Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Fintech Scales Vertical SaaS
Today, about 90% of public SaaS companies and the 2019 Forbes Cloud 100 have subscription-based revenue models. Now new fintech infrastructure companies have made it possible for SaaS businesses to add financial services alongside their core software product. By adding fintech, SaaS businesses can increase revenue per customer by 2-5x* and open up new SaaS markets that previously may not have been accessible due to a smaller software market or inefficient customer acquisition.
See: Capital Efficiency During Crisis: The Burn Multiple
This wave is happening first in vertical markets (meaning the market around a specific industry, such as construction or fitness). Vertical software markets tend to have winner-take-most dynamics, where the vertical SaaS business that can best serve the needs of a specific industry often becomes the dominant vertical solution and can sell both software and financial solutions to their core customer base. Moreover, while early vertical SaaS companies – Mindbody, Toast, Shopify – typically started by reselling financial services (primarily payments), they are now embedding financial products beyond payments – from loans to cards to insurance – directly into their vertical software.
With fintech, vertical markets are larger than most realize
Every 10 years or so, we evolve how software is distributed and sold. Each evolution – from on-premise to subscription and bottom-up – has unlocked new markets and grown the overall software market. Until now, these software business models expanded the overall market by growing the user base, from large enterprises to small- and medium-sized businesses (SMBs) and midmarket companies to individual users. But the fintech business model increases the overall market for software in two additional ways:
- it increases revenue per user by 2 to 5x* versus a standalone software subscription, and as a result,
- it unlocks new verticals where previously the total addressable market (TAM) for software was too small and/or the cost of acquiring customers was too high.
Vertical markets are particularly good candidates for a SaaS+fintech business model. While customers in horizontal markets often try different software vendors, resulting in multiple winners in a market segment, customers in vertical markets prefer purpose-built software for their specific industry and use cases. Once one software solution demonstrates its value, the customer base will consolidate around that company for all its software needs.
Fintech changes the CAC and LTV equation
Fintech also impacts the go-to-market channels for vertical SaaS by growing the revenue per customer and making the product stickier. Put another way: fintech holds, or even lowers, the cost of customer acquisition (CAC), while increasing the lifetime value (LTV). (Read our primer on startup metrics and acronyms.)
See: Fintech Acquisitions Show Sector Strength Despite Covid-19
Mindbody, for example, earned ~$250/customer per month; while it charged ~$150/month, or ~$1800/year on average for its software plan, it earned an additional ~$100/month from payments revenue.** Thus, payments meaningfully increased the lifetime value (LTV) of the customer, while the cost of customer acquisition (CAC) remained the same, if not lower, since the additional value provided to the customer could accelerate the sale.
Lowering CAC while increasing LTV makes a direct, inside sales go-to-market possible where it previously wasn’t, meaning SaaS companies can acquire new customers that would otherwise have been too expensive. At >$5,000 average revenue per customer, vertical SaaS companies can afford to hire an outbound inside sales team instead of relying on less costly channels, like word of mouth and paid acquisition.
Embedding fintech (rather than just reselling) improves margins and makes the product stickier
The vertical SaaS companies who initially added financial services primarily resold financial services from a third-party. For example, Mindbody offered lending by referring customers to Lending Club.
With new fintech infrastructure players, however, companies can now go from reselling to embedding a variety of financial services, not just payments, directly into SaaS products.
See: Who needs banks? How tech companies are taking a bite out of financial services
Reselling remains a viable option, and can be easier to launch or used as an on-ramp to embedding financial services. However, embedding results in higher margins and a stickier product overall. It creates a more seamless customer experience: a loan through a familiar interface rather than being redirected to a third-party site. With an embedded service, the software provider can draw on a proprietary set of data – such as contractor sales to inform lending or product information for better warranties – to underwrite risk, factoring in things like seasonality to better tailor the service to each customer’s needs and risk profile. Ultimately, that produces better margins on fintech products and new go-to-market options.
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