• Nikhita Hyett, EU MD at BlueSnap


• 20.12.2022 03:15 pm
#payments #saas

Since Elon Musk’s takeover of Twitter, there’s been a flurry of announcements from the new CEO about the vision he has for the company. Among them, is his plan to add payment and banking services to the platform, which could include high-yield money market accounts, debit cards and peer-to-peer transactions. Musk’s Twitter isn’t alone in eyeing the banking space: many Big Tech companies are primed to move into the sector.

Although the current chaos at Twitter isn’t a blueprint companies would want to follow, examining their own payments process and looking to incorporate payment features into their offering is something more software companies need to consider.

SaaS companies of all sizes have the opportunity to revolutionise their software platform through embedded payments. Investing in embedded payments allows them to create a new revenue stream, optimise the user experience and enhance product stickiness. As such, this technology is quickly separating out the software herd, with those that have embraced embedded payments leading the pack and those that haven’t, trailing behind. In a difficult macroeconomic climate, no one wants to be in last place.

Turning to embedded payments to drive growth

There are several strategies a business can pursue to increase its revenue. For example, it might broaden its service offering, or look to expand into new markets. Both of these represent significant strategic shifts. They demand investment, expertise and a considerable amount of management time.

That’s not to say either are bad ideas, but there could be potential revenue sitting right under software firms’ noses - in the form of embedded payments. To visualise the scale of the opportunity, consider Shopify. The e-commerce software giant has around two million merchants globally, each of whom pay a monthly subscription between $29 and $299. Yet Shopify’s market cap stood at a whopping $33 billion. You don’t have to be Warren Buffet to see that something here doesn’t quite add up.

The secret to Shopify’s success, it turns out, is embedded payments. That is, it's one of the largest SaaS companies to switch from requiring its clients to engage with third-party payment providers to equipping them with the technology to become a payment processor in their own right. Through its software, Shopify makes life simpler for merchants - helping them grow average basket size and boost customer loyalty - by processing their own payments. It also provides a frictionless experience for customers and generates sizeable additional revenue for Shopify, which earns a percentage on every transaction.

Embedded payments are an easy win

People spend around $22 billion every year on Shopify. Now not every B2B SaaS platform sees that volume of transactions - but even one that handles a tenth of that amount is generating revenue for payment gateways and processors that could instead be going directly to its own top line.

This is a classic example of low-hanging fruit. Put in the investment and the revenue will come. As the software platform, you generate revenue on every transaction. Your clients are most likely not fintech companies, so going out and engaging a payment processor is outside of their core skill set (and likely a hassle they’ll be grateful to outsource). As for the end customer, they benefit too thanks to a streamlined checkout process which all takes place within the merchant’s own distribution channels (instead of being re-directed to a third-party site for payment).

In short, software firms which aren’t taking advantage of embedded payments are leaving revenue on the table, with analysts estimating that the wide embedded finance opportunity could be worth more than $7 trillion by the end of the decade.

Partnering with a payment orchestrator

As mentioned, fintech businesses tend not to feature heavily in the typical SaaS company’s client portfolio. Equally, many software firms might not take kindly to the idea of becoming a fintech themselves. While it makes sense for some large SaaS providers to invest eight-figure sums into acquiring and maintaining the necessary financial licenses and approvals, this isn’t a model that works for all.

But you, as a software company, don’t have to become a payment provider to offer embedded payments. Instead, SaaS providers can achieve the same goals by partnering with a payment orchestrator. This is when a software company works with an established and trusted payment gateway, to embed the relevant payment processing software within its own platform.

There are a number of mechanisms that can be adopted, including turnkey, white label and hybrid solutions. In other words, software firms can crawl, walk or run on their embedded payments journey. The important thing is to choose the right option for your business, depending on the requirements of your client portfolio, how quickly you want to move and your wider business objectives.

Is there a catch?

Of course, all this talk of low-hanging fruit worth a trillion dollars in revenue might sound too good to be true, and it’s natural to ask what can go wrong? Done correctly, however, the answer is “very little.”

Every MBA graduate’s favourite tool is the value triangle - as it can apply to almost everything. Embedded payments is no exception in that clients and customers want payments to be cheap, fast and reliable.

The risk lies in failing to deliver on any of these parameters. Setting the price competitively is simply a case of monitoring the market. It’s the other two measures that often see SaaS providers opt to partner with an established payment processor. The payment system has to be reliable and secure, or your brand reputation will suffer. And moving at speed requires having immediate access to the payment infrastructure - ready to integrate with your own systems. 

Software companies may choose to manage their payments completely on their own and over time this can deliver some benefits. But for many, this is an overly risky move, as they must now bear financial liability and may not have the resources or expertise to do this. That’s why partnering with a payment orchestrator is a smart move. This allows SaaS companies to quickly evolve their offering and drive revenue, increase customer loyalty, and enhance the checkout experience for end users - while leaving the complexity and liability to the experts. As the software market becomes more crowded and competitive every day, embedded payments are a service no SaaS firm can afford to ignore.