payment infrastructure today position themselves to leverage these innovations as they mature.

Market Consolidation: The payments industry continues consolidating around technology-forward players and specialized vertical providers. Software platforms that delay payment integration risk being excluded from this evolution, as competitors establish payment capabilities and capture customer relationships.

Adjacent Opportunities: Payment integration serves as the foundation for comprehensive embedded finance offering,s including lending, banking, insurance, and treasury management.

Platforms that view payments strategically rather than tactically create opportunities for multiple revenue streams and deeper customer relationships.

The PFaaS model represents more than technological evolution, it’s the infrastructure enabling software platforms to become financial services companies.

As the boundaries between software and finance continue blurring, payment monetization will increasingly separate market leaders from market participants.

Bottom Line: For software platforms processing meaningful transaction volume, the question isn’t whether to monetize payments, but when and how to do it strategically. Companies that recognize this shift and act decisively will capture disproportionate value in the embedded finance transformation ahead.

The optimal payment strategy for any platform is the one whose marginal benefit, whether in revenue, customer experience, or competitive positioning, exceeds the marginal cost at this moment in its growth trajectory.

Build optionality into every payment decision today, and you can climb the value curve tomorrow without rebuilding your entire infrastructure.

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