Why Flexibility in Payment-Program Models Determines Long-Term Success for ISVs

Referral, Gateway-Only, ISO, PayFac Models Compared

For many software providers, the first step into payments is choosing a partner and integrating payment functionality into their platform. It’s a hectic but exciting time in a software platform’s development, with a million dev and business tasks and decisions underway simultaneously. Typically, longer-term payments planning isn’t being considered yet. It’s not until much later that many ISVs realize that the structure of that initial payments partnership is restricting how much their payments program will be able to grow over time.

Commonly, ISVs start out with a simple partnership model. This is where the ISV integrates the payments platform, the partner handles everything payments behind the scenes, and the two companies share payments revenue. But under the hood, this basic arrangement is typically tied to a deeper structure—ranging from a referral partnership or gateway-only approach to an ISO or PayFac model. Over time, it’s actually this foundational setup that allows software companies to adapt their payments approach as their platform, merchant base, and revenue goals expand.

If you’re considering a new payments partner and looking at which program type to build on, now is a good time to learn a little more about your options and the pros and cons of each. Understanding the differences will help you determine which structure aligns best with your current stage of growth and where you may want your payments program to take you in the future.

The Role of Embedded Payments in Modern Software Platforms

Embedded payments are no longer just a convenient add-on. They’ve become one of the most powerful monetization opportunities for software companies.

Today, integrated payments help platforms generate recurring revenue streams, deepen merchant relationships, reduce friction in the customer experience, and increase platform stickiness and retention.

And as payments become more central to the software platform, the structure of the payment program becomes increasingly essential.

Four Common Payment Program Models

ISVs typically operate within one of four partnership structures with their embedded payments providers. Here’s a look at those structures, their characteristics, and their revenue potentials. Keep in mind that the greater the role and responsibility a software provider takes on within the payments ecosystem, the greater your revenue opportunity.

1. Referral Partnership—Simplest

In a referral model, you introduce your software clients to a payment provider. The payment company then manages the merchant account, processing infrastructure, onboarding, and support. You do the software; they do the payments.

Characteristics

• Simple entry point
• Minimal operational responsibility
• Limited control over pricing or merchant experience
• Revenue through referral fees or revenue share

For many early-stage payment programs, referral partnerships provide an effective, low-risk way to get started with payments.

2. Gateway-Only—Simple to More Involved

As you know, integrated payment providers offer a range of capabilities. Payment processing is a core function, of course, but gateway services are also foundational. Payment gateways capture, secure, and route payments data from a customer to the appropriate payment processor or network for authorization.

If you have an existing payment processor and want to maintain the economics and distribution, you can keep that processor relationship while moving to a more modern gateway. This often gives you better developer tools and APIs, a unified customer experience across payment types, tokenization and data portability, advanced billing capabilities, geographic or vertical expansion rails, faster innovation, and that all-important flexibility to evolve and scale.

With this model, you and your clients can also enjoy the significant benefit of bringing your own devices. No need to source—or pay for!—new hardware. Your sunk investments are protected. If the gateway provides device-agnostic architecture, there’s also no need for you to worry about device certifications. The gateway provider handles device integrations, processor certifications, and tokenization and routing. You just need to integrate to the gateway.

Gateway-only programs such as Payroc Path are designed with this type of flexibility in mind. You can begin with a gateway-only approach that enables payment acceptance while preserving existing processor relationships. Sales remains in your control. Your existing processor or you handle the Merchant Processing Agreements. You or your processor own the risk. Then, as your platform evolves, the same infrastructure can support a transition to a full-service payments program that includes merchant acquiring, revenue participation, and deeper operational support.

Characteristics

• Greater control over payment experience and workflows
• Ability to support multiple processors or switch providers
• Optional ownership of underwriting, compliance, and funds flow. You may choose to own these responsibilities, or you may defer them to your processor.
• Revenue through monetization of payments or value-added services
• Merchants pay twice—an auth fee to their processor and an auth fee to the gateway provider

3. ISO (Independent Sales Organization) or Reseller Model—More Involved

In an ISO / Reseller structure, you act as the sales and distribution channel for payments. You participate more directly in merchant relationships, payment-pricing strategies, risk and liability, and payment-program management. You sell the payments integration to your clients and help them onboard and start processing; your partner runs the payment technology behind the scenes keeping your brand front and center. Support is often shared, with your team handling day-to-day payment questions and issues and your partner providing support for more complex problems.

Characteristics

• Greater revenue potential
• More influence over the merchant experience
• Deeper involvement in sales and onboarding
• Brand building and consistency

The ISO model offers more potential for your business but also requires a greater participation in and commitment to running payments.

4. PayFac (Payment Facilitator) Model—Most Complex

In a full PayFac model, you operate a more comprehensive payment program. You become a payment facilitator, or mini payments company, which involves onboarding merchants under your own master account. You own, pricing, risk and liability, and merchant experience. To the merchant, you are the payment provider, and you handle all merchant-facing steps and communications, from sales to ongoing support. Behind the scenes, your payments partner operates and maintains the processing infrastructure, settlement, and advanced troubleshooting. When complex merchant support is needed, the payments partner typically works with your team—not with the merchant with directly.

Characteristics

• Highest level of control
• Deep integration into the platform
• Significant revenue opportunity

And while the rewards are great, so is the lift. You also take on risk, compliance, and operational burden.

Finally, if you want fully embedded payments without taking on all the payments responsibilities, you may be interested in Managed Payfac, which is a sub-option of the PayFac model structure. With Managed PayFac, you get deep control via a boarding API, merchant-relationship ownership, and revenue share while leaving the underwriting, risk, and compliance scope to your payments partner. Under this model, you are a software company with embedded payments—not a payments company.

Embedded Payments Business Model Types Comparison

*Gateway-only models can range from light integrations to deeply embedded payment orchestration depending on your needs and choices.

How Merchant Pricing Models Play an Important Role

Beyond the partnership structure with your payments provider, the variety and delivery of payment-processing pricing models that will be available to both you and your clients is an additional critical feature of any payments integration.

Again, what you’re looking for is flexibility. You want to be able to choose from the full range of processing models regardless of your integration type (cloud, SDK, or hybrid). And depending on your business model, you may want your merchants to be able to select from a menu of processing options as well.

Broadly, there are two processing pricing categories—one in which the merchant covers the processing costs, and one in which the end consumer pays (or partially pays) the costs. Within each category are a number of suboptions.

Traditional Processing Models

These are the payment-processing models in which the merchant covers the processing costs.

• Cost-Plus
  Visa, Mastercard, and the other card networks charge a fee on every transaction, called an interchange rate. With Cost-Plus Pricing, that fee passes through to merchants directly, at cost. Then the payment processor adds their margin—a clearly disclosed percentage and per-transaction fee—as a separate line item.
• Cost-Plus Tiered Pricing
  Cost-Plus Tiered works identically to Cost-Plus, with one addition: the processor’s margin is structured into three tiers based on card type—Standard, Mid, and Premium. Network costs still pass through at cost. The processor fee simply varies by the card brand the customer uses.
• Tiered Pricing
  Every card type gets sorted into one of three rate categories—Standard, Mid, or Premium—and the merchant pays one blended rate within each tier.
• Flat Rate
  Every transaction—debit, credit, rewards, business card—is billed at one flat percentage plus a per-transaction fee. The merchant’s monthly processing cost is completely predictable.

Cost-Saving Processing Models

These are the payment-processing models in which the end consumer pays for (or helps pay for) the processing costs.

• Convenience Fee 
  A convenience fee is a flat fee assessed by a merchant for offering an alternative payment channel (such as online or phone) that is different from the merchant's customary payment method, provided that the fee is applied consistently to all payment types within that channel and is clearly disclosed to the customer prior to completing the transaction. (Example: A city allows free payment in person or a $3 fee to pay online.)
• Surcharging
  Allows the merchant to pass off some of their processing fees to their customer. The customer is given the choice of whether or not they'd like to pay the extra fee, depending on whether they chose debit or credit card since Payroc Compliant Surcharging only applies to credit cards (not debit or prepaid cards). (Example: A $200 purchase includes a $6 fee (3%) only if the customer chooses to pay with a credit card—while debit and cash remain fee-free.).
• Dual Pricing
  At checkout, customers are presented with the advertised card price and a discounted cash price. This empowers merchants to eliminate processing costs by raising advertised pricing (no cap) and enables consumers with a clear choice at checkout. Payroc Dual Pricing applies to all cards, including debit, credit, and gift cards. (Example: A product is listed at $5.15 (card price), but customers can pay $5.00 if they choose cash—giving them a clear choice at checkout.)
• Service Fee
  This program is available to Municipal, Government and Higher Education SIC codes ONLY. The Program offers a "Service Fee" to offset costs of card acceptance to the entity for services, taxes, fines, etc. (Example: A resident pays a $120 utility bill online and is charged a $3.25 service fee to cover the cost of providing the payment service.)
  
  

  State and local laws apply, are variable and change frequently. These are the responsibility of the merchant to monitor and implement. These definitions are not legal advice.

Ask the embedded payments providers you are vetting about the payment-processing pricing models they support. The best partners support the full range of options for every integration type. Any limitations could end up being a significant hindrance to optimizing your payments program and satisfying your merchants’ needs.

Why Flexibility Actually Matters More Than Choosing the “Perfect” Model

Here’s perhaps the single most important point of this entire article: You don’t have to commit to a single payment-partnership model permanently. Your payments partner should allow you to choose an initial partnership structure while also providing you with the freedom to make adjustments and new choices as time goes on. In other words, the most successful payment arrangements evolve alongside your platform.

Here’s how it often goes. As their platforms and business models mature, many ISVs move through payments-model phases, though not necessarily in a linear fashion:

• Starting with referral model for speed to market
• Expanding into ISO-style structures as adoption grows, for greater control and margin
• Moving toward PayFac or managed programs as payments become a strategic revenue driver

But regardless of which model you begin with or how your business ends up changing and scaling over time, what you want most is flexibility. Why? Because flexible payment partners make it possible for you to adjust your strategy whenever you need to—and this is key—without rebuilding your payments infrastructure.

Key Factors to Evaluate

When deciding which payments model is the best bet for you, you should consider several strategic factors.

√ Platform Maturity

Where is your software platform in its evolution? Early-stage platforms may prioritize speed and simplicity, while mature platforms may want more ownership of the payment experience.

√ Revenue Strategy

How integral will payments be to your financial plan? Some platforms treat payments as a supporting feature, while others view it as a major revenue driver.

√ Operational Resources

As you may have noticed in the descriptions above, different models require wildly different levels of operational involvement on your team’s part.

Consider your capacity to support areas such as:

• merchant onboarding
• merchant support
• payment-program management

Letting your payments partner shoulder some or all of these responsibilities may be the most practical approach early on. A more full-service payments partnership also allows you to focus on building and scaling your software business.

√ Customer Experience Goals

Platforms that want tighter control over merchant workflows often prefer models that allow deeper integration. If the client and end-user experience are central to your business model, you will probably want to consider the Managed PayFac and PayFac structures.

√ Your Appetite for Payments Involvement

Is your software company interested in developing more and more payments expertise and operational support? Or would you rather focus on your core competencies and leave payments to a payments company? Even some very large SaaS platforms strategically choose not to create their own in-house payments departments but instead continue deep, referral-based partnerships with a strong embedded payments provider for the long-term.

Why Merchant Adoption Often Determines Program Success

Selecting the right payment-program structure is an important decision, but it’s not the only factor that determines long-term success. Many ISVs discover that merchant adoption—not integration—is in fact the biggest challenge once payments are enabled within their platform.

Even with integrated payments available to them, your clients will still need guidance around:

• pricing structures
• onboarding steps
• configuring payments within the platform
• understanding the value of integrated payments

To address these challenges, some payment providers offer add-on Sales-as-a-Service programs that help their software partners introduce payments to their merchant base.

These programs can support:

• merchant education and onboarding
• pricing conversations with merchants
• activation of integrated payment features
• overall merchant adoption

Because Sales-as-a-Service can operate alongside referral, ISO, or PayFac models, it allows you to accelerate adoption and use without building a full internal payments sales organization.

In many cases, the most successful payment programs combine a flexible program structure with strong go-to-market support.

Payments Programs Should Grow with Your Platform

Integrated payments can become one of the most valuable components of your software platform. But long-term success often depends on selecting a partnership model that supports growth and evolution.

Referral, gateway-only, ISO/Reseller, and PayFac models each offer their own set of advantages, and the right choice depends on your platform’s current stage, resources, and strategic goals. But ultimately, the most effective approach isn’t choosing a single model and sticking with it but instead choosing a payments partner that provides the flexibility, infrastructure, and support you need for the payments model to evolve as your platform grows.