Recurring revenue is a beautiful thing. Managed services providers (MSPs) and value-added resellers (VARs) have discovered that selling services their clients use month after month can build a steady revenue stream. And, if you keep your customers happy and the churn rate low, your recurring revenue stream can continue indefinitely – and even grow.
One excellent opportunity to build recurring revenue is residual income from payment processing. Dave Menton, Senior Director of Channel Sales North America at Tabit, says it’s one of the most lucrative options to add to your solution stack.
Do the Math
Although the residual income you can expect will vary depending on your clients and your payment processing partner, here’s one simplified illustration to show the potential recurring revenue from payment processing:
- A merchant pays an effective rate of 4 percent for credit card processing, and the VAR that sold the account receives 30 percent of that amount.
- On average, the merchant does $10,000 monthly in credit card sales. The merchant pays $400 in fees, and the VAR receives $120.
- If the VAR increases its number of customers with the same credit card processing volume by five per month, at the end of two years, the VAR would have 120 customers. If they make $120 monthly from each account, the VAR receives $14,400 monthly in payment processing residual income.
- If the VAR maintains a base of 120 customers, that would mean $172,800 per year in recurring revenue from payment processing residuals.
Menton stresses this is just one example and advises having a detailed conversation with your payment vendor to understand precisely how this will work for your clients and the residual income you could expect. “Some do profit share, some give top line, it varies based on processor or acquirer,” he says.
A Little Investment Goes a Long Way
Menton says VARs and MSPs should expect to spend some time upfront to educate themselves and their team on providing payment solutions. “The overall business model is more complex than a standard solutions sale,” he explains. “Payments have several layers – banks, acquirers, processors, ISOs – a lot of different pieces come into play.”
However, you don’t have to navigate the learning curve alone. Look for a payments partner willing to educate you and help ensure your success. “There are always many options for companies to partner with when adding to your solution stack. It’s essential to vet companies to understand who they are and if they’re a good fit. This is equally important in payments,” says Menton. “Understanding the payments space is an investment: It pays off in the long run.”
Business growth can be part of that ROI. “Payments can open up avenues you aren’t selling in today,” he says. “You may have walked past doors before that you can now walk into with something to offer.”
Payments also help you build stronger relationships with your current clients. “Most customers prefer to deal with a single vendor for as many solutions as possible,” Menton says. “If they can turn to you, their trusted advisor, there’s no confusion about who to call and no finger-pointing.” He adds that payments is another solution in your stack, building stickier relationships that clients would find hard to walk away from.
Evaluate Your Unique Opportunity
Menton says that as the industry moves to the as-a-service model, VARs and MSPs need to find ways to build recurring revenue to replace the upfront margin they once received from solution or project sales.
“Payments is a big part of that,” says Menton. A few years ago, the RSPA surveyed its members to create a Target Operating Model for point of sale (POS) solution providers. The association found that one-third of all nontraditional revenues for VARs in this space came from payments.
“Clearly, payments is a major player,” he says. “Ninety-nine percent-plus of businesses in some way, shape or form are taking non-cash payments. For you not to take advantage of it is a missed opportunity.”
FAQs
“Residual income” from credit card processing refers to continuing passive income that you can receive after onboarding a new client as a payment processing or merchant services reseller.
How much does a payment processor make per transaction? ›
In most cases, credit card processing fees will run between 1.5% to 4% of the total value of a transaction.
How to make residual income off credit cards? ›
EARN SIGN-UP BONUSES
The easiest way to earn passive income from your credit cards is sign-up bonuses. This is usually in the form of cashback or points in one lump sum one time once you hit the required spending in a specific time period.
How much is the residual income? ›
RI = Net Income – Equity Charge
Simply put, the residual income is the net profit that's been altered depending on the cost of equity. The equity charge is computed by multiplying the cost of equity and the company's equity capital.
How do I calculate my residual income? ›
Residual income is calculated as net income minus a deduction for the cost of equity capital. The deduction, called the equity charge, is equal to equity capital multiplied by the required rate of return on equity (the cost of equity capital in percent).
What is residual income examples? ›
Residual income is a source of revenue that continues even after your work is complete. It can include money from royalties (for example from a book or film), rental income (for example from property) and subscriptions (for software or learning materials).
Is payment processing lucrative? ›
Payment processing is a lucrative, high-growth, and profitable business. Every business needs a payment processing provider, whether they sell online or in local shops.
Is payment processing a good career? ›
A commonly asked question by many people thinking about getting involved in the credit card processing industry is “Can I make good money selling merchant services?” The short answer is YES…. a lot of it!
How to make money from payment processing? ›
Payment processors make money by receiving a commission. The fee is calculated as a percentage of the transaction between the customer and the merchant and relies on the last one. It also could be a fixed price per transaction.
Is credit card processing lucrative? ›
Credit card processing provides a rewarding career with good growth potential. By offering essential payment solutions to various businesses, you can build strong relationships and help them succeed. The industry is always changing, allowing you to provide innovative services.
To calculate residual income, the bank subtracts the mortgage payment, property insurance, taxes, and other monthly payments—credit cards, installment accounts, or student loans from the applicant's monthly income. The amount left—which doesn't include food and utilities—is considered residual income.
Can you live off residual income? ›
Yes, you can live off of passive income. It's easiest to live off of passive income if you live in an area with a low cost of living. To live off of financial investment and cash-equivalent income, you'll need a larger amount of money. To earn $30,000 per year, you'll need $600,000 invested at 5% per year.
How do you calculate residual income examples? ›
There is a number of ways to calculate residual income, but the most recognized formula is: RI = Net Operating Income − (Minimum Required Return × Cost of Operating Assets) For example, if your net operating income is $3000, the minimum required return is 10%, and the cost of operating assets is $1000, then your RI ...
How to calculate residual income tax? ›
Take away any PAYE and other income tax credits you'll be entitled to. The remaining amount is your estimated residual income tax.
What are residuals in payments? ›
These residuals are a small percentage of the overall fees charged to merchants for the service. Each merchant agrees on the fees they will pay and within those is the leftover or “residual” funds for the business that helped set up their account.
What does residual mean income? ›
Personal Finance
Residual income is the income an individual has left after all personal debts and expenses are paid in personal finance. Residual income is the level used to help figure out the creditworthiness of a potential borrower. 3.
Is it good to have residual income? ›
Residual income is an important factor for businesses and individuals. Your personal residual income can make a difference in the types of loans and other offers you qualify for, and the more residual income you have, the better you can invest in wealth building for the benefit of your future self.
What is the residual income of a paycheck? ›
Residual income is the money left over after you pay your bills (house payments, utilities, loans, credit cards, etc.). There are a few different ways to build residual income. You can put away money from your regular paycheck or use other types of income streams to make more money.
