Flexibility, oversight, and scalability are key factors most SaaS businesses would rank as extremely important to them. While around 50% of SaaS businesses find the lack of cloud vendor lock-in to be important, many companies end up trapped in restrictive relationships with payment processing providers, unaware of the repercussions this can have. This includes lack of control of your data, being more vulnerable to disproportionate price increases, and jeopardizing your company’s scalability, among others. 

Consider WePay, which officially became a Chase company in 2017. Post-acquisition, Chase didn’t renew client contracts beyond 12 months, so businesses had to either quickly find alternatives (which would mean significant costs and potentially operational delays due to potential vendor lock-in), or had no option but to stay with Chase. 

While Chase initially worked hard to integrate WePay’s capabilities into their features, more recently there have been reports showing that JP Morgan Chase seems less interested in competing with other PayFacs. Instead, their focus seems to be on cutting costs and offboarding major clients, which have now switched to its competitors. 

For startups and scaling SaaS businesses in particular, they will likely rely on more niche payment service providers (PSPs). However, the risk of these PSPs going out of business or being acquired can dramatically impact the operations of your business. In this article, we’ll look at what vendor lock-in is, the risks it comes with, and how to minimize the drawbacks of this phenomenon. 

What is Vendor Lock-in?

Vendor lock-in is when a business is entirely dependent on a single cloud or SaaS provider. If switching to another vendor is extraordinarily difficult or prohibitively expensive, this then qualifies as vendor lock-in. 

In many cases (particularly when it comes to PSPs) merchants or businesses may not necessarily realize they are experiencing vendor lock-in. For example, if you choose a PSP such as a PayFac as a Service, the providers will store cardholder data on their own servers. While this offloads regulatory compliance to the PFaaS, it does come with the (potential) drawback that you no longer have direct access to that data. 

But let’s say you’d want to switch to a new provider, only to be told that you could only do so after a predetermined time, such as 48 months, or if you paid $150,000 to access cardholder data—that would qualify as vendor lock-in. And the reality is that even after waiting or paying, you still wouldn’t get all of the data needed to seamlessly board your MIDs on a new PSP.

Understanding the Risks of Vendor Lock-In

• Reduced flexibility and scalability: With no leverage to convince your vendor to innovate, you may lose out on being able to access the latest technologies. For example, if your current payment processor doesn’t accept specific payment methods or isn’t available in certain regions your organization wishes to expand to, you could miss out on multiple revenue streams.

• Higher costs due to lack of competition: No leverage also means your current vendor can charge higher fees and offer lackluster service, which can affect profitability. You may also be forced to pay for solutions you may not need, further driving up costs.

• Poor user experience: As innovation stagnates and costs continue to increase, this may start seeping into the overall customer experience. If your SaaS organization has less time to dedicate to providing good customer support, you may see your churn rates rising and your MRR dropping, creating a vicious cycle of tighter revenue streams.

  
  

Key Signs of Potential Lock-In

While you may not notice vendor lock-in immediately, it’s possible to proactively spot it before signing an agreement with a PSP. If you’re on the lookout for a new payment processor, here are some factors to take into careful consideration to minimize the risk of vendor lock-in. 

• Proprietary systems that hinder data portability: Does your potential provider offer their own alternative to popular integrations? If you aren’t able to integrate your existing FinTech stack into their platform, but rather need to transfer all your data into their own integrations, it may be harder to transfer it out during your next payment migration.

• Long-term contracts with punitive exit clauses: Before signing on the dotted line, carefully look at the contract length: can you renew on a yearly basis, or do you need to sign for a minimum of 48-72 months? If you want to end the contract earlier, at what cost does it come? 

• Lack of interoperability with other payment systems: If your future PSP does not support integration with other payment platforms, you may end up in a siloed payment ecosystem. Say the payment processor has a payment gateway that exclusively works with its own (proprietary) software: this impedes your ability to work with or add new services and cause significant operational inefficiencies. Should you finally switch vendors, this can also cause substantial data engineering work.

Evaluate Payment Providers for Flexibility

To avoid vendor lock-in issues, it’s important to critically evaluate future providers for flexibility. While there are many other factors to weigh into consideration, vendor lock-in can significantly minimize your long-term ROI, so give this factor careful consideration. 

When selecting a payment provider, make sure their APIs can seamlessly integrate into other third-party systems. Ascertain that their APIs are well-documented, and that they provide ample resources and a sandbox to facilitate a frictionless implementation. 

Another factor you should consider is modular solutions: can you only pay for the services you use, so you can fully customize your payment stack? Is it possible to add or remove features at will, or are you penalized if you do so? 

Then, to avoid data gravity, it’s important to assess how easily you can migrate data should you want to switch providers. Do they offer tools or resources for exporting data, while taking all compliance standards and regulatory requirements into account? 

Once you’ve landed on your final pick, negotiate your contract strategically, particularly if you cannot find the above information in writing. Ensure you include a flexible termination clause that doesn’t involve excess fees; it should also include data portability to protect your customer data. 

Also important is full transparency on any (hidden) fees and pricing structure, as well as fixed moments for performance reviews so you can evaluate your level of satisfaction with your provider, ideally based on the progress made towards certain KPIs. 

By carefully considering these factors when searching for a PSP, you can ensure interoperability and flexibility are guiding principles in your way of working with your future provider.

Leverage Multi-Provider Strategies

To reduce the risk of lock-in, consider working with multiple payment providers to reduce dependency on a single vendor. Alternatively, you can also regularly compare providers to ensure you have access to the most competitive pricing and features.

One solution which can pay off in the long run is using a payment orchestration platform like Preczn, which in essence is streamlining, coordinating, and optimizing payment processing activities. Say you’re a merchant accepting payments and you want to get optimal performance throughout the entire payments value chain—without needing to integrate to every point solution in the market and optimize performance yourself—that’s where payment orchestration steps in. 

If you’re a vertical SaaS organization, platform orchestration can play an important role in streamlining your way of working and driving growth: by starting with one core application, you can minimize costs and scale to multiple FinTech applications as necessary. By connecting to an orchestration layer, you can quickly go live with any PSP connected to that central platform.

Focus on Data Portability and Ownership 

While working with a PSP comes with benefits like short go-live times, being shielded from compliance requirements, and monetization opportunities, it can come with limitations, such as if an enterprise client wants features your PSP doesn’t support. Fully owning your payment data also reduces data migration and implementation times, as well as the risk of data gravity, which could take several months during a transfer. 

At Preczn, we utilize our platform and merchant vault to centralize merchant onboarding and transaction data across and between vendors, SaaS organizations, and PSPs, allowing you to unlock these opportunities through our payment orchestration platform. 

Preczn gives you the ability to vault, label, and group merchant data, making it easy to migrate them to different providers when needed. 

Prepare for Provider Transitions  

Payment migration is no easy undertaking, and comes with many challenges, such as data integrity, regulatory compliance, costs, customer comms, and much more. It’s essential to have a contingency plan in place should you switch providers, and carefully document all workflows to ensure a smooth transition. 

To support vertical SaaS organizations when transitioning, we offer comprehensive solutions that address most common challenges. This includes data import and gap analyses, templatized boarding forms, tokenization and payment routing, and email parsing for underwriting. The end results? Continuous operations during the transition, stronger compliance, improved merchant experience, and deeper access to payment data, all without the concerns of vendor lock-in.

Conclusion

PSP vendor lock-in can have serious ramifications, and given the challenges that come with payment migration, it’s not uncommon for vertical SaaS businesses to consider putting off migration. However, the opportunities available when partnering with a payment orchestration platform are significant, including flexibility, more oversight into your data, and a seamless merchant and customer experience. At Preczn, we make it easier for organizations to overcome the hurdles of migration, which in turn will lead to scalable solutions that drive sustainable, long-term growth. 

Learn more about how we unlock these opportunities through our payment orchestration platform. Contact us for more information.