Companies that have no connection to the financial world - Mindbody (fitness), ServiceTitan (HVAC, plumbing), WonderSchool (daycare), Jobber (lawncare, painting) - are suddenly making more revenue from online payments and other financial services than they do from their core software subscription revenue.
These is because new Fintech infrastructure companies have made it possible for SaaS businesses to add financial services alongside their core software product. By adding Fintech, SaaS businesses can increase revenue per customer by 2-5x, a significant new market opportunity and inspiration for what might be to come in the future.
The First Step: SaaS Companies Processing Their Own Payments
From Forbes: “By looking at several examples of fast growing vertical SaaS companies, we observe a fundamental business model shift taking place whereby vertical SaaS companies are becoming SaaS + payments companies, and by doing so are creating mega-opportunities in deceptively small markets.”
By integrating payments functionality into their product, MindBody captures a significant new revenue stream and increases their TAM by 41% to $1.2 billion. Not only are they generating a high margin recurring SaaS licensing fee but they are taking a cut, roughly 80 bps of payment volume according to their public filings, of every dollar their customers make. While MindBody was one of the early vertical SaaS companies to integrate payments as a key and differentiating product feature, they are not alone as a handful of successful and scaling vertical SaaS companies have followed suit.
These software companies’ stated primary line of business is to license their software on a monthly subscription. MindBody’s gym owner customers pay MindBody a monthly fee. Plumbers pay ServiceTitan a monthly fee for use of their software. However these software companies have introduced a new line of business – payment processing. When the gym owner signs up a new customer, that customer pays their gym fee via MindBody. When the plumber finishes a job, the customer’s payment is processed online via ServiceTitan. They don’t achieve this via Moneris or PayPal, they have built the payment processing technology and links to payors themselves, and collect a % on each payment.
Because these businesses provide software that helps facilitate the interaction between business and customer, it allows them to be integrated into the payments flow and actually be the payment processor for its SaaS customers.
"These examples are only a handful of the vertical end markets where SaaS+payments business model makes sense, but there are many more. What is clear is that the next generation of vertical market SaaS businesses should incorporate payments functionality directly into the product feature-set and take a cut of that payment flow rather than outsource those payments to external providers.”
The Future: FinTech, InsureTech
Adding direct payment processing is a natural first step, but in the future market analysts speculate that SaaS companies could add the full stack of FinTech and Insurance capabilities to their standard offerings.
Consider: traditional insurance is highly inconvenient: I purchase my asset (house, car, lease on an office), but then I have to go somewhere else to buy insurance. It would be natural and highly advantageous to be able to embed insurance at the point of purchase. “Insurtechs” are able to better acquire customers (“would you like some insurance with that?”) and better select risk by leveraging the data of the hosting SaaS platform.