Embedded payments refer to the seamless integration of payment processing capabilities directly within a software application or digital platform, eliminating the need for users to be redirected to an external site or service to complete a transaction.
This technology allows businesses to offer a more streamlined and convenient payment experience, as it enables customers to make purchases, pay invoices, or transfer funds without ever leaving the platform they are using—whether it’s a mobile app, a website, or a business management tool.
For example, in a ride-sharing app, the payment is processed automatically once the ride ends, without requiring the user to input their card details each time. Embedded payments are commonly used in e-commerce platforms, SaaS products, booking systems, and financial apps, as they not only enhance user experience but also help businesses increase conversions and customer retention.
When businesses integrate payment functionality into the core workflow, they can offer a more cohesive and frictionless experience, while also gaining better control over the transaction process and customer data.
How Embedded Payments Work
Embedded payments refer to the seamless integration of payment processing capabilities directly into a software platform, eliminating the need for users to switch between multiple tools or providers. This allows businesses to collect payments, manage billing, and reconcile transactions—all within one ecosystem.
For example, a gym management software with embedded payments lets members pay for subscriptions directly through the platform. These integrations typically include credit card processing, ACH, invoicing, and even recurring billing—all without the user needing to sign up separately with a third-party payment processor.
Traditional PayFac Model of Embedded Payments
The Traditional Payment Facilitator (PayFac) model involves a software platform becoming a registered payment facilitator (under a sponsor bank). This model gives the platform control over underwriting, onboarding, compliance, and risk management.
Key characteristics:
- The software company acts as the merchant of record.
- It underwrites and manages its sub-merchants (its customers).
- It handles compliance, KYC, and PCI responsibilities.
- Revenue is generated through interchange and processing fees.
Pros:
- Greater control over the payment experience.
- Higher revenue potential from payment fees.
Cons:
- Significant regulatory, financial, and operational burden.
- Requires a long setup time and ongoing risk management.
PayFac-as-a-Service Model of Embedded Payments
PayFac-as-a-Service (PFaaS) is a more flexible and low-risk alternative. In this model, the software company partners with a third-party provider that already operates as a registered PayFac. This allows platforms to embed payment capabilities without taking on the heavy regulatory and compliance burdens themselves.
Key characteristics:
- The third-party provider is the merchant of record.
- The software company focuses on user experience and integration.
- Compliance, risk, and payment infrastructure are managed by the PFaaS provider.
Pros:
- Faster time-to-market.
- Minimal regulatory exposure.
- Access to embedded payments revenue via revenue sharing.
Cons:
- Less control over the payment stack.
- Revenue share may be lower than in the traditional model.
How to Monetize Embedded Payments
Monetizing embedded payments means turning the built-in payment functionality in your software or platform into a revenue-generating stream. Here's how it works and the most common strategies:
- Payment Processing Fees (Markup on Interchange): One of the most common ways to monetize embedded payments is by marking up the interchange or processing fees. When users make transactions through your platform, you can charge a slightly higher percentage than what your payment processor charges you. For example, if the processor charges 2.5%, you might charge 2.9% and keep the 0.4% margin as profit. This model works especially well for platforms that process a high volume of payments, such as SaaS tools or marketplaces.
- Flat-Rate Convenience Fees: Another straightforward strategy is to charge a flat transaction fee for each payment processed through your system. This approach is frequently used in industries like fitness, healthcare, or property management, where users are accustomed to paying a set fee for convenience. For instance, you might add a $1.50 fee to each rent payment or service booking. This method allows for predictable income and works well when transaction volumes are steady.
- Subscription or Tiered Pricing: If your platform offers various pricing plans, you can bundle premium payment features—like recurring billing, advanced invoicing, or detailed reporting—into higher-tier subscriptions. This encourages users to upgrade their plans in exchange for more advanced payment capabilities. It’s a great strategy for SaaS platforms that already rely on monthly or annual recurring revenue models.
- Revenue Share with a PFaaS Provider: If you’re using a PayFac-as-a-Service model, your embedded payments provider may offer you a portion of the transaction revenue they earn. You don’t have to handle underwriting, compliance, or risk management, yet you still benefit financially from each payment processed. This is an ideal option for platforms that want to monetize payments without the heavy lift of becoming a registered PayFac themselves.
- Value-Added Payment Services: Offering optional, premium payment-related services can also be a lucrative strategy. These can include features like same-day payouts, fraud prevention, or chargeback protection. Users pay extra for these add-ons, giving you additional revenue streams beyond basic transaction fees. This approach works well for more mature platforms whose customers demand advanced financial tools.
- Embedded Financing or Lending: Enabling embedded financial services such as buy now, pay later (BNPL), installment plans, or invoice financing allows you to earn commissions or referral fees from lending partners. This model is particularly effective in B2B platforms or marketplaces where large transactions are common, and customers may benefit from flexible payment options.
