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
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
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.
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.