A plumbing company and a quick-serve restaurant have little in common operationally, but both now rely on specialized software platforms designed specifically for their industries. During the Software-as-a-Service (SaaS) renaissance, solutions emerged to serve distinct verticals, such as Toast for restaurants, Mindbody for fitness studios, and ServiceTitan for contractors.
Although these platforms were built for niche industries, many providers have discovered a powerful revenue opportunity in a universal business need: payments.
As Don Apgar, Director of Merchant Payments at Javelin Strategy & Research, discusses in the Vertical SaaS: Best Practices for Monetizing Payments report, this opportunity also presents a challenge for integrated software vendors—developing a compelling embedded payments strategy that meets the unique needs of their vertical while effectively mitigating risk.
Preparing for the Unseen Future
These strategies have become a critical focus for SaaS firms, in part because their cost-effective point-of-sale (POS) platforms have seen widespread adoption among small businesses. As payments have been embedded within these systems, they have delivered several key benefits to business owners.
“It’s important for the workflow of the business owner,” Apgar said. “If you have a POS system, being able to take customer payments and have those payments posted and reconciled within the software is a big time-saver. It’s a great customer experience because it reduces the friction, you don’t have a separate device, and all those good things.”
“But on the back end, the software companies quickly realized that much like the independent sales organizations (ISOs), there’s a residual component to payments,” he said. “From a revenue standpoint, payments revenue became in some cases more lucrative than software fees for some of these companies.”
The revenue potential is one reason the small business segment has become a prized target for many of the world’s leading financial services firms. In response, the market has seen a wave of new product launches aimed at this sector, including POS systems, payments orchestration platforms, and working capital solutions.
Amid this surge of interest in small enterprises, the vertical SaaS sector has also attracted its share of attention.
“As private equity becomes more interested and invested in the software space, one of the big PE drivers is, ‘What are you guys doing with payments?’” Apgar said. “At the same time that payments became more important to consumers—because now everybody wants to tap their card, that’s the whole pandemic-driven customer experience, and cut the payments time down—it became more important to businesses to have them integrated.”
“Payments also became more important to software companies because of the revenue potential, so you’ve got those three factors coming together at the same time,” he said.
Changing the Construct
While consumer behavior and payment processor preferences are important considerations, one of the most pressing questions for SaaS providers is ultimately what merchants want.
“What they want is a connected workflow and reasonable pricing,” Apgar said. “It doesn’t have to be the cheapest, but the rat-hole that some of the SaaS companies have gone down is, ‘I integrate payments and I create a so-called walled garden where if you use my software, you have to use my payments.’ It’s creating the perception of, ‘I can overcharge the merchant out the wazoo and they have no option.’”
In truth, switching SaaS vendors is not always easy for merchants, though this is not solely due to payments reliance. For example, a restaurant using Toast will likely have its entire menu, including ingredients, loaded into the system. This makes tasks like building checks seamless, but operational advantages extend far beyond that.
“The POS has become about more than just ringing up sales, it’s running your business,” Apgar said. “You’ve got your servers, you’ve got your tips loaded in there, and if you want to switch from Toast to somebody else, it’s a big effort.”
“Changing is not impossible, merchants do it all the time, but it’s not as easy as just pulling out the Bank of America payment terminal and putting in the Chase payment terminal,” he said. “There’s a whole construct around that. It’s not installed software—it’s easy in that regard to change—but it’s the dataset that’s the killer.”
Knowledge Rolls Upstream
Even so, while these factors can make switching vendors difficult midstream, merchants now have more options than ever. If their SaaS provider pushes too hard in the wrong direction, many will ultimately take their business elsewhere.
“Merchants want stability and predictability,” Apgar said. “Don’t hit me with a fee or create a policy that jams me up. Merchants want it just to work, to be reliable, to be predictable and to be efficient. It is just back to basics, if you will, for the software companies.”
Payments remain one of the most fundamental considerations. SaaS vendors that can offer well-integrated payments services stand a better chance of gaining, and keeping, merchant loyalty.
However, delivering reliable, secure, and efficient payments is just as important for the financial services firms that facilitate these transactions.
“If you go back to the processor level—the Fiservs and the Chases of the world—software companies have become an important distribution channel for payment services, because merchants aren’t going into the bank to open a payment account,” Apgar said. “They’re not responding to salesmen, independent agents knocking on their door and saying, ‘Would you like to switch your payments over?’”
“When the merchant buys the software, that is when they buy their payment processing,” he said. “But it has become an important distribution channel for the service companies that provide payment processing. Knowledge rolls upstream, so it’s important for the SaaS company to know what the merchant wants. But then you go up to the ladder and it’s important for the processor to know what the SaaS company wants.”
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