How embedded payments generates revenue for software companies
Here’s a concrete example adapted from Matrix partner Matt Brown’s article on invisible asymptotes in vertical SaaS.
Let’s say there’s a SaaS platform for law firms and start with some assumptions:
- There are 100,000 law firms in the market
- Average of 10 employees per firm
- Core SaaS product is $49 per user per month
- Law firms average $1M annual revenue
This SaaS platform doubles their revenue without adding a single user.
After adding embedded paymentsPlatform earns 50 - 100 basis points (0.50% - 1.00%) on every dollar that the law firms invoice and collect on the platform.
This adds $5,000/yr in revenue from each law firm ($1M/yr revenue x 50 basis points).
Average annual revenue per law firm = $10,888
Total addressable market doubles to > $1B/yr
Here's the math...
SaaS fees only
Platform earns $49 per user x 10 users per firm x 12 months = $5,888 per law firm.
Platform’s growth is limited by the number of law firms and the size of the law firms’ teams.
Average annual revenue per law firm = $5,888
The total addressable market is = $588M/yr
After adding embedded payments
Platform earns 50 - 100 basis points (0.50% - 1.00%) on every dollar that the law firms invoice and collect on the platform.
his adds $5,000/yr in revenue from each law firm ($1M/yr revenue x 50 basis points).
Average annual revenue per law firm = $10,888
Total addressable market doubles to > $1B/yr
Furthermore, embedded payments revenue tends to be low cost and high margin (more on this here), so the SaaS platform materially increases their overall margin as well.
Merchants want embedded payments
While SaaS overall is getting more competitive, embedded payments are getting easier, and merchants want embedded payments. Merchants are voting with their processing volume as they migrate from legacy acquirers to modern software platforms.
Boston Consulting Group
- The percentage of businesses using vertical software increased from 30% in 2018 to 50% in 2022
- As of 2022, ISVs account for 29% of merchant acquiring revenue, and their share is expected to increase to 37% by 2025
- As of 2022, traditional acquirers have 59% share, projected to decline to 47% by 2025
"SMB Merchant Acquiring: Software is eating the world (and revenue pools),” Boston Consulting Group, 2022
Bain & Company
“Financial services embedded into e-commerce and other software platforms accounted for $2.6 trillion, or nearly 5%, of total US financial transactions in 2021, and by 2026 will exceed $7 trillion...”
“Embedded Finance: What It Takes to Prosper in the New Value Chain,” Bain & Company, 2022
UBS
- SMBs account for 25-30% of US payment volume but 65-70% of net revenues
- SMB direct merchant acquiring revenue is expected to decline from ~26% of total acquiring revenue in 2022 to ~14% in 2027
- ISV acquiring revenue is expected to increase from ~24% to ~33% during that time
“The Question 3.0,” UBS, 2023
SMBs account for less than a third of US payment volume but approximately two thirds of net payment processing revenues. In other words, the SMBs that most vertical SaaS platforms serve are the most profitable payment processing segment in the market.
This represents a massive revenue opportunity for vertical SaaS platforms. And vertical SaaS platforms can create value for these SMBs by providing a fully embedded payments experience that saves time with in-context reporting and easy reconciliation.
Should SaaS platforms make money on embedded payments?
SaaS leaders usually add embedded payments for one of two reasons:
A) Drive revenue or B) Increase retention
When embedded payments are done well, you don’t have to choose. The successful payments product will drive revenue and increase retention.
Discounting payments to boost retention is either unnecessary or ineffective, depending on the situation.
If the core SaaS product is a high-value end-to-end solution and the embedded payments product saves time for merchants, then merchants are willing to pay higher prices.
In this situation, you don’t have to price payments at cost to promote retention. It’s just not necessary because the combined SaaS + payments product is so valuable.
If retention is low because the core SaaS product isn’t ingrained in merchants’ day-to-day, saving them time and helping them grow revenue, embedded payments won’t fix an underperforming SaaS product.
Even if you temporarily boost retention with low-cost payment processing, you’ll constantly be competing on price.
If the core SaaS product is a high-value end-to-end solution and the embedded payments product saves time for merchants, then merchants are willing to pay higher prices.
In this situation, you don’t have to price payments at cost to promote retention. It’s just not necessary because the combined SaaS + payments product is so valuable.
If retention is low because the core SaaS product isn’t ingrained in merchants’ day-to-day, saving them time and helping them grow revenue, embedded payments won’t fix an underperforming SaaS product.
Even if you temporarily boost retention with low-cost payment processing, you’ll constantly be competing on price.
Product first, then payments.
A comprehensive vertical SaaS product with a high-quality embedded payments implementation will drive revenue and increase retention – you won’t have to price payments at cost to promote adoption or retention. Conversely, if the core SaaS product isn’t sticky enough, embedded payments won’t fix it without first optimizing the core SaaS product.
Embedded payments are most successful when added to a robust product that merchants already rely on.
Next post: Pricing essentials
