Independent Software Vendors (ISVs)
Overview
An ISV (Independent Software Vendor) is a company that develops and sells software designed for specific business verticals or use cases. Unlike ISOs who primarily sell payment processing, ISVs sell software solutions that happen to include payments.
| Role | Description |
|---|---|
| Primary Product | Vertical-specific software (POS, practice management, booking systems) |
| Payment Role | Embed payments into software as a feature (not the core product) |
| Value Proposition | Solve industry-specific business problems, payments are seamless |
| Revenue Model | SaaS subscriptions + payment processing revenue |
Key Point: ISVs monetize payments as an enhancement to their software business. The software creates merchant dependency; payments become a natural revenue multiplier.
The ISV Advantage:
- Stickiness: Merchants won't switch software just for better payment rates
- Higher LTV: Software + payments = 2-5x revenue per merchant (a16z data)
- Lower Churn: 5-10% vs 15-30% for pure payment providers
Historical Evolution
ISVs evolved from pure software companies to payment-embedded platforms.
Timeline: The Rise of ISV-Embedded Payments
TIMELINE: ISV PAYMENT EVOLUTION
═══════════════════════════════════════════════════════════════
1990s-2000s: Software and Payments Separate
┌─────────────────────────────────────────────────────────────┐
│ • ISVs sell software (POS, practice management, etc.) │
│ • Merchants get payments separately from ISO/bank │
│ • Two vendors, two relationships, no integration │
│ • Reconciliation headache: Match software sales to payments │
└─────────────────────────────────────────────────────────────┘
│
▼
2005-2010: Basic Integrations Emerge
┌─────────────────────────────────────────────────────────────┐
│ • ISVs partner with payment gateways (Authorize.net) │
│ • Basic API integrations (separate logins, separate systems)│
│ • ISVs earn referral fees ($50-100 per merchant) │
│ • Still fragmented experience for merchants │
└─────────────────────────────────────────────────────────────┘
│
▼
2010-2015: Square & Stripe Change Everything
┌ ─────────────────────────────────────────────────────────────┐
│ • Square (2009): Hardware + software + payments unified │
│ • Stripe (2010): Developer-first APIs for embedded payments │
│ • Stripe Connect (2012): Enable platforms to onboard subs │
│ • Merchants expect integrated, seamless payment experiences │
└─────────────────────────────────────────────────────────────┘
│
▼
2015-2020: ISV-to-PayFac Movement
┌─────────────────────────────────────────────────────────────┐
│ • Toast, Mindbody, Shopify become PayFacs │
│ • ISVs realize: "We can own the payment stack" │
│ • PayFac-as-a-Service (PFaaS) emerges for smaller ISVs │
│ • Payment revenue often exceeds software revenue │
└─────────────────────────────────────────────────────────────┘
│
▼
2020-Present: Embedded Finance Expansion
┌─────────────────────────────────────────────────────────────┐
│ • Beyond payments: Lending, banking, insurance embedded │
│ • ISV share of merchant acquisition: 29% → 37% (projected) │
│ • Vertical SaaS dominates (horizontal software losing) │
│ • AI/data driving new capabilities (fraud, underwriting) │
└─────────────────────────────────────────────────────────────┘
Key Insight: The ISV payment evolution follows a clear pattern: Software first, payments second. ISVs that successfully embed payments create enormous switching costs and unlock significant revenue.
What ISVs Do
ISVs solve industry-specific business problems through software, with payments as an integrated capability.
The ISV Value Proposition
┌──────────────────────────────────────────────────────────────────────┐
│ WHY MERCHANTS CHOOSE ISVs │
└──────────────────────────────────────────────────────────────────────┘
TRADITIONAL APPROACH (Without ISV):
──────────────────────────────────
Merchant needs:
1. Business software (POS, scheduling, etc.)
2. Payment processing (separate vendor)
3. Reporting/reconciliation (manual)
4. Integrations (often broken)
Timeline: Weeks to months to set up
Relationships: 2-5 different vendors
Complexity: High
ISV APPROACH (Embedded Payments):
──────────────────────────────────
Merchant needs:
1. ISV software (includes payments)
Timeline: Same day to 48 hours
Relationships: 1 vendor
Complexity: Low
Additional benefit: Unified reporting, automated reconciliation
How ISVs Add Value
┌──────────────────────────────────────────────────────────────────────┐
│ ISV VALUE STACK EXAMPLE │
│ (Restaurant Software) │
└──────────────────────────────────────────────────────────────────────┘
┌─────────────────┐
│ Diner/Customer │
└────────┬────────┘
│
┌────────▼─────────┐
│ Restaurant │
│ POS Terminal │
└────────┬─────────┘
│
┌── ──────────────────┼────────────────────┐
│ │
▼ ▼
┌───────────────┐ ┌─────────────────┐
│ Payment │ │ Restaurant │
│ Processing │ │ Management │
│ │ │ │
│ • Card Auth │ │ • Menu Mgmt │
│ • Settlement │ │ • Table Mgmt │
│ • Tip Adjust │ │ • Kitchen Display│
│ • Reporting │ │ • Inventory │
└───────┬───────┘ │ • Labor Mgmt │
│ │ • Reporting │
│ └─────────────────┘
│
▼
┌─────────────────────────────────────────┐
│ Value-Added Services │
│ │
│ • Working Capital Loans (Toast Capital)│
│ • Payroll processing │
│ • Online ordering integration │
│ • Loyalty programs │
│ • Third-party delivery integration │
└─────────────────────────────────────────┘
│
▼
┌───────────────┐
│ Restaurant │
│ Owner │
│ │
│ Single login │
│ Unified data │
│ One vendor │
└───────────────┘
ISV Payment Integration Models
ISVs have evolved through several payment partnership models, each offering different levels of control and revenue.
Evolution of ISV Payment Models
┌─────────────────────────────────────────────────────────────────┐
│ ISV Payment Model Evolution │
└─────────────────────────────────────────────────────────────────┘
Level 1: REFERRAL MODEL (Least Control, Least Revenue)
┌──────────────┐ Refers ┌──────────────┐
│ ISV │ ────────────────> │ Payment │
│ Software │ │ Provider │
└──────────────┘ └──────────────┘
│ │
│ │
▼ ▼
┌─────────────────────────────────────────┐
│ Merchant │
│ (Manages two separate relationships) │
└─────────────────────────────────────────┘
Revenue: $50-100 per merchant referral (one-time)
Level 2: ISO PARTNERSHIP (Some Control, Some Revenue)
┌──────────────┐ Acts as ISO ┌──────────────┐
│ ISV │ <───────────────> │ Processor/ │
│ (ISO Agent) │ Revenue Share │ Acquirer │
└──────────────┘ └──────────────┘
│ │
│ │
└──────────┬───────────────────────┘
│
▼
┌──────────┐
│ Merchant │
└──────────┘
Revenue: 10-20% of processing margin (ongoing residuals)
Control: Limited pricing control, no underwriting control
Level 3: [PAYFAC MODEL](#the-payfac-model) (High Control, High Revenue, High Risk)
┌──────────────────────────────────────────────────────┐
│ ISV as PayFac │
│ ┌────────────┐ ┌──────────────────────┐ │
│ │ ISV │ │ Payment Processing │ │
│ │ Software │ <────> │ & Risk Management │ │
│ └────────────┘ └──────────────────────┘ │
│ │
│ Master Merchant Account with Processor/Bank │
└──────────────────────────────────────────────────────┘
│
│ Sub-merchant
│ Relationships
▼
┌──────────────────────┐
│ Sub-merchants │
│ (Rapid onboarding) │
└──────────────────────┘
Revenue: 50-100% of processing margin
Control: Full pricing, underwriting, experience control
Risk: Chargeback liability, compliance burden, capital requirements
Level 4: PAYFAC-as-a-SERVICE (Medium Control, Good Revenue, Lower Risk)
┌──────────────────────────────────────────────────────┐
│ ISV Platform │
│ ┌────────────┐ ┌──────────────────────┐ │
│ │ ISV │ │ Payment UX/API │ │
│ │ Software │ <────> │ (ISV-controlled) │ │
│ └────────────┘ └──────────────────────┘ │
└──────────────────────────────────────────────────────┘
│ API Integration
▼
┌──────────────────────┐
│ PFaaS Provider │
│ (Stripe Connect, │
│ Adyen for Platforms,│
│ PayPal Complete) │
│ │
│ • Compliance │
│ • Underwriting │
│ • Risk Management │
│ • Settlement │
└──────────────────────┘
│
▼
┌──────────────────────┐
│ Sub-merchants │
└──────────────────────┘
Revenue: 40-70% of processing margin
Control: Pricing and UX control, limited underwriting control
Risk: Significantly reduced, provider handles most compliance
Model Comparison Table
| Aspect | Referral | ISO Partnership | PayFac | PFaaS |
|---|---|---|---|---|
| Revenue Share | 1-5% | 10-20% | 50-100% | 40-70% |
| Control Over Pricing | None | Limited | Full | Full |
| Control Over Underwriting | None | None | Full | Partial |
| Compliance Burden | None | Low | Very High | Low-Medium |
| Time to Market | N/A | 6-12 months | 12-24 months | 3-6 months |
| Chargeback Liability | None | None | Full | Shared |
| Capital Requirements | None | Low | High ($500K-$5M) | Low-Medium |
| Typical Volume Threshold | Any | Any | $50M+ annually | $10M+ annually |
Major ISV Players (2024-2025)
Restaurant & Hospitality ISVs
Toast
- Market Position: #1 full-service restaurant POS
- POS Market Share: ~24%
- Ranking: 14th largest payment processor by volume
- Gross Payment Volume (GPV): $92 billion (2024)
- Merchants: 85,000+ restaurant locations
- Target Market: Table-service restaurants, full-service dining
- Payment Model: PayFac (owns payment stack)
- Notable: Payment processing revenue exceeds software subscription revenue
- Differentiation: Built specifically for restaurants, not adapted retail POS
Square (Block, Inc.)
- Market Position: Dominant in micro-merchants and mobile POS
- POS Market Share: ~27-28%
- Merchants: ~4 million U.S. merchants
- GPV (F&B segment): $58 billion
- Target Market: Very small retailers, market vendors, mobile sellers
- Payment Model: PayFac pioneer
- Notable: Democratized payment acceptance for smallest merchants
- Ecosystem: Expanded to banking (Square Banking), lending, payroll
Shift4
- GPV: $72 billion
- Target Market: Table-service restaurants, hospitality, stadiums
- Payment Model: PayFac + traditional acquiring
- Notable: 2024 acquisition of Revel Systems expanded POS footprint
- Differentiation: End-to-end payment technology + gateway services
Clover (Fiserv)
- GPV: $225 billion
- Market Position: Largest by volume, distributed through bank channels
- Target Market: Counter-service restaurants, retail
- Distribution: 41% of payment providers list Clover products
- Payment Model: Fiserv-owned platform, bank/ISO distribution
- Notable: Distributed through bank branches and ISOs/VARs, not direct sales
Retail & E-commerce ISVs
Lightspeed
- GPV: $87 billion
- Target Market: Retail businesses needing sophisticated inventory management
- Verticals: Golf courses, bike shops, specialty retail
- Payment Model: PayFac (multi-processor backend)
- Differentiation: Advanced inventory, multi-location management
Shopify
- Payment Revenue: 74% of total revenue from merchant solutions
- Merchants: Millions of e-commerce stores
- Payment Model Evolution: Started on Stripe Connect (2013) → evolved to own more stack
- Notable: Demonstrates transition from software company to payments company
- Differentiation: E-commerce focus, omnichannel (online + in-person POS)
Vertical Specialty ISVs
Mindbody (Fitness & Wellness)
- Revenue from Payments: 50%+ of total revenue
- Target Market: Fitness studios, yoga, pilates, spas, salons
- Payment Features: Recurring billing, class packages, membership management
- Notable: Classic vertical SaaS payments monetization model
Clio (Legal)
- ARR Growth: $100M (2022) → $200M (2024)
- Target Market: Law firms and legal practices
- Payment Features: Trust accounting compliance, client billing, invoice payments
- Differentiation: Industry-specific compliance (IOLTA accounts, bar association rules)
Vertical Markets
ISVs dominate specific vertical markets where industry-specific software creates merchant dependency.
High ISV Penetration Verticals (2024-2025)
| Vertical | ISV Penetration | Why ISVs Dominate | Leading ISVs |
|---|---|---|---|
| Restaurant & Hospitality | 65% | Complex workflows (table mgmt, tips, kitchen), regulations | Toast, Square, Shift4, Clover |
| Fitness & Wellness | 55% | Recurring billing, scheduling, membership management | Mindbody, Zen Planner |
| Retail | 45% | Inventory management, multi-channel needs | Lightspeed, Square, Shopify |
| Healthcare | 40% | EHR integration, HIPAA compliance, patient billing | Practice management software |
| Legal Services | 35% | Trust accounting (IOLTA), matter-based billing | Clio, MyCase |
| Field Services | 50% | Mobile payments, scheduling, job costing | ServiceTitan, Jobber |
Common Vertical ISV Payment Features
Industry-Specific Payment Features:
════════════════════════ ═══════════════════════════════════════
RESTAURANTS:
• Tip adjustment and tip pooling
• Split checks / multi-tender
• Pre-authorization (tabs)
• Kitchen display system integration
• Online ordering + delivery integration
• Alcohol age verification compliance
FITNESS & WELLNESS:
• Recurring membership billing
• Class package management
• No-show fees and cancellation policies
• Multi-location membership portability
• Family/couple account billing
HEALTHCARE:
• Patient responsibility estimation
• Insurance copay collection
• HIPAA-compliant payment processing
• Payment plan management
• EHR integration
LEGAL:
• Trust account (IOLTA) compliance
• Matter-based billing
• Retainer management
• Invoice financing
• Bar association rule compliance
FIELD SERVICES:
• Mobile payment at job site
• Signature capture
• Deposit and final payment workflows
• Invoice generation from job tickets
• Financing for large purchases
ISV Economics
Revenue Model Transformation
Traditional ISV (Software-Only) Revenue:
Monthly SaaS Subscription: $100-500/month
Annual Value per Merchant: $1,200-6,000
Margin: 70-80%
Churn: 15-25% annually
LTV: $4,000-20,000
Modern ISV (Software + Payments) Revenue:
Monthly SaaS Subscription: $100-500/month
Payment Processing Revenue: $500-2,000/month (on $50K-200K volume)
Annual Value per Merchant: $7,200-30,000
Overall Margin: 40-60% (blended)
Churn: 5-10% annually (sticky due to payments)
LTV: $50,000-200,000
Revenue Multiplication Effect:
- 2-5x increase in revenue per merchant (a16z data)
- Lower churn: Switching costs increase dramatically when payments integrated
- Higher LTV: Longer customer relationships due to switching friction
Payment Revenue Breakdown (Typical ISV PayFac)
Example: Restaurant ISV Processing $100,000/month per merchant
Gross Processing Revenue: $100,000
[Interchange<!-- (/ecosystem/core-concepts/four-party-model#interchange-fees not yet migrated) --> + Assessments: -$2,200 (2.2% blended)
Processor Fee: -$300 (0.3%)
─────────
Net Processing Margin: $1,500 (1.5%)
ISV Charges Merchant: 2.75% + $0.10/txn
ISV Gross Revenue: $2,750 + ~$150 = $2,900
ISV Costs:
- Interchange + Assessments: -$2,200
- Processor Fee: -$300
- Risk Reserve: -$100
- Operational Costs: -$100
─────────
ISV Net Payment Profit: $200/month per merchant
Comparison to SaaS Revenue: $200 vs $300 SaaS subscription
Payment Revenue as % of Total: 40% of gross revenue
At Scale (1,000 merchants):
SaaS Revenue: $300,000/month
Payment Revenue: $200,000/month (net profit)
Total Monthly: $500,000/month
Payment % of Profit: ~40%
Note: Payment revenue often has better retention than SaaS
ISV Dissatisfaction with Payment Partners (2023 TSG Survey)
- 58% dissatisfied with payment companies' innovation
- 50% dissatisfied with deployment friction
- 75% looking for new processing partners
This drives ISVs toward:
- Becoming PayFacs (full control)
- Using PFaaS platforms (better than traditional ISOs)
- Multi-processor strategies (reduce dependency)
The ISV-to-PayFac Evolution
Why ISVs Become PayFacs
Control Motivations:
- Pricing Control: Set merchant rates independently, capture full margin
- Experience Control: Own entire merchant onboarding and payment flow
- Data Control: Access to transaction data for analytics and additional services
- Speed Control: Onboard merchants in minutes vs weeks
- Feature Control: Build custom payment features for vertical needs
Economic Motivations:
- Revenue Expansion: Increase from 10-20% (ISO) to 50-100% (PayFac) of margin
- Merchant Stickiness: Payments create switching costs, reduce churn
- Cross-Sell Opportunities: Use payment data to offer lending, insurance
- Valuation Multiple: Payment revenue valued higher than SaaS revenue
Example: Toast's PayFac Evolution
2013: Founded as restaurant management software
2014: Partnered with processor (limited control)
2016: Became PayFac (full control)
2021: IPO with payments as majority of revenue
2024: Payment processing revenue > software subscriptions
Result: Transformed from SaaS company to payment-first platform
When Should an ISV Become a PayFac?
Volume Threshold Rule of Thumb:
- $50-100 million annually in merchant processing volume
- At this scale, economics justify compliance investment
- Below this, PFaaS usually makes more sense
ISV-to-PayFac Decision Matrix:
| Factor | Favor PayFac | Favor PFaaS |
|---|---|---|
| Annual Processing Volume | Over $100M | Under $50M |
| Merchant Count | 500-1000+ | Under 500 |
| Risk Tolerance | High (can handle liability) | Low |
| Engineering Resources | 10 or more dedicated engineers | Limited dev resources |
| Time to Market | 12-24 months acceptable | Need 3-6 months |
| Capital Available | $2M-5M or more | Under $1M |
| Industry Risk Profile | Low-risk vertical | Higher-risk vertical |
| Control Requirements | Need full underwriting control | Pricing control sufficient |
| Compliance Expertise | In-house or can hire | Outsource preferred |
The Middle Path: PFaaS (PayFac-as-a-Service)
Most ISVs (2024-2025) choose PFaaS for optimal balance:
┌──────────────────────────────────────────────────────────┐
│ PFaaS: Best of Both Worlds │
└──────────────────────────────────────────────────────────┘
ISV Controls: PFaaS Provider Handles:
✓ Merchant pricing ✓ Sponsor bank relationship
✓ Merchant onboarding UX ✓ Card network registration
✓ Payment flow/experience ✓ Compliance monitoring
✓ Transaction data access ✓ Underwriting decisioning
✓ Branded payment solution ✓ Risk management
✓ Settlement operations
✓ Chargeback management
✓ PCI compliance
Revenue Share: 40-70% of margin (vs 50-100% as full PayFac)
Time to Market: 3-6 months (vs 12-24 months as full PayFac)
Capital Required: $100K-500K (vs $2M-5M as full PayFac)
Leading PFaaS Providers (2024-2025):
- Stripe Connect
- Adyen for Platforms
- PayPal Complete Payments
- Finix
- Worldpay for Platforms
ISV vs ISO Comparison
Understanding the difference between ISVs and ISOs is critical for payment ecosystem literacy.
Fundamental Differences
┌─────────────────────────────────────────────────────────────┐
│ ISV vs ISO: Core Distinction │
└─────────────────────────────────────────────────────────────┘
ISV (Independent Software Vendor)
┌────────────────────────────────────────┐
│ Primary Business: SOFTWARE │
│ │
│ ┌──────────────┐ │
│ │ Software │ ◄──── Core Product │
│ │ Platform │ │
│ └──────┬───────┘ │
│ │ │
│ ▼ │
│ ┌──────────────┐ │
│ │ Payments │ ◄──── Monetization │
│ │ (Integrated) │ Enhancement │
│ └──────────────┘ │
│ │
│ Value: Solving industry-specific │
│ business problems │
└────────────────────────────────────────┘
ISO (Independent Sales Organization)
┌────────────────────────────────────────┐
│ Primary Business: PAYMENT SALES │
│ │
│ ┌──────────────┐ │
│ │ Payment │ ◄──── Core Product │
│ │ Services │ │
│ └──────┬───────┘ │
│ │ │
│ ▼ │
│ ┌──────────────┐ │
│ │ Optional │ ◄──── Value-Add │
│ │ Equipment/ │ (Optional) │
│ │ Software │ │
│ └── ────────────┘ │
│ │
│ Value: Payment expertise and │
│ merchant services │
└────────────────────────────────────────┘
Detailed Comparison Table
| Dimension | ISV | ISO |
|---|---|---|
| Primary Product | Vertical-specific software | Payment processing services |
| Revenue Model | SaaS subscriptions + payment revenue | Payment processing residuals |
| Merchant Relationship | Own the merchant (via software dependency) | Share merchant with processor |
| Switching Cost | Very high (would lose business software) | Low (just payment processing) |
| Target Market | Specific verticals (restaurants, retail, etc.) | Any merchant needing payments |
| Software Development | Core competency | Not core, may resell third-party |
| Payment Expertise | Growing competency | Core competency |
| Typical Evolution | Software → Add payments → Become PayFac | Sales agent → Maybe add software |
| Merchant Onboarding | Integrated into software setup | Standalone payment application |
| Churn Rate | 5-10% annually | 15-30% annually |
| Revenue per Merchant | $500-2,500/month (software + payments) | $50-500/month (payments only) |
The Blurring Lines (2024-2025 Trend)
Key Distinguisher:
- ISV: Merchant comes for the software, stays for integrated payments
- ISO: Merchant comes for payment processing, may get software too
See ISOs (Independent Sales Organizations) for detailed comparison.
Current Trends (2024-2025)
1. Embedded Finance Expansion
ISVs moving beyond payments to full financial services:
Payment Evolution Ladder:
2010s: Accept Payments
↓
2015-2020: Own Payment Stack (PayFac)
↓
2020-2025: Embedded Finance
Components:
├── Payments (mature)
├── Lending (working capital, merchant cash advance)
├── Banking (deposit accounts, debit cards)
├── Payroll (employee payment, tax filing)
├── Insurance (liability, workers comp)
└── Investment (merchant cash management)
Examples:
- Square: Square Banking, Square Loans, Square Payroll
- Shopify: Shopify Capital (lending), Shopify Balance (banking)
- Toast: Toast Capital (lending), Toast Payroll
2. Vertical SaaS Dominance
Horizontal software losing to vertical-specific solutions:
Why Vertical SaaS Wins:
- Industry-specific workflows deeply integrated
- Compliance requirements baked in (e.g., alcohol sales, HIPAA)
- Industry terminology and UX match user expectations
- Pre-built integrations with industry tools
- Higher willingness to pay (solves specific pain points)
3. ISV Consolidation
Larger payment players acquiring ISVs:
Recent Examples:
- Shift4 acquires Revel Systems (2024): POS + payment processing
- Fiserv owns Clover: Distribution through bank channels
- Global Payments acquires AdvancedMD: Healthcare vertical
4. Multi-Processor Strategies
Larger ISVs avoiding single-processor dependency:
┌─────────────┐
│ ISV │
│ Platform │
└──────┬──────┘
│
┌──────────────┼──────────────┐
│ │ │
▼ ▼ ▼
┌─────────┐ ┌─────────┐ ┌─────────┐
│Processor│ │Processor│ │Processor│
│ A │ │ B │ │ C │
└─────────┘ └─────────┘ └─────────┘
Benefits:
- Redundancy (failover)
- Negotiating leverage
- Geographic optimization
- Cost optimization (route to lowest cost)
5. AI and Data-Driven Decisioning
ISVs leveraging payment + operational data:
Use Cases:
- Fraud Detection: Vertical-specific fraud patterns
- Dynamic Pricing: Adjust merchant rates based on risk
- Working Capital Lending: Underwrite loans using payment history
- Business Intelligence: Industry benchmarking for merchants
6. Regulatory Scrutiny Increasing
Payment-embedded ISVs facing more oversight:
Key Concerns:
- Money Transmitter Licensing requirements
- Banking charter requirements for embedded banking
- Consumer protection (CFPB oversight)
- AML/BSA compliance responsibilities
PayFac Implications
For those building PayFac platforms, understanding ISVs is critical because ISVs are your ideal customer segment.
Why ISVs are Ideal PayFac Platform Customers
- Built-In Distribution: ISVs already have merchant relationships
- Lower Churn: Merchants won't leave ISV just for better rates
- Higher Volume per Merchant: ISVs target growing businesses
- Vertical Risk Expertise: ISVs understand their industry's risk patterns
- Long-Term Relationship Value: Cross-sell opportunities (lending, banking)
PayFac Platform Partnership Models with ISVs
┌──────────────────────────────────────────────────────────┐
│ PayFac Platform + ISV Partnership Models │
└──────────────────────────────────────────────────────────┘
Model 1: PFaaS (Most Common)
┌────────────────────────────────────────┐
│ PayFac Platform (Stripe Connect) │
│ • Provides PayFac infrastructure │
│ • Handles compliance, underwriting │
│ • Manages sponsor bank relationship │
└──────────────┬─────────────────────────┘
│ API Integration
▼
┌────────────────────────────────────────┐
│ ISV Platform (e.g., Toast) │
│ • Integrates payments into software │
│ • Controls merchant pricing & UX │
│ • Owns merchant relationship │
└──────────────┬─────────────────────────┘
│
▼
[Sub-merchants]
Revenue Split: 60/40 or 70/30 (ISV/Platform)
Model 2: White-Label PayFac
┌────────────────────────────────────────┐
│ Your PayFac Infrastructure │
│ • Processing, compliance, risk │
│ • Completely white-labeled for ISV │
└──────────────┬─────────────────────────┘
│ White-label
▼
┌────────────────────────────────────────┐
│ ISV (Appears as Own PayFac) │
│ • Full branding control │
│ • Pricing control │
│ • Merchant relationship ownership │
└──────────────┬─────────────────────────┘
│
▼
[Sub-merchants]
Revenue Split: ISV pays platform fee + processor costs
What ISVs Want from PayFac Platforms
- Fast Integration: Clean APIs, good documentation, sandbox environments
- White-Label Capabilities: Their brand on merchant-facing materials
- Pricing Control: Set their own merchant rates
- Fast Onboarding: Instant or same-day merchant activation
- Revenue Share: 40-70% of margin (competitive with becoming full PayFac)
- Support Infrastructure: Help with merchant support, chargebacks
- Vertical Understanding: Industry-specific features and risk models
Self-Assessment Questions & Answers
Question 11: Why would an ISV (like a restaurant POS software company) want to become a PayFac instead of just referring merchants to an ISO?
Answer:
An ISV would want to become a PayFac (or use a PFaaS provider) instead of just referring merchants to an ISO for several compelling reasons:
1. Revenue Expansion (Economics)
| Model | Revenue Share |
|---|---|
| ISO Referral | 1-5% of margin (or $50-100 one-time referral) |
| ISO Partnership | 10-20% of margin |
| PayFac | 50-100% of margin |
| PFaaS | 40-70% of margin |
Example Math:
- Restaurant merchant processing $100,000/month
- ISO referral: ~$50-100 one-time
- ISO partnership: ~$50-100/month
- PayFac: ~$200-500/month ongoing
At 1,000 merchants, the difference is massive:
- ISO referral: $50K-100K one-time
- PayFac: $200K-500K/month recurring
2. Control Over Merchant Experience
As a PayFac, the ISV controls:
- Onboarding Speed: Instant activation vs waiting days/weeks for ISO/bank
- Pricing: Set competitive rates, bundle with software
- User Experience: Payments seamlessly integrated in software UI
- Branding: All merchant-facing materials show ISV brand
- Support: Handle merchant questions directly
With ISO referral, merchants deal with a third party for payments, fragmenting the experience.
3. Merchant Stickiness (Lower Churn)
ISO Referral Model:
┌──────────────┐ ┌──────────────┐
│ ISV Software │ │ ISO/Payment │
│ (Separate) │ │ (Separate) │
└──────────────┘ └──────────────┘
↓ ↓
Merchant can easily switch either vendor
Churn: 15-25% annually
PayFac Model:
┌─────────────────────────────────┐
│ ISV Software + Payments │
│ (Unified Platform) │
└─────────────────────────────────┘
↓
Switching means losing entire system
Churn: 5-10% annually
4. Data and Cross-Sell Opportunities
As PayFac, the ISV has access to:
- Real-time transaction data (sales trends, seasonality)
- Cash flow information (enable working capital lending)
- Business health indicators (early warning for churn)
This data enables:
- Lending: Offer merchant cash advances (Toast Capital)
- Business Insights: Help merchants optimize operations
- Insurance: Offer liability coverage based on volume
- Banking: Deposit accounts, business debit cards
5. Competitive Advantage
Restaurants comparing two POS systems:
- System A: "Sign up separately with a payment processor"
- System B (PayFac): "Accept payments immediately, all in one place"
System B wins every time for busy restaurant owners.
6. Valuation Impact
Public market and acquirer valuations:
- Pure SaaS companies: Valued at 5-10x revenue
- SaaS + payments companies: Valued at 8-15x revenue
Investors value payment revenue highly because:
- Recurring and growing with merchant success
- Higher switching costs than pure software
- Proven monetization model
Trade-offs to Consider:
| PayFac Benefits | PayFac Challenges |
|---|---|
| Higher revenue share | Chargeback liability |
| Full control | Compliance complexity |
| Better merchant experience | Capital requirements ($2M-5M) |
| Lower churn | Engineering investment |
| Cross-sell opportunities | Longer time to market (12-24 months) |
The PFaaS Middle Ground:
Most restaurant POS companies today choose PayFac-as-a-Service (PFaaS):
- Get 40-70% of margin (vs 10-20% with ISO)
- Fast time to market (3-6 months)
- Compliance handled by provider
- Control over pricing and experience
- Lower capital and engineering requirements
Bottom Line:
For a restaurant POS company, becoming a PayFac (or using PFaaS) transforms them from:
- Software vendor (merchant pays $100-300/month for software)
To:
- Commerce platform (merchant pays $500-2,000/month for software + payments)
That's a 5-10x increase in revenue per merchant, with lower churn and higher lifetime value. No rational business would choose a simple ISO referral when these alternatives exist.
Key Takeaways
-
ISVs are software-first - They solve industry problems with software; payments are an add-on revenue stream
-
ISV market share is growing rapidly - Projected 29% → 37% of merchant acquisition
-
Payment revenue can equal or exceed SaaS revenue - Toast, Shopify, Mindbody all derive 40-70%+ from payments
-
Vertical specialization creates stickiness - Industry-specific software has much higher switching costs than payments alone
-
ISVs have 4 payment models - Referral (1-5%), ISO (10-20%), PayFac (50-100%), PFaaS (40-70%)
-
PFaaS is the sweet spot for most ISVs - Good economics, lower risk, faster time to market
-
ISVs are ideal PayFac platform customers - Built-in distribution, lower churn, higher volumes
-
The trend is embedded finance - Beyond payments: lending, banking, insurance, payroll
-
75% of ISVs are looking for new payment partners - Dissatisfaction creates opportunity
-
For PayFac platforms, ISV partnerships are strategic - They provide scale, vertical expertise, and distribution
References
Industry Research
- Nilson Report - Payment industry statistics and ISV market data
- TSG (The Strawhecker Group) - ISV satisfaction surveys and market research
- a16z: Fintech Scales Vertical SaaS - ISV payment economics analysis
Major ISV Information
- Toast Investor Relations - Public filings, GPV data
- Block/Square Investor Relations - Market share data
- Shopify Investor Relations - Payment revenue breakdown
- Lightspeed Commerce - Retail ISV platform
PayFac-as-a-Service Providers
- Stripe Connect - Leading PFaaS platform
- Adyen for Platforms - Enterprise PFaaS
- PayPal Commerce Platform - PayPal's platform offering
- Finix - Modern PFaaS infrastructure
Vertical SaaS Resources
- Bessemer Venture Partners: State of the Cloud - SaaS + payments trends
- McKinsey: Embedded Finance - Market projections
Previous Topic: ISOs (Independent Sales Organizations)
Next Topic: [The Payment Facilitator Model
Related Topics
| Topic | Description |
|---|---|
| The Four-Party Model | Interchange economics and fee structures |
| Card Network Role | Network registration for PayFacs |
| Transaction Lifecycle | Authorization, settlement, chargebacks |
| Debit Networks [Debit Networks & Routing Routing | Durbin savings for ISV merchants |
| Payment Processors | Processor relationships with ISVs |
| Payment Gateways | Gateway integration patterns |
| Acquiring Banks | Sponsor banks for PayFac ISVs |
| ISOs | ISO vs ISV comparison |