Payments

What’s behind software companies becoming payment companies?

  • Software companies are increasingly getting deeper into payments.
  • This increases revenues and expands their total addressable markets.
close

Email a Friend

What’s behind software companies becoming payment companies?

One of the most interesting things happening in fintech is that companies far away from finance are adopting financial services. This could take the form of a retailer like Walmart offering its customers a debit card, complete with a rewards and incentives system. Or, it could be rethinking a firm's entire business around financial services, in what Anthemis partner David Galbraith calls 'paving the way for new value creation or new business models".

Software companies are well on their way to becoming payments companies. In a presentation at Tearsheet's Embedded Conference, Finix CEO Richie Serna described what's happening in payments infrastructure that is enabling software firms like Mindbody and Clubessential to look increasingly more like fintech companies.

Payments infrastructure 101

payments ecosystem
the payments ecosystem

There are a lot of hands in the payments ecosystem cookie jar. From issuing banks and processors to the card networks to acquiring banks and processors, the payments technology stack is supported by some very large companies. The most recent addition to the stack over the past ten years is what Serna calls Payments Facilitators.

Firms like Stripe and Square provide a modern connective layer between the underlying payments stack and the end merchant, enabling software firms to pass through their own sponsorship of merchant accounts. "Even though you hear Stripe saying that they're disrupting payments, really what they are is a RESTful API built on top of First Data and Wells Fargo," Serna said. In return for this functionality and connectivity, Payment Facilitators earn good economics: between 50 and 100 basis points of a payments transaction.

Software as payments distribution

evolution of payments distribution
the evolution of payments distribution

From an industry perspective, Payments Facilitators provide more than just a slick UI on top of a lot of clunky infrastructure. Their success in attracting merchants to their platforms increasingly shifts distribution power of payment services to these Payment Facilitators. But todays' firms in this space may only be the first wave.

"We think the next wave of billion dollar Payments Facilitators won't look like Stripe or Square -- they'll look like Toast, a software provider for the restaurant industry and Mindbody, a software firm for yoga studios," he said.

Market growth

market growth of payments in the US
payments via software is quickly growing

Software firms are poised to be an increasingly important driver of payments growth in years to come. In 2019, about 8 percent of all payments revenues came through software vendors. But it's a quickly growing part of the ecosystem and poised to grow at a 30 percent CAGR over the next decade "You pay for software first and then you pay for payments later," Serna said.

Companies like Uber and Lyft think of themselves as financial services companies. Payments become part and parcel of their products. Riders have a seamless payment experience to pay for their travel. But these firms also want to be able to pay out their drivers as quickly and frequently as possible with instant disbursements. Payments can be a huge driver of profits for software firms as they have large margins.

Lightspeed is a commerce solution for SMBs that recently went public. In its S-1, the company said that by becoming a payments company and taking payments in-house, its take rate on transactions went from about 25 basis points to 65 basis points. "At scale, that's monstrous," he said.

Getting into payments also expands the total addressable market size for software companies. Mindbody is a software as a service firm that helps fitness studios manage and schedule classes. 50 to 60 percent of all its revenues now come from payments. "Every single yoga mat and every single class, Mindbody takes 3 percent of that," Serna said. "I think they're taking 90 to 95 basis points of its payment stream."

Mindbody recently sold for about $2 billion.

0 comments on “What’s behind software companies becoming payment companies?”

Payments

Challenges facing Paze: Jostling for position in a crowded digital wallet space

  • EWS launched its digital wallet service Paze, earlier this year. But Paze is coming into a space where incumbents have become deeply embedded.
  • What challenges await the new digital wallet service?
Rabab Ahsan | June 06, 2023
Payments

Citizens and Mastercard roll out first-of-its-kind Touch Card in the US for the visually impaired

  • To enable more inclusive payments for the sight impaired, Citizens has rolled out America's first touch card for its high net-worth clients.
  • Touch cards are an emerging card standard designed to provide a greater sense of security, inclusivity, confidence, and independence to visually challenged consumers.
Sara Khairi | June 06, 2023
Banking, Payments

Santander embraces the Earned Wage Access trend, taps DailyPay to strengthen client relationships

  • Santander Bank has tapped DailyPay to incorporate the Earned Wage Access offering into its treasury management in a move to benefit its commercial banking clients in the US.
  • The EWA offering can serve as an impactful tool for bank clients, bolstering the bond between the employee and the employer as well as establishing a sound footing for their businesses. In turn, it deepens the client-bank relationship and reinforces the growth that they can achieve together.
Sara Khairi | June 01, 2023
Lending, Payments

Can lenders improve the financial health of consumers through design?

  • Design can play a critical role in improving consumers' financial health when it comes to lending.
  • Research by the Financial Health Network shows that areas like defaults, making payments, and borrowing the right amount can be significantly improved through behavioral design principles, to ensure customers make decisions that improve their financial well-being.
Rabab Ahsan | May 26, 2023
Payments

5 questions with Zip CEO Larry Diamond

  • Payment act as a beachhead for financial services firms to more deeply serve customers, according to Zip's Larry Diamond.
  • We spoke to the payment firm's CEO about his new focus on the US and the future of the company.
Zachary Miller | May 15, 2023
More Articles