Paysafe (PSFE) Q3 2025: ISO Channel Rises to 33% of Segment, Squeezing Margin Expansion Path
Paysafe’s Q3 reveals a strategic tug-of-war between robust core-market growth and persistent margin drag from the expanding low-margin ISO channel. Despite strong iGaming and e-commerce momentum, the business mix shift and delayed wallet innovation are tempering margin ambitions. Investors should watch for execution on direct channel scaling and product roadmap delivery as key levers for future earnings power.
Summary
- Margin Pressure Intensifies: ISO channel now over a third of merchant segment, diluting EBITDA leverage.
- Core Growth Remains Solid: iGaming and e-commerce drive North America and Europe, offsetting wallet and non-core softness.
- Execution on Direct and Product Initiatives Critical: Direct SMB scaling and wallet rollout delays will define 2026 earnings trajectory.
Performance Analysis
Paysafe’s Q3 showed accelerating core-market growth but a less favorable business mix, as the ISO, independent sales organization, channel’s share of merchant segment revenue rose to more than 33%—up five points in two years. This channel’s single-digit EBITDA margin profile is weighing on overall profitability, even as direct channels and e-commerce deliver mid-20s margins. Organic revenue growth came in at 6%, with iGaming up nearly 50% and e-commerce exceeding 20%, though the latter moderated from prior quarters. SMB, small and midsize business, revenue rose 4% but was driven by ISO, not higher-margin direct sales.
Digital wallets, Paysafe’s account-based and eCash offerings, posted 4% organic growth, with engagement milestones like 500,000 account and card registrations. However, classic wallet growth slowed, and product rollout delays persisted. Adjusted EBITDA grew 7% year-over-year, but the margin improvement was flattered by a one-time licensing deal, masking underlying mix headwinds. Free cash flow conversion normalized near 70% after one-off timing effects last year.
- ISO Channel Expansion: ISO now over one-third of the merchant segment, up from 28% two years ago, compressing blended margins.
- Direct Channel Scaling Lags: Direct SMB and e-commerce growth outpaced by ISO, with new mid acquisition up 20% but still not shifting mix fast enough.
- Wallet Growth Below Plan: Classic wallet and new product rollouts slower than anticipated, especially outside Europe.
Net leverage remains high at 5.2x, driven by FX and divestiture effects, with deleveraging now targeted for 2027. The share repurchase program was expanded by $70 million, reflecting management’s confidence but also limited near-term deleveraging progress.
Executive Commentary
"While we're pleased with our third quarter and year-to-date progress, we continue to see outperformance of our lower margin product and sales channels. Our updated 2025 outlook reflects our current business dynamics and a longer timeline for the delivery of key product initiatives as we navigate the complex ecosystem required to bring innovative new solutions to the market."
Bruce Lothers, Chief Executive Officer
"The main driver this year is the mixed dynamic due to the success within our ISO channel, which continues to outpace the growth of higher margin direct channels in merchant solutions...this is not where we plan to be from a margin perspective, nor does it reflect the potential of our business model and the operating leverage that we can deliver."
John Crawford, Chief Financial Officer
Strategic Positioning
1. ISO Channel Growth: Margin Headwind
The ISO channel’s revenue share has climbed to over a third of the merchant segment, reflecting strong double-digit growth. While this channel delivers volume, its single-digit EBITDA margins dilute overall profitability. Paysafe’s direct channels—e-commerce and SMB direct—carry mid-20s margins but are not scaling fast enough to offset the ISO mix shift. Leadership acknowledged prior optimism about shifting mix in 2025 was misplaced, and now expects margin pressure to persist until direct initiatives compound meaningfully.
2. Core Market Resilience: iGaming and E-commerce
North America and Europe, which make up 90% of revenue, grew 8% each, with iGaming up nearly 50% and e-commerce over 20%.
Enterprise e-commerce bookings rose 25% with higher contract values, and iGaming wins with BetMGM and Underdog are expanding Paysafe’s footprint in high-growth verticals. However, non-core verticals and lower-tier merchants saw softer trends, and a last-minute client shutdown in Q3 highlighted risk in higher-risk merchant category codes.
3. Digital Wallets: Progress and Delays
Paysafe’s wallet business hit 500,000 account and card registrations, with strong engagement in targeted European regions. Partnerships with BBVA and local payment solutions in Latin America—such as Pago Efectivo and SafetyPay—drove double-digit volume growth. Yet, classic wallet growth was below plan, and new product launches, including the Business Wallet, are delayed by regulatory and banking ecosystem inertia. Leadership framed these as “work in progress,” with demand present but execution lagging original timelines.
4. Capital Allocation: Share Buybacks Over Deleveraging
Paysafe repurchased $20 million in shares in Q3 and expanded its repurchase authorization by $70 million, citing undervaluation. Meanwhile, net leverage remains elevated at 5.2x, with deleveraging now pushed to 2027. Management’s willingness to prioritize buybacks signals confidence in long-term strategy but also reflects slower-than-expected EBITDA expansion and cash flow growth.
5. Product Roadmap and Value-Added Services
Paysafe is investing in new value-added services—such as lending and payroll—for SMB clients, aiming to boost client retention and revenue per merchant. Direct channel new mid acquisition for the Clover product surged 49% YoY, and agent programs are being expanded to accelerate direct sales. However, the impact on overall mix and margin is expected to build gradually, not immediately.
Key Considerations
Paysafe’s Q3 highlights a business at a strategic crossroads: core market momentum is strong, but the business mix and product execution are restraining margin expansion and deleveraging. Investors should weigh the durability of iGaming and e-commerce growth against the slower shift to higher-margin channels and wallet innovation delays.
Key Considerations:
- ISO Channel Outpaces Direct: Persistent low-margin ISO growth is diluting segment profitability and slowing margin expansion.
- Direct Channel Execution Needed: New mid acquisition is accelerating, but direct revenue mix shift will take time to materially impact margins.
- Wallet Rollout Delays: Product roadmap execution in digital wallets is slower than planned, with regulatory and partner complexity cited as key barriers.
- Capital Allocation Balancing Act: Buybacks are prioritized over rapid deleveraging, reflecting confidence but also limited near-term earnings growth.
- Core Market Growth Offsets Non-Core Drag: iGaming and e-commerce in North America and Europe remain robust, but non-core and legacy wallet businesses are under pressure.
Risks
Paysafe faces ongoing risks from its business mix shift toward the low-margin ISO channel, which could continue to suppress EBITDA leverage if direct channel scaling remains gradual. Wallet product rollout delays expose the business to competitive threats from more agile fintechs, while high net leverage (5.2x) constrains flexibility, especially if margin expansion stalls. Regulatory complexity and client risk in non-core merchant categories add further uncertainty to revenue durability.
Forward Outlook
For Q4, Paysafe guided to:
- Adjusted EBITDA margin near 23%, down from Q3’s 29.2% (which included a one-off benefit)
- Free cash flow conversion expected within or slightly above 65–70% target range
For full-year 2025, management now expects:
- Organic revenue growth of 5–6%
- Adjusted EBITDA growth of 4–5% (excluding divestiture)
- Adjusted EPS of $1.83–$1.88
Looking to 2026, preliminary guidance calls for mid to high single-digit organic revenue growth and high single-digit adjusted EBITDA growth, with a more detailed outlook to follow on the year-end call. Management cited product delays, mix headwinds, and a longer ramp for new wallet and direct channel initiatives as key factors shaping the outlook.
- Direct channel scaling and wallet rollout will be critical for margin recovery
- Deleveraging to sub-4x net leverage now targeted for 2027
Takeaways
Paysafe’s core-market growth engines remain intact, but the ISO channel’s expansion and wallet delays are the key swing factors for future earnings power. The next year will test Paysafe’s ability to accelerate direct channel mix shift, execute its product roadmap, and deliver on its margin and deleveraging ambitions.
- Mix Shift Drag: ISO channel’s rise to over one-third of segment revenue is a structural margin headwind, despite strong underlying volume growth.
- Product Execution Watch: Wallet rollout delays and slow direct channel scaling are the critical levers for restoring operating leverage and valuation upside.
- 2026 Inflection Point: Investors should monitor progress on direct mix shift and wallet launches as the main catalysts for margin and cash flow improvement.
Conclusion
Paysafe’s Q3 2025 results underscore the challenge of scaling profitable growth amid a shifting business mix and complex product roadmap. Sustained core-market momentum provides a foundation, but execution on direct channel and wallet initiatives will determine the company’s ability to unlock margin and deleveraging in the coming years.
Industry Read-Through
Paysafe’s experience highlights a broader payments industry challenge: scaling new product adoption and driving profitable growth as volume shifts to lower-margin channels. The persistent margin drag from ISO and the complexity of launching regulated wallet solutions signal that legacy payment processors face structural headwinds even as core verticals like iGaming and e-commerce grow. For peers, the takeaway is clear: rapid product innovation and effective channel management are now prerequisites for margin expansion and valuation resilience in the evolving fintech landscape.