A benefit of working in partnerships for a platform business like Xero is meeting countless people building innovative products. Every week I spend hours reviewing propositions, debating the value they might bring to our platform and how they will support our 2 million+ users.
One category that I’ve spent the past few years focusing on is payments. It’s a fascinating competitive environment, where products are ultimately confined by the same banking and card network infrastructure. How do you differentiate yourself in a market where there are a finite number of payment rails to move money around?
In the UK, Faster Payments brought instant payment settlement to market for bank to bank transactions, and Open Banking brought APIs to Faster Payments. But data pipe companies like TrueLayer and Plaid are democratising access to those APIs. Saying you provide Open Banking payments isn’t a point of differentiation anymore, and this is the newest technology available in the market.
There are however areas where payment processors can rise to the top. Here are five key areas I’d suggest focusing on when considering who to partner with.
Consideration 1: Customer onboarding
If you’re operating a product that brings buyers and sellers into one environment, like a marketplace (Amazon), an e-commerce platform (Shopify), or a business platform (Xero), a core part of your value proposition will be helping your sellers get paid - so they will need to sign up to the payment service as a merchant.
One of the great points of friction in any financial product is account creation and verification. KYC and AML are required by law, you can’t get around that. However you can make providing the documentation and status messaging as slick as possible.
Ask potential payment partners how they onboard their customers. What information do they need? Do they digitise the process as much as possible, either in house, or through a third party provider like Onfido or Jumio?
Two KPIs to ask for are average verification time and success rates. Are there business types which your payment provider struggles to serve? And if so, what percentage of those sit within your user base? For example trusts in Australia can be tricky to verify, so understanding what percentage of your base falls within this bucket, and how your payment partner handles them, will be important.
A payment provider with poor onboarding will lead to customer tickets and ultimately frustration from users.
Consideration 2: Design flexibility
Payments should live in the background, and be as seamless as possible. With the power of APIs, you should be able to maintain your core design principles and user experience. Embedded payments lead to a better experience and higher conversion - so work with partners that are API-led.
Consider your payment partners ability to modularise components - whether that’s onboarding, data collection to process the payment, or messaging back to the platform. Uber does a great job of this, with features like split payments for sharing ride costs with others in the car with you - all within the workflow of the ride sharing app.
Consideration 3: Payment methods
This feels obvious, but it’s important. What payment methods suit your user base? If you operate in e-commerce where instant payment confirmation is required prior to dispatching goods, an ACH payment which may take 3-5 days to settle isn’t going to cut it. However in invoicing it works perfectly fine and provides cost benefits in B2B over other payment methods like cards.
In B2C, mobile is key. Apple Pay and Google Pay are table stakes if you want to increase conversion in online consumer products. Apple Pay is enabled on half of all iPhones, with around 500 million users.
Find a payment provider that has coverage across the applications and operating systems you need to ensure conversion remains high.
Consideration 4: Cost and margin economics
Your view on cost will depend on where and how payments fit within your product ecosystem. At a basic level, you want to find the right balance of providing a market competitive product for your customers, while creating value for you and your payments partner. Price is very transparent now, so markups need tangible value for the customer to warrant paying a little more.
Understanding the margin economics of your payment partners will help you better understand how value can be distributed to the parties involved. Some early stage payment providers will rely on third party service infrastructure to connect into scheme networks and banking rails, which will increase their service costs and diminishes margin to share, or simply make them more expensive. There may however be a trade-off between price and technology; cheaper isn’t always better.
So make sure you’re asking about the supply side of your potential payment partners. Do they connect directly into the payment networks? Who is their acquiring bank? Understanding the stack behind the product will help you make informed decisions and build a viable commercial model.
Consideration 5: Customer support
Last but certainly not least is customer support. Nothing raises the blood pressure of your users more than errors in payments handling. If one of your customers is expecting funds to be settled today and the money doesn’t appear, that’s going to cause urgent problems.
Understanding the method of customer support, standard SLAs and escalation processes is critical. Things will go wrong from time to time, but the sign of a good partner is one that takes ownership and resolves problems for customers quickly.
While your teams may handle first line support, if the issue is about the payment itself there is a good chance you will need to pass your customer over to your payments partner to resolve the issue. So having trust that they’ll be taken care of is key.
I also recommend training your customer facing teams on the payment providers you work with, to help improve first line support management. Payments should be treated as a core part of your overall product, even if powered by a partner.
This is by no means an exhaustive list, but if you are exploring payment partners then they are five things you should be including in your selection scorecard.