Unpacking The Embedded Payments Business Case For B2B Software Platforms

All software companies are payments companies. Those quick to recognize this – such as Shopify and Toast – have transformed their value propositions and the growth trajectory of their businesses. Those that haven’t risk falling short of their customers’ expectations and their market potential.

It’s not difficult to recognize the growing trend of software platforms making inroads into payments. In virtually every industry vertical, specialized software platforms are integrating payments into their offerings. This includes providers selling software to churches (Faithlife), residential property managers (Yardi), membership clubs (Club Essential), utilities providers (CityBase), government agencies (CourtMoney), law firms (Headnote), performing arts businesses (Neon One), auto repair shops (Shopmonkey), fitness clubs (ABC Fitness Solutions), health and wellness business (Mindbody), restaurants (Toast), fraternities (Greekbill), non-profits (Blackbaud), field services (Jobber) and medical practices (Medfusion) – just to name a few.

Payments has emerged as one of the most logical and high-impact expansion strategies for B2B software platforms. Taking ownership of payments translates to greater control over and refinement of the customer experience. It provides an avenue to increase product engagement, and perhaps most importantly, it serves as a force multiplier for revenue growth.

The Business Case for Software Platforms Offering Payments

451 Research, part of S&P Global Market Intelligence

Driving Revenue Growth

Perhaps the most obvious reason for software platforms to move into payments is to increase average revenue per user (ARPU). Generating per-transaction revenue can be a force multiplier for growth, allowing a software platform to directly benefit from its customers’ success. This benefit is especially pertinent for vertical SaaS platforms whose market opportunity is inherently limited by the number of businesses in the vertical they serve.

For fast-growing software platforms, payments can quickly become a major revenue driver. Consider that, of Toast’s nearly $1.2bn in revenue over a nine-month span (ending September 30, 2021), 83% was attributed to financial services. During the same time span, Shopify’s merchant solutions revenues (primarily fees from Shopify payments) accounted for 69% of total revenues. It’s important to note that this revenue comes at essentially zero additional customer acquisition cost.

Further, offering payments opens the door to a variety of additional monetization opportunities beyond payment processing fees. For instance, software platforms can levy fees for add-on reporting and analytics capabilities, specific payments services (e.g., instant payouts), point-of-sale hardware, and using third-party payment service providers (as Shopify currently does).

Enhancing the User Experience

Most payment service providers haven’t historically excelled in design and user experience. Software platforms, on the other hand, tend to take tremendous pride in their brands, and often compete on the basis of the user experience. This can be particularly problematic when considering how deeply ingrained payments are within most software platforms’ user experience. For instance, take a payment process like merchant onboarding – often one of the initial touchpoints a customer has with a software platform. Onboarding through a traditional payment processor can entail redirects, significant paperwork and multi-day approval windows – not an ideal first impression for a software platform to make. Essential business functions including transaction reporting and payouts are also conducted outside of the software platform’s influence, which can result in a disjointed and often frustrating user experience.

Taking greater ownership over the payments process translates to greater ownership over, and refinement of, the user experience. Software platforms offering payments can provide their customers with instant onboarding, consistent branding, tailored payment capabilities and uniform support. Ultimately, it puts software platforms on the path to becoming more of an ‘operating system’ for their customers’ businesses.

Increasing Product Stickiness

Simply put, payments are a way for software platforms to deepen their hooks into customers. Offering payments enables software platforms to increase product engagement while positioning themselves as a more indispensable business partner. Ultimately, this can serve to improve retention.

We also see a clear opportunity for payments data to create the basis for high-impact new products, such as working capital and analytics. Lightspeed’s advanced analytics product, for example, provides restaurants with business intelligence, such as specific menu items that drive guest retention. Importantly, this capability is powered by payments data and therefore only available to users of Lightspeed Payments. Payments data can also be used to inform a software platform’s business and product strategy, providing insight into geographic trends and customer dynamics.

The path forward

For many software platforms, the road to payments can be a confusing one, clouded by similar vendor marketing narratives and opaque descriptions of the time, resources and investment involved. There is no shortage of partners to consider. Most payment processors have begun to lean into the distribution opportunity that software platforms present, although capabilities and approaches vary widely. Simultaneously, an ecosystem of payments-enablement startups has emerged to equip software platforms that wish to run payments in-house with various infrastructure to do so.

There are many possibilities for software platforms to consider, ranging from relatively straightforward referral models to becoming full-fledged payment facilitators that directly participate in the flow of funds. Each model has its own advantages and tradeoffs, and there is no single right answer. In 451 Research’s recent report, Exploring the Payments Opportunity for B2B Software Platforms, we discuss the various deployment models, profile key vendors and offer a perspective on the longerterm opportunity for software platforms in embedded finance.

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