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?”

Partner, Payments

Retailers: We have a holiday gift for you. Unwrap the new loyalty and digital engagement tool

  • Consumers spent $38 billion online during Thanksgiving weekend, an almost 8% jump year-over-year, far outstripping expectations.
  • Now, by offering personalized rewards and flexible payment options, brands can reap the benefits of greater customer loyalty without impacting their bottom line.
Simon Khalaf, Marqeta | December 07, 2023
Banking, Payments

Why Citi CEO Jane Fraser calls the firm’s Treasury and Trade Solutions a ‘thing of beauty’

  • As Citi embarks on its turnaround, some of the firm's assets stand out.
  • CEO Jane Fraser believes the bank's TTS division will be able to serve multinational clients' multi-year move towards resiliency.
Zachary Miller | December 07, 2023
Payments

Spend management platforms are Wising up

  • Last week Wise announced a partnership with Webexpenses, a cloud-based provider of financial management software.
  • As spend management grows, Wise is planning to ride the wave and grow its platform business.
Rabab Ahsan | December 06, 2023
Payments

5 trends that left an imprint on the payments landscape this year

  • With the conclusion of the year on the horizon, we reflect on the key trends that have left an impact on the payments landscape throughout 2023.
  • Tearsheet engaged with a broad spectrum of experts in the payments industry, who shared their insights on the overarching themes that have defined this year.
Sara Khairi | December 01, 2023
Payments

How Government-to-Person payments can address the 5.9 million big unbanked problem in America

  • As of 2021, around 6 million Americans were unbanked and this problem disproportionately affects Black and Hispanic households, of which 10% have no checking or savings account.
  • Government-to-Person (G2P) payments may be a way to bring unbanked communities into the fold in a way that counters lack of trust and incentivizes participation.
Rabab Ahsan | November 30, 2023
More Articles