Why we decided not to have a revenue sharing business model

Over the last couple of months, we have been getting increasing requests from potential partners like banks, PSPs and acquirers to enter into a revenue sharing model as part of our partnership agreement. This works by convincing companies to use certain payment providers that bring in net new revenues of which the company would then get a share, usually in perpetuity.

As naturally curious people, we decided to first dig deeper into this potential scenario and to evaluate what it would mean for Payrails and how it will benefit our merchants. We spent a lot of time talking to different merchants, some who already use Payrails and some who don’t, and other industry professionals that we trust to understand the long-term impact of a revenue sharing model and to weigh the pros and cons.

To our surprise, this seems to be a very common practice in the payments industry. “Everybody is doing it!” was a frequent response from the individuals we spoke to. And it does make sense – at least for payment providers, as it effectively increases their distribution. On the merchant side, however, things are not as straightforward.

Ultimately, we decided against having this model for many reasons, with the most significant ones being the conflict with how we imagine the future of Payrails and of the entire payments industry. From the beginning, our vision for Payrails has been:

1. Creating a viable alternative to building payment solutions in-house
2. Becoming a real partner by acting as an extension to our merchants’ payment teams
3. Being fully agnostic and radically transparent with our merchants

All of this would break down if we would agree to a revenue sharing arrangement, especially if it’s one hidden from our merchants. No platform can claim to be agnostic if any of the following are true:

1. They have financial incentives through revenue sharing with any entity representing any part of the transaction value chain, including schemes, processors, acquirers, etc.
2. They have a majority ownership or significant investments from any entity representing any part of the transaction value chain

I’d like to go a little deeper into our decision not to have revenue sharing arrangements and to explain why a revenue sharing model goes against one of the core promises of the Payrails solution. I will also reflect on the recent Money20/20 Europe event in Amsterdam and on some of the conversations our team had there, which convinced me that we made the right decision for us and our partners that will remain true for a long time to come.

What a revenue sharing model would have meant for Payrails

Essentially, a revenue sharing business model means that a company would distribute its revenue among certain stakeholders, like strategic business partners. In theory this approach commits all stakeholders to strive for each other’s success, a mutually beneficial agreement that ensures everyone is compensated fairly for their contribution to the partnership.

In practice, adopting this model would have meant that certain payment providers would receive additional revenues. However, it also means that Payrails would receive a share of those revenues. We consider this to be a huge conflict of interest: When recommending a payment provider to our merchants, do we recommend the one that would be best for their business, or the one where we would receive a higher cut of the profits? After much consideration, we decided that this would have fundamentally contradicted what Payrails offers: a solution that is truly PSP agnostic.

Economics of revenue sharing and impact on merchants

To understand the economics of a revenue sharing model and get a sense for how much revenue this could potentially be in practice, let’s walk through a short example calculation. The current market rate offers we received seem to be between 20% and 30% of the generated net new revenue, usually in perpetuity. So for a merchant who brings in 500M USD in total payment volume (TPV) every year, this would mean that 500M USD x 2% in payment fees x 30% of revenue shared would result in the amount of costs they could save if they simply have a direct partnership agreement.

Why we decided not to have a revenue sharing business model

On our journey to understand the viability of a revenue sharing model for Payrails, we realized that many industry players who use this kind of arrangement are not as agnostic as they claim to be, and that’s due to the very nature of such a model.

We at Payrails believe in offering merchants a truly agnostic payments solution. This means that they should be able to take advantage of the combined power of multiple different PSPs, payment partners and integrations. As every business is different, this combination varies from merchant to merchant, from country to country. A revenue sharing model would result in a conflict of interest that goes against this fundamental promise of the Payrails solution. It would mean that we would be commercially incentivized to prioritize the success of one PSP or partner over another – even if we still offer the services of other PSPs with whom we do not have such a revenue sharing agreement. This preference would mean that we are not fully agnostic and that would not be in the best interests of our merchants.

In order to remain fully agnostic and to offer merchants the absolute fullest scope of our capabilities, we decided that a revenue sharing model is not the right path for Payrails.

Insights from Money20/20 Europe in Amsterdam and what happens next

From the conversations we had at this year’s Money 20/20 Europe event in Amsterdam, we realized that we were right in making this choice for Payrails. The merchants we talked to were aware that revenue sharing arrangements were a common practice in the payments industry, however they voiced their frustration at the lack of transparency, both in terms of costs and communication. They also expressed a strong interest in having a direct relationship with a payment platform, which would lower their own operating costs in exchange.

What, then, is the best way to choose a potential payment partner? Merchants ask us this a lot, so much so that we have an entire request for proposal (RFP) guide on the matter. But considering the proliferation and confusion around shared revenue models, we will be revising our guide to include questions to find out if a payment partner is truly agnostic and is not operating with a revenue sharing agreement. We have introduced the following questions that we believe merchants should ask:

• Do you receive any incentives from any 3rd party (including but not limited to PSPs, acquirers, fraud prevention tools) that you currently support? If yes, what will be the average kickback you get for the transactions processed for our company?
• How do you decide which payment partner to prioritize for integration? How does the potential of a kickback influence that decision?
• If we suggest integrating a new provider, will you get a referral bonus? If they don't provide a bonus, would you deprioritize them in the roadmap?
• Do you charge your clients more if they choose the partner that has a lower kickback rate?
• What would happen if a payment partner stops sharing revenue with you? How will that affect our business? Will we have to work with an alternative option?

We’re revising our RFP guide as we speak and will release it in the coming days.