Within vertical SaaS technology companies, trends towards expansion into payments and other embedded FinTech offerings have become increasingly prevalent the past few years. This isn’t surprising considering the massive size of unrealized value in this space (see: Bain: Embedded Finance Value Chain). However, there remains a lot of uncertainty determining in which industries there are potential hotspots of such value-add opportunities. Finally, there is a lot of confusion as to how such firms should actually execute the work needed, both technically and operationally, to realize such value, and importantly – the tradeoffs in doing so.
In this blog series, Yeeld will share some insights and secrets to unlock some of this potential.
To set the stage, vertical SaaS software companies are defined as technology companies that serve a specific industry, such as construction, healthcare, or fitness. Some are more niche than others, considering well known examples like Mindbody for the fitness industry, or lesser-known but still impressive Business Infusions for equine veterinary practices. Often, such categories of software have sprung out of family-owned businesses within the vertical, realizing a software opportunity that addresses a specific workstream like personnel or order management. As such, many of such companies haven’t taken much as their Silicon Valley-style peers in Venture Capital (although that is changing as of late). Of course, they may not have been traditionally-attractive investments for venture anyway, given the relatively smaller TAM within a vertical.
However, the opportunity for such firms to capture significantly more value by offering embedded payment acceptance or other financial products like lending, issuing credit or charge cards, or even alternative payment models like Buy Now Pay Later (BNPL) has attracted massive interest by investors, both within Private Equity and increasingly, Venture Capital type firms like Fractal. Such investors are hopeful that such SaaS companies are well positioned in their respective markets to increase valuation by developing and onboarding their end merchants onto a payments acceptance solution, followed by even more lucrative financial products.
But the question remains – how exactly should such companies go about this, and what are the elements to successfully executing on this mission?
To start, vertical SaaS businesses should conduct some initial market and consumer research and analyze risk, and begin the process of procurement a payments technology processor to provide the underlying technical infrastructure for a payments solution.
Product Market Research and Initial Risk Assessment
The first step to embarking on an embedded payments offering is to conduct an investigation of opportunities to capture payments volume within their industry, including research into existing solutions, and pain points of the customer base. It may even be worth visiting customer sites, observing all of the instances where a payment occurs or could occur, and how that payment is transacted – assuming it is generally paid for in-person. If transactions primarily occur online – we recommend research into the typical checkout flow, transaction size, and available payment methods for your target customers’ end-clients. It will be worth asking customers themselves if they would like a better payment acceptance solution than their current process, and exploring more about what sorts of rates and fees they pay today for credit card or other payments processing.
As a part of this research, you should also take stock of the risk profile of your client base and turnover, and how reliable this segment of the market has been in terms of timely payments, predictability of solvency, and other factors. Is your market segment highly sensitive to economic downturns, and is it difficult to enter the market? Are there indicators in this customers’ current usage of the software you offer today that they are a legitimate business? For example – if you offer photography software for photography studies: is it possible to monitor the number of stored photographs to determine if a certain studio is legitimate?
While this risk evaluation exercise may seem strange – it is an important factor to determine the best approach for offering payments products, and whether you will want to pursue full underwriting of payments or a shared solution with a payments vendor. This analysis is sadly often overlooked and is a core element of such discovery. Without it – it can result in massive losses, fraud, chargebacks, or worse – shuttering a site completely. There is some good news: these can all be avoidable and managed risk can actually turn into a massive asset for a payments offering.
The more you know the nuances, market signals, and unique payment flows and buyer preferences within your industry, the more informed you will be in the next stage – which is when you’ll actually select a payment technology solution to power your payments product.
Selecting the right Payments Technology Partner
The next phase is to begin researching, engaging, and ultimately signing with a payments technology company that makes the most sense for your business, such as Stripe, Adyen, or Payrix. There’s no one-size-fits-all approach here, and while Stripe’s Connect product has historically been a widely-used framework for embedded payments in SaaS, there are many good and competitive options that continue to proliferate as SaaS platforms have evolved.
Ultimately, you’ll want to select a company and product that has the right infrastructure for multi-party money movement, and can provide the right technology offerings, geographical coverage, risk management framework, support and implementation approach, in-person hardware options (if you will accept in-store or “card present” payments) that make sense for your company as you grow.
In this stage, you’ll want to model your monetization potential based on what is known as interchange plus pricing. With this pricing model – payments technology vendors are likely to offer your company variable pricing for payments that is represented as a certain percentage above the core interchange, or wholesale, transaction cost. From there, you can determine how much to charge on top of that, or an alternative monetization and pricing model – like a flat 3% fee.
In a simplified sense, the spread between your interchange plus pricing and what you ultimately go to market with represents your potential take rate. You’ll also want to be clear on which party ultimately “owns” your customer – if you prefer for your payments vendor to take on more of the up-front risk, you can generally expect that some merchants may be rejected or even offboarded if deemed too risky, and that you won’t have ownership of certain types of compliance information, like Know Your Customer (KYC) or Know Your Business (KYB). You also may not have as much control over the client’s onboarding or support experience.
It may be tempting to select a vendor based on pure commercial offerings only, or to attempt to mix and match lines of business with different payments technology vendors. However: in the beginning stages of your company’s payments journey, both can be short-sighted decisions. Why do you ask? The cost of maintenance, risk support, product roadmap as you grow all matter a great deal. In addition, you’ll want to consider speed to market, brand reputation, support offerings, and other factors in addition to commercials.
In addition to Stripe and Adyen, Yeeld recommends you evaluate a number of options as you begin your payments journey in this stage. There are many potential options that Yeeld has experience with as you begin your payments journey Rainforest offers a strong speed-to-market potential with embedded components and flexible merchant risk offerings. Payrix is another great option that has deep experience in a variety of monetization strategies, and offers a powerful set of admin tools. Airwallex has a strong international presence which could work well depending on the geographical footprint of your company.
If you would like an introduction to any of these firms, or assistance in evaluating potential options for your vertical SaaS company, contact us to learn more.
In our next article, we’ll dive deeper into technical scoping, technical and operational implementation, and go-to-market planning to help a vertical SaaS company get an embedded payments product off the ground.