Embedded Payments - Payment Strategies for SaaS Platforms! 💡

Around 90% of Software-as-a-Service (SaaS) companies use a subscription business model. Whether by bank transfer or card payment, SaaS businesses invoice their customers regularly for use of their software. As a result, these businesses focus on the optimization of their recurrent pricing and invoicing transactions to improve acquisition rates and customer stickiness. This marks the beginning of a new approach to payment monetization by SaaS companies.

Add into the mix the new wave of SaaS solutions dedicated to vertical markets (i.e., sector-specific software packages and services, for industries like hospitality or sports). SaaS companies have been the first to adopt a ‘Win-Win’ dynamic in these vertical markets by meeting the needs of a specific industry while also incorporating financial services. Toast and Shopify were two of the first SaaS businesses to sell financial services. They have integrated them into their product, taking things further than straightforward payment services with payment cards, loans, and insurance. 

To offer these new services, SaaS organizations can use fintechs that specialize in infrastructure. Software-as-a-Service companies can increase their customer revenue considerably – by a potential factor of 2–5 – by integrating fintech. The winning approach for these vertically-positioned businesses will consist of integrating financial services, specifically payments, to acquire new customers and increase revenue while also reducing their unsubscription rates.

The Great Verticalization of SaaS  🔍

Every ten years or so, the way SaaS software is distributed and sold evolves. Each development (from the subscription installation method to a bottom-up approach) allows the creation of new markets, often by extending the client base, from SMEs to large corporates.  The new generation of SaaS companies is ambitious and differentiated by a desire for extremely rapid growth. Shopify and Toast are perfect examples of this. 

Their objective is to offer services to Small and Medium Enterprises (SMEs) in a specific sector (e.g., hospitality, marketing, or construction) with extremely personalized functionalities and customer experiences. However, they rapidly became registration systems for their customers, supplying single platforms for services like CRM, stock management, cash flow management, HR management systems, etc. These vertical markets have become ideal candidates for the creation of a SaaS/fintech business model. If a SaaS company becomes dominant in a particular sector it can offer extra services like:

• Traditional SaaS extension - upselling software products and adding extra modules. 
• Fintech opportunity - adding financial services like payments, cards, loans, bank accounts, compliance, and salary management. 

Embedded Finance improves margins and makes products stickier 💡

Some vertical SaaS companies are looking to embed financial services and more specifically payments into their offering. This strategy:

• Increase revenue: the idea is to look beyond traditional revenues in the SaaS world (i.e., just subscriptions).
• Enables cross-selling: marketing payment products to existing SaaS customers without incurring any additional customer acquisition costs. 
• Reduces subscription rates: by supplying a more complete solution tailored to customers’ needs, the risk of unsubscriptions is reduced considerably.

Initially, SaaS businesses added financial services by selling the services of a third-party partner. However, with new fintech infrastructure players, businesses can now transition from reselling to embedding financial services directly into SaaS products.  Reselling is a reliable option that enables new services to be launched quickly. However, embedding directly means higher margins and a more transparent customer experience. With embedded services, vertical SaaS solutions can access various proprietary data that flows from all the services used to adapt to customer needs and risk profiles.

The Emergence of Embedded Payments 💳

While financial services add value for customers, vertical SaaS businesses acquire customers and create loyalty because of their differentiated solutions rather than because of their financial services offerings. It will always be preferable to launch financial services once customers have adopted a SaaS offering.

Many companies have waited until their main business activity has developed before being able to monetize payments. Shopify began without payments and principally used to supply software that helped SMEs create e-commerce sites to manage their online storefront. The directors at Shopify realized that merchants were having to process payments via a third party (a complicated and often tedious process). So Shopify decided to take advantage of Stripe’s APIs to handle payment flows for merchants.

Although payments were the first Embedded Payment services to emerge, overall the opportunities on offer with embedded financial services are generally underexploited. They could involve loans, cards, or insurance. Payments processing is often easiest for vertical SaaS solutions to embed. White label payments originating from payment services providers represent another opportunity. But they can be difficult to monetize because of extra charges customers have to absorb. Vertical SaaS solutions that have opted for this can use a large transaction volume to negotiate with their PSP. They can also offer to carry out transactions via other payment methods on the platform.

Other businesses have decided to embed payments to become payment facilitators themselves (“PayFacs”). PayFacs play an active role in payment processing and can capture a percentage of transaction volume in exchange for handling any risks and transactions related to payment collection. Fintechs specializing in infrastructures enable SaaS companies to become PayFacs. This also requires a certain economic heft to be able to allocate resources for things like licenses, verification, transaction and risk management, etc. Also, if the vertical SaaS business operates worldwide, it will have to handle the challenge of sales channels (both online and points of sale) and the geographical challenges of having to adapt the SaaS business to meet various national and domestic regional regulations.

The Strategies for Embedded Payments into your Vertical SaaS solution 👨‍💻

N°1: Mark Up transactions on your platform

Merchants who use your SaaS solution take payments from their customers (via a payment service provider, for example), you then have the opportunity to embed payment processing directly into the SaaS platform to allow payments to be taken. By handling payment processing on behalf of your merchants and marking up transactions as they pass through the system, you can make your merchants’ lives easier while also generating a new source of revenue. 

At the point, a customer pays, behind the scenes the merchant and the vertical SaaS solution share the transaction. This might not sound like much, but with the thousands, or rather millions, of transactions passing through the SaaS platform, this strategy adds up to a substantial revenue stream.

N°2: Offer your SaaS platform for free and generate revenue over time

This strategy goes further as it involves monetizing payments while also allowing free use of your SaaS platform. This lets you capture market share more quickly, create an ‘indispensable’ product and maximize your revenue over time. The advantages of this approach are:

• An increase in 'lifetime value' from usage-based revenue.
• A reduction in customer acquisition costs.
• Reduced subscription rates alongside new opportunities around payments (the marketplace market). 

Imagine that a restaurant with a million Euros worth of sales pays you €10,000 a year to use your SaaS platform.  At the same time, they are paying €25,000 to a payment service provider to manage payments. That could be you! But you don’t have to provide your platform for free. You can also use a flywheel model by lowering the price to subscribe to your vertical SaaS solution to attract more clients.

N°3: Become a PayFac (a payment facilitator)!

A payment facilitator, known as a PayFac, is a specialist merchant aggregator/ account with the same privileges as a payment processor. Payment facilitators can subscribe to sub-merchants, process transactions, take care of disputes and carry out payment orders on behalf of these sub-merchants. Embedding these advantages in-house allows you to further reduce the costs of growing revenue while also offering better control over your product and customer experience. 

Toast supplies a SaaS platform for restaurant and point-of-sale management, managing daily transactions and creating an improved client experience. Toast is also a payment facilitator and its customers – restaurants – are sub-merchants. Historically, restaurants needed three providers to cover all of Toast’s business activity – a SaaS solution for reservations, a bank or payment service provider to collect payment, and finally a hardware supplier to accept payment at point-of-sale.

Things to keep in mind: There is still a lot of space for payments in vertical SaaS and the next payment wave will see more PayFacs emerge. On top of this, many software suppliers embedding payments will have payment flows that are a lot more complicated to handle, like managing multiple stakeholders. As a Core Banking Platform and payment orchestration, specialist, we think that embedding payments into vertical SaaS companies is the logical next step for growth. Skaleet works with vertical SaaS companies to support their plans to facilitate payments (“PayFac”) to process their payments and create personalized flows. For organizations committed to this third strategy that needs embedded payment components, our solution is a top recommendation to facilitate the management of sub-merchants, manage disputes and carry out payment orders while also reducing costs and creating new sources of revenue.