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SaaS Vendors Unlock New Growth By Offering Their Own FinTech

3/18/2020

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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.

Other examples:
  • a plumber who operates a small plumbing business subscribes to ServiceTitan software. ServiceTitan then provides the tools to run the plumber’s small business operations – schedule appointments, manage inventory, etc.
  • an in-home daycare owner subscribes to WonderSchool software. WonderSchool then provides the tools to operate the daycare business – scheduling food plans, managing absences, etc.
  • a pest control business uses Jobber software to operate their pest control business

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.


Growth of Global Payment Facilitator (PayFac) Population

A 2019 analysis quoted by various software vendors shows the rise of “global payment facilitators” increasing as high as at 4,229 in 2025. One of the drivers of this population growth: “It is becoming increasingly popular for software companies to begin taking more control of the payments process on their platform by becoming PayFacs. When a software company becomes a PayFac, they take ownership of the payments portion of their software and handle many of the payments responsibilities that previously were held by 3rd parties. […] When acting as a payment facilitator the software company is responsible for payments functions, such as getting the merchant approved and set up to begin accepting payments, determining the fee the merchant pays for each transaction, funding of the merchant (getting the appropriate amount of money into the merchant’s bank account), ongoing monitoring for fraud or other suspicious activity to ensure a safe payments ecosystem, and handling chargeback requests”

I’m not sure of the validity of this study as I can’t find the source document, however the reference provided is “AZPG calculations using data from Double Diamond Group / Infinicept, Boston Consulting Group, Cap Gemini, World Bank, Bank of Mexico, Visa, MasterCard, PayPal, Square, Shopify, Owler.com, Clearbit.com, interviews with global payments consultants, integrated payments executives, payment facilitators, and others”.

What Types of Software Companies Are Becoming PayFacs? 

Credit Suisse categorizes 3 types of software companies that are becoming payments facilitators:
  1. Core commerce platforms/payments companies (e.g., Square, Stripe, PayPal, BlueSnap, PagSeguro, SumUp)
  2. Integrated Software Vendors (ISVs) with vertical-specific SaaS offerings (e.g., software to help manage a restaurant or fitness center), which have a payments aspect to their software and/or workflow (e.g., Toast, Mindbody, Lightspeed, ServiceTitan)  
  3. Marketplaces and related technology platforms that “take payments in-house” (e.g., Etsy, Shopify, Wix, Yapstone)

Proliferation of Businesses That Help Software Companies Become PayFacs

It seems the barrier to entry to becoming a PayFac has been lowered by a proliferation of small companies offering a service to help you become a Payment Facilitator, such as PayEngine, Infinicept, Payrix, Amaryllis, Tilled, Finix, TSYS, and AgilePayments. A sampling of some of these companies’ recent marketing:

  • PayEngine explains its mission on a podcast - to help software companies become PayFacs by providing them the software infrastructure and consulting. “Our platform provides all the necessary technology for software vendors to easily move payments in-house. They can increase revenue by up to 30% overnight by allowing companies to set their own rates directly over interchange and retain the majority of profits, without having to worry about the merchant-of-record liability or implementation complexities"
  • Infinicept, a small company in the US that has a mission to help software companies become payment companies, hosted a webinar featuring 3 software company CEOs and how they became full payments companies with Infinicept's help. "By owning the payments function, these companies were able to provide the service their customers deserved without needing to rely on 3rd party payment service providers." 
  • Payrix, a small US firm, was interviewed on a podcast where he explained his company's mission to help software businesses become payment providers. "Here’s the good news: today there are providers like Payrix who offer the payment infrastructure as a service technology for companies to become a PayFac."
  • A popular article FinTech Envy: Software Companies Race to Add Payments. The article starts "They started out as software companies. They're turning into fintechs." 
  • Amaryllis, a small company in Israel, published 5 Reasons Every Software Company Should Consider Becoming a Payment Facilitator
  • Tilled, a small company in the US, launches a PayFac-as-a-Service model, where they provide the technology for you to become a fully registered payment facilitator or take advantage of "hybrid models" where you can become a sub-payment facilitator along with them
  • Finix — a startup “enabling the new Stripe’s and Square’s of the world. By becoming your own Stripe or Square, the processing fee goes to you instead of a middleman"— said it had seen its transaction volume more than quadruple from Q2 2019 to Q2 2020.
  • TSYS launched their service Why It Pays To Be a Payment Facilitator
  • AgilePayments, a small US firm writes Why Every Software Vendor Should Consider Becoming a PayFac

But it’s not only startups who are offering to help software companies ‘own payments’. Large established PSPs are also offering this service, for example:

  • Unipay is providing a consulting service targeted at "SaaS companies, franchisors, ISVs, online marketplace owners and venture capital firms". They published a whitepaper How to Become a Payment Facilitator.
  • Fiserv launched subsidiary Carat that helps software companies become PSPs. Their manifesto: How Becoming a Registered Payment Facilitator Pays Off (PS: It's Not Rocket Science)
  • Stripe, as we know, offers its Stripe Connect white-label product that has apparently allowed 100s of companies including Shopify, Lyft, Instacart to “bring payments in-house”

​As the saying goes, who made the most money during the gold rush? It wasn't the gold diggers, it was the people who sold them shovels!

Cost of Becoming A Registered Payments Facilitator

From Infinicept: "Although the benefit of becoming a payfac is greater control and higher profit margins, the initial and ongoing investment is steep, including:
  • Hiring a full-time payments team – business, legal, engineering, and customer service.
  • Set up — acquiring processor/bank sponsorship, gateway integrations, Level 1 PCI DSS certification, building customer dashboard and payout systems, hiring consultants/advisors.
    Time: 6-12+ months
    Cost: $650k-1.1M
  • Customer onboarding and compliance — develop customer underwriting and onboarding including ID verification, risk scoring systems, compliance with various licenses and card network requirements, data retention, and privacy.
    Time: 6-18 months
    Cost: Approx $1.8M
  • Ongoing management capability — account onboarding and monitoring, risk monitoring, fraud prevention, chargeback process handing (including evidence submissions, reporting, and annual compliance validation.)
    Cost: $200k-1M+/year
  • Additional costs — expansion into international markets, plus ongoing technical and procedural compliance due to new regulations."

Different Business Models: Registered Payment Facilitators and Hybrid Payment Facilitators

When a company like PayEngine, Payrix, or Stripe helps you become a PayFac, they all offer a range of models, from helping you become a full-fledged PSP (where you bear all of the aforementioned costs, plus the risk and compliance responsibility), to hybrid options such as “Managed PayFac” and “Hybrid PayFac”, where the software company and the enabling FinTech “share” the risk and responsibility. 
​
What About PSD2 Compliance?

If you are a software company turned PayFac using a hybrid model, it’s not clear to me whether you would be considered a regulated entity under PSD2 and be supervised by regulators like the Financial Conduct Authority (FCA). For example if you’re becoming a Hybrid PayFac by making use of Stripe Connect, apparently you aren’t in scope of PSD2 or the FCA.  "With Stripe Connect, Stripe contracts with both the Seller and the Platform to settle payments to the Seller and fees to the Platform. Funds that are owed by the Buyer to the Seller are never in the possession or control of the Platform. Instead, these funds are settled to Stripe’s regulated client money bank account for the benefit of the Seller, before being paid out to the Seller by Stripe. The regulated payment services are rendered by Stripe instead of the Platform, so the Platform does not incur the significant regulatory and compliance overhead of getting a payments license or exemption." Indeed, Shopify uses Stripe Connect for its payments and yet Shopify doesn’t appear on the FCA registry, only Stripe does.

However Stripe is the only company listed in this article that promises to handle PSD2 requirements on behalf of the PayFac. All the other companies - PayEngine, Payrix, etc. – are silent on PSD2, focusing only on helping companies either meet PCI compliance, KYC and AML, or taking the PCI/KYC/AML responsibility partly or fully away from them, depending on the hybrid model.
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