Voice of the Industry

How SaaS platforms are disrupting the payment acceptance industry

Tuesday 7 March 2023 09:17 CET | Editor: Raluca Ochiana | Voice of the industry

Yuriy Kostenko, Partner at Flagship Advisory Partners, elaborates on current market dynamics and how SaaS providers disrupt the distribution of payments acceptance.


The digital marketplace is being disrupted by the accelerating convergence of business Software-as-a-Service (SaaS) solutions and payment services. SaaS market leaders such as Shopify and Lightspeed are rapidly expanding into payments by bundling their core software products with payment acceptance services. These early leaders are rapidly gaining market share, and we expect others to follow, disrupting the payment acceptance product distribution landscape. This article provides an update on these disruptions and offers an outlook on the future positioning of business SaaS platforms in the fintech space.

Current market dynamic: SaaS providers disrupting the distribution of payments acceptance

Technology has been the key factor that has enabled digital-savvy SaaS providers to merge their core software solutions with payment products. Next-generation SaaS is cloud-based software that is flexible and robust compared to static, on-premise, digital products that are often siloed and rigid. Most next-generation business SaaS platforms operate via API integrations that allow providers to expand beyond basic business management tools and easily enable other services, such as payment acceptance.

The positioning of the SaaS in the merchant’s vendor selection lifecycle makes it an ideal distribution channel for payment acceptance. Whether a merchant is building a web shop or looking for software to help manage inventory, selecting a SaaS solution will most often take precedence over choosing a payment acceptance services provider. In this merchant buying lifecycle, SaaS providers are exceptionally well-positioned to complement their business software solutions with a payment acceptance proposition. This is particularly true for smaller merchants that are often time-constrained and favor plug-and-play bundled offerings that will make their lives easier.

Next-generation SaaS platforms that are increasingly embedded with payments are rapidly being adopted in mature markets – and are now key distributors of payment acceptance solutions. In the US, for example, the SaaS industry is already the largest distribution channel for payment acceptance products, particularly in the ecommerce environment (see examples of payment acceptance distribution channel mix below). This payment acceptance product distribution dynamic is continuously growing in favor of SaaS platforms, a trend now emerging in other parts of the world, notably Europe.

Figure 1 – Payment acceptance distribution channels (% new contracting merchants; 2022 est.)

Payment acceptance distribution channels

Source: Flagship Advisory Partners

Near-term outlook: SaaS providers capture more of the payments value chain

The end-state operating model for scaled SaaS providers is a fully functioning fintech unit embedded within the SaaS platform, a concept that only a few players have reached today. Most SaaS platforms are still in the early stages of their SaaS and payments evolution. Many providers still operate as pure software vendors with occasional arm’s-length partnerships with traditional payment service providers (PSPs) that offer limited monetisation opportunities for both parties. More scaled SaaS platforms are establishing strategic partnerships with PSPs that generate lucrative new revenue streams.

Today, only a few prominent global SaaS platforms have a fully embedded payment proposition. In such a structure, the SaaS platform owns the merchant relationship via its own payments product brand (e.g., Shopify Payments). The same SaaS platform also controls the commercials of the payment acceptance product by obtaining a ‘buy rate’ from a payment service provider and capturing most of the margin, resulting in attractive profitability. Among popular scaled SaaS platforms such as Toast or Shopify, over 70% of the company’s total revenue is from payment acceptance solutions (see examples in the figure below).

Figure 2: Revenue mix of select SaaS providers

Revenue mix of select SaaS providers

Source: company annual reports

Medium-term outlook: SaaS providers expand into fintech beyond payments acceptance

The convergence of SaaS and payments creates a strong foundation for leading SaaS providers to expand into other fintech products. Several prominent SaaS platforms that already offer their own branded payment acceptance are now actively marketing other fintech solutions, such as loyalty tools and merchant cash advances (e.g., LightSpeed Capital). Financing solutions, even if fully sponsored and controlled by a bank partner, tend to offer margins to SaaS providers that are far more lucrative than software or payment acceptance. SaaS providers will also be well positioned to distribute other core financial services to clients that already use the SaaS solution as a core system, including payouts, spend management, insurance, and other products.

Fintech expansion areas can extend beyond mere payment acceptance or other value-added services such as operational financing. With access to unified data intelligence, SaaS providers can explore other unique propositions, including advanced data analytics tools and fully-embedded integrations with back-end accounting or payroll solutions. The new market positioning of business SaaS platforms can also provide a framework that would allow SaaS solutions to support other elements of the value chain, such as supplier management (e.g., retailers or restaurants communicating, ordering, and paying their wholesale distributors via SaaS platforms).

The accelerating convergence of SaaS and payments is already reshaping the payment acceptance industry. Business SaaS is now one of the most valuable distribution channels in the fintech space. The robustness and flexibility of next-generation SaaS technology allow these providers to continue expanding well beyond their core software solutions. As it scales, the SaaS industry is expected to not only capture more of the payment acceptance value chain but start assertively challenging other aspects of the fintech space.

This editorial piece was first published in The Paypers' Cross-Border Payments and Ecommerce Report 2022–2023, which taps into the fast-growing cross-border market and provides a comprehensive overview of trends and developments that are pivotal in this space, being the ultimate source of information for ecommerce businesses interested in expanding globally.

About Yuriy Kostenko

Yuriy has been a payments advisor for 17 years, supporting clients across the globe on dozens of successful consulting engagements and M&A advisory roles. Yuriy is an expert in merchant acceptance, digital payments, and payment transaction processing. Yuriy supports a broad range of clients with diverse business problems, including financial investors and private equity firms, payment service providers, payment schemes, and retailers.

About Flagship Advisory Partners

Flagship Advisory Partners is a boutique consultancy and M&A advisory firm focused on payments. We provide strategy, delivery, and M&A support to financial institutions, PSPs, fintechs, technology providers, brands, and investors. We serve clients globally from offices in Europe and the US.

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Keywords: cross-border payments, ecommerce, SaaS, marketplace, fintech, PSP
Categories: Payments & Commerce
Companies: Flagship Advisory Partners
Countries: World
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Payments & Commerce

Flagship Advisory Partners

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