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?”

Finance Everywhere, Payments

Google launches digital wallet: 5 questions with Payments GM Arnold Goldberg

  • Google launched its digital wallet and virtual cards at its latest I/O developer conference, marking its first move in the payments space since the Plex project was scraped late last year.
  • Tearsheet spoke with Google's head of payments, Arnold Goldberg, about what this means for the Big Tech's journey in financial services.
Iulia Ciutina | May 13, 2022
Member Exclusive, Payments

Payments Briefing: ‘We penetrated the blue ocean opportunity of the Spanish-speaking market’ – NovoPayment’s Anabel Perez

  • This week, we take a look at Miami-based BaaS provider, NovoPayment.
  • We also discuss Bumped, a firm that rewards customers with equity in the brands they shop from.
Ismail Umar | May 12, 2022
Payments, Podcasts

What’s Happening in Payments Ep. 6: Quontic’s payment ring, Visa’s move into NFTs, and the new Square Stand POS system

  • This week, we discuss why Quontic Bank decided to launch a contactless payment ring.
  • We also talk about Visa's recent crypto and NFT-related activities, as well as Block's upgraded Square Stand POS system.
Ismail Umar | May 05, 2022
Payments

Rewarding shoppers with brand ownership: Bumped expands with a new browser extension

  • Bumped runs a service that rewards customers with fractional ownership of partner brands that they shop from.
  • The firm’s new browser extension notifies online shoppers every time their purchase is eligible for a stock reward.
Subboh Jaffery | April 27, 2022
Member Exclusive, Payments

Payments Briefing: ‘We want to be the bank that got people into wearables’ – Quontic Bank’s Steve Schnall

  • This week, we discuss Quontic Bank’s new contactless payment ring.
  • We also take a look at Square’s upgraded Square Stand POS system.
Ismail Umar | April 25, 2022
More Articles