Vertical SaaS: The Next Big Player in Financial Services
The last decade showed how the power of technology can solve for multiple needs within one platform or solution.
We saw this back in 2015 with Craiglist — an online take on newspaper classified ads that filtered for products & services sold locally. From jobs to collectibles, a user can find what’s available and directly contact a seller. The homepage showed multiple categories, which were really industry verticals (automotive, recruiting, real estate, freelance / gig work, etc.).
In the last 8 years, numerous companies emerged with a specialty focus on one of these categories — each one creating a premier marketplace. TaskRabbit (for gig work), SeatGeek (concert & sports event ticketing), Zillow (home sales), and others. The movement towards unbundling is only continuing post-pandemic with payments.
Banks and financial institutions were disrupted by modern payment providers such as PayPal, Stripe, Square, and Adyen. Many of these paytech giants are now being disrupted by vertical software-as-a--service (SaaS) firms that are hyper-focused on small to medium-sized businesses (SMBs) within an industry. This user segment contributes to more than half of GDP in high-income countries.
WHY THE payments ‘SHIFT’ TO VERTICAL SAAS?
For the SMB segment, “less is more.”
For a small team, It’s easier to keep multiple functions running through one platform. These companies prefer payments through the same platform they manage their business. A ‘one-stop-shop’ makes sense.
Vertical SaaS companies have picked up on this preference and are offering payments as part of their solution. There’s a convenience factor for business clients AND a new path for monetization for SaaS providers. The revenue from payments is a quick revenue-add, especially since acquiring a user that pays a monthly subscription takes time.
StyleSeat, MindBody, Squire, and similar firms allow stylists, barbers, and wellness specialists to connect with clients to book appointments. These companies integrate payments directly into their booking platform. Customers don’t have to go offsite and these companies can view, manage, and disburse received payments through their management dashboard.
On the opposite end, payment companies have focused on specific verticals and then added custom services for managing operations. A key example is with restaurants gaining more from their point of sale (POS) payment vendors. Toast (and other restaurant-focused paytechs) now provide payroll and operating functions in addition to merchant services.
on the path to BECOMING ‘EVERYTHING, ALL AT ONCE’
FinTech made possible the transition towards highly customized financial services solutions. Instead of generic offerings from traditional banks, vertical SaaS companies (who connect deeply with their client base) leveraged modern technology to address many painpoints, simplify day-to-day activities, boost revenue, and improve customer experience.
INDUSTRY-SPECIFIC
Providing a tailored solution makes complete sense. Why not have a platform that solves the major painpoints for a specific audience? The concern (especially from investors such as venture capitalists) was that this narrowing down of a single market also limits the likelihood of exponential growth (by going horizontally broad).
The truth is that this specialty focus is what allows emerging startups (vertical SaaS) to get noticed and start building volume with loyal customers. Incumbents (such as payment providers & banks) tend to offer only ‘cookie-cutter’ products — not accounting for ‘one-off’ needs. This lack of expertise isn’t what SMBs are looking for.
ROBUST OPERATIONS
For SMBs, becoming scrappy and doing more with less is nothing new. These smaller companies lack the resources of established competitors. An economic downturn reduces the ability to operate even further.
Vertical SaaS solutions lead to gains in operational capacity and productivity. No need to hire a team for HR & payroll if an existing vendor offers this as part of their solution. More SMBs are leveraging additional services as a way to outsource in-house needs and (in-turn) reduce total operating costs.
REVENUE BOOST
Besides operations, the customized approach from vertical SaaS also benefits a company’s ability to target prospects and convert them to clients. An increase in acquisition rate helps business scale over time when it comes to revenue growth. Add to this a lower cost per transaction (versus alternatives with legacy providers), and platforms start to see a noticeable revenue lift in the first months.
PREMIUM CUSTOMER EXPERIENCE
For business clients, managing an entire business process through one dashboard is a huge WIN.
With payment vendors in particular, this can mean invoicing, collections, data analysis, reconciliation, and payouts — all through one portal. No need to manage a login for a separate vendor that provides a single component for each function. Administrative and compliance-related tasks can also be part of this managed view, which is especially helpful for companies embedding financial services other than payments (such as account & card issuance).
What’s next for Vertical SaaS? Banking services
The advance of technology PLUS financial institutions’ willingness to work with fintech startups is taking the industry to a future state that’s ‘Embedded.’
If an SMB is already running major functions through one platform, adding a suite of banking services to complement financial-related tasks is a perfect fit. Beyond transferring value (payments), businesses will be able to hold & store value (deposits), and gain additional benefits from doing so. Waived transaction or platform subscription fees in exchange for increased activity? It’s a WIN-WIN.
Vertical SaaS sectors in which this can be a true gamechanger:
Transport, logistics, trucking;
Business accounting, tax reporting;
Expense management, travel;
Point-of-sale (POS) merchant services (payment acceptance vendors);
Real estate property management;
The themes in each of these verticals comes down to the concept of an ‘ecosystem.’
If there are multiple parties involved in a business process / cycle, having them all on the same platform with the ability to perform banking services between them makes life easier.
Vertical SaaS enablers need to continue asking: “what’s missing in [XYZ] market?” It’s in answering this WHAT that we will see the most success with embedded finance in the next 3-5 years.
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