In the evolving landscape of Embedded Finance, payins and payouts embedded within Software-as-a-Service (SaaS) platforms have been pivotal in streamlining financial transactions for businesses and consumers alike.
Payins refer to the mechanism through which funds are received by a SaaS platform, encompassing payments acceptance from customers or users for services rendered. Conversely, payouts are the processes in which funds are disbursed from the software platform – this can be B2C or B2B; example use cases include (but are not limited to) gambling payouts, gig-worker compensation, benefits payouts, corporate travel, and supplier payments. Integrating payin and payout functionality into existing SaaS applications does not only improve user experience but also ensures seamless and efficient financial flows for businesses.
Payins embedded into SaaS have grown to be the largest distribution channel for payments acceptance in the US, and Europe is rapidly shifting the distribution of payments acceptance to SaaS as well. SaaS/ISV payment channels facilitate most small and medium-sized business payments in the EU, the US, and the UK, relative to alternative payment channels such as banks, PSPs, and ISOs. More specifically, over fifty percent of SMB ecommerce transactions rely on ISV/SaaS, and about a quarter of in-person transactions. These figures are only expected to grow as more and more businesses shift from banks, PSPs, and ISOs to SaaS/ISVs for payment facilitation. (Figure 1)
In the US, the prevailing small and medium business net take rates for embedded payins are roughly 0.75%, and about 0.65% in the EU/the UK (Figure 2). Additionally, the share of economics earned by SaaS/ISV providers varies with the scale of average annual volume, ranging from 40% to 85% in the US, and 30% to 75% in the EU/the UK. Notably, it is less common for SaaS companies to operate at high volumes in the EU/the UK than in the US.
Many SaaS platforms currently embed payment acceptance using a simple referral model, whereby they refer customers (in some shape or form) to third-party payment processors and earn commission on each transaction. However, there is a growing shift towards Payfac Lite as SaaS platforms seek greater monetisation opportunities. For those operating at a very large scale, adopting a full Payfac model becomes more common. The transition from the Referral model to Payfac Lite reflects a trend toward improved revenue generation. (Figure 3)
In the US, embedded payments acceptance is maturing, yet significant opportunities remain in smaller, niche verticals. In contrast, Europe’s embedded payments landscape is less developed, presenting a more greenfield opportunity for growth. However, geographic fragmentation and smaller-scale markets pose challenges for widespread adoption in Europe. Despite these obstacles, Europe is expected to follow the US pattern, gradually adopting embedded payments acceptance, making it an interesting opportunity. (Refer to figure 4)
Whereas embedded payins have relatively obvious use cases across multiple verticals, not all embedded payout use cases have high-value potential. B2C payout use cases that provide a strong fintech monetisation opportunity are higher in value because they meet one of the following criteria:
Urgent timing;
Cross-border;
Recipient is under-banked;
Integration of the payment into a broader automated workflow;
The payment needs to be tightly controlled.
While embedded payins are relatively mature, embedded payouts are still in their nascent stages, holding significant promise for businesses.
1. SaaS-embedded acceptance has been an exceptional success. Now that it is maturing, platforms and PSPs are looking for the next Embedded Finance opportunity.
2. Payouts, especially those facilitated through card-based payment methods, are highly monetisable.
3. Penetration of software and other platform types capable of embedding payments continues to expand, along with the diversity of use cases supported by these platforms.
4. The supply of embedded payout services and operating models will continue to grow and mature.
Operating models for embedded payouts are similar to those of embedded payins, offering a range of solutions from turnkey to customised. These models create opportunities for SaaS platforms to achieve monetisation with relatively low effort by integrating payout capabilities. By offering diverse payout solutions tailored to various business needs, Embedded Finance providers can unlock new revenue streams. This adaptability empowers SaaS platforms to effectively meet a wide range of client demands, thereby bolstering their market influence and profitability. (Refer to Figure 7 for more details on these strategies)
This editorial piece was first published in The Paypers' Embedded Finance and Banking-as-a-Service Report 2024, which is the latest comprehensive market overview and analysis focusing on the key players and products within the Embedded Finance and BaaS ecosystem.
Erik is a Partner at Flagship and has worked as a payments specialist for more than 23 years. He is a leading advisor and recognised thought leader on embedded finance, payments processing, issuing and consumer lending, and has advised on 100+ clients globally.
Flagship Advisory Partners is a boutique strategy consultancy and M&A advisory firm focused on payments and fintech. We deliver 80+ engagements per year with our team of 30 payments and fintech experts. Our key differentiators are deep expertise, practical operating experience, strong track record, unique IP, and leading-edge insights.
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