Payments and Revenue Strategies: Sorting the Myths from the Facts

You don’t need a crystal ball to see where the SaaS market is headed. Besides, we have something more concrete: data. Fortune Business Insights reported that the SaaS market was valued at just over $215 billion in 2021. By 2029, its value is expected to grow to $883.3 billion. This large jump in valuation aligns perfectly with the rapid adoption of software-as-a-service most of us are seeing in our daily lives.

Raise your hand if you don’t use a single software application at your company. Okay, I can’t see your hands, but I doubt I’d see many if I could.

Now let’s factor in payments. When looking at the payments industry as a whole, global revenue was $1.9 trillion in 2020 and expectations are that payments revenue will reach $2.5 trillion by 2025. Currently, SaaS companies make up less than 10% of this trillion-dollar pot.

That’s a lot of untapped revenue opportunities for SaaS companies.

What’s more, traditional payments have seen a steady decrease in market share, dropping from 67% in 2016 to just 49% in 2022. Considering this trend, I predict that over 50% of payments will process through SaaS platforms within 10 years or so.

That might sound like a bold statement.

But platforms already accounted for approximately 19% of payments in 2022. Going back to my earlier point, at least 70% of all software used by businesses is SaaS-based, and in just two years it’s forecasted to reach 85%. With this much SaaS adoption, I’d say my prediction is a safe bet.

So herein lies the question.

Why aren’t more SaaS companies moving faster to tap into that trillion-dollar payments market? The answer boils down to the myths surrounding SaaS revenue and payments.

Many SaaS companies are either unaware of the additional revenue opportunities available to them or think they can’t take advantage of them because of size, business model, or lack of expertise outside of their field.

The truth is, there are plenty of ways platforms can scale and grow revenue.

Fact: Subscriptions only scratch the surface when it comes to revenue opportunities for SaaS platforms and e-commerce business merchants.

This first myth is often a “self-perceived” blocker for companies that would otherwise be great candidates for payments acceptance. Let’s take a closer look at the subscription revenue model and how payments fit into the equation.

What is a subscription revenue model?

The subscription revenue model isn’t anything new. But it wasn’t widely adopted by SaaS platforms until after 2008. Similar to how the Covid-19 pandemic fueled a surge in demand for online products and services, the financial crisis of 2008 sparked many companies to switch to subscription-based models. So much so, that today, subscriptions are the “gold” standard.

The reason subscription models are so popular is two-fold. First, they are convenient and provide high value for customers. Second, they help companies develop long-term relationships with their customers and contribute to more revenue over time.

With this model, customers pay a monthly, quarterly, or annual fee to use the software, or in the case of e-commerce, to regularly receive shipments of products. On the SaaS side, the focus is on keeping current customers and attracting new ones, which makes the revenue cycle simple. Essentially, it’s a continuous process of customer acquisition, upselling, and retention.

The problem with subscription-only revenue models

The problem is, gaining new customers doesn’t come cheap. The average customer acquisition cost (CAC) ranges from $274 to $1,450 per customer for SMB SaaS, mid-market from $1,406 to 5,266, and enterprise-level SaaS companies from $2,190 to as much as $11,228 (depending on the industry).

With pure software, it’s easier to hit the ceiling when it comes to net revenue retention. To help counter this, most companies upsell or cross-sell, and/or incorporate annual increases into their contract—but this is typically only 5% or less of additional revenue.

The SaaS subscription model is also vulnerable to economic downturns. If you rely solely on subscriptions, your revenue for one customer could potentially fall to zero if you serve a market segment that’s hit hard by a down economy. That’s because it’s easier for companies to “walk away” from your product to cut costs.

The first step to capturing untapped revenue is to embed payments into your product or service. Just doing this unlocks enormous potential for your company.

Embedded payments allow you to increase your own market opportunities and automatically make your customers stickier. This is because payments are a merchant’s lifeblood. Embedding payments also improves your customer experience. This is why companies that offer payments typically see reduced customer churn rates.

Furthermore, if your underlying customer base is growing, your net revenue retention could easily be over 120%—and that’s without any subscription increase.

Another area where payments shine is flexibility, which we all know is a beautiful thing to have in any market. Payments provide companies with greater optionality to adapt their business models to what the market demands. This includes the ability to decide where their revenue is coming from.

For example, you could focus your business model on payments revenue and offer your software for free or at a highly discounted price. The reasoning behind this strategy is that it’s very attractive to current and potential customers. You may think this method would hurt your bottom line, but companies like Toast have shown otherwise. Payments make up 90% of their gross profits and just passed the $100 billion mark in annualized gross payments volume in 2022.

You also have the option to flip this around. Offer payments at a discounted rate and focus on growing subscription revenue. Of course, you can also just add payments to your current model and grow revenue from both services. It’s all about what works best for your business.

Last, but certainly not least, businesses that offer payments are more likely to weather an economic storm. This is because their customers rely on accepting payments to survive. It’s much harder to stop using a product or service that also provides your means of accepting payments.

Fact: There are other ways SaaS platforms can grow revenue on the finance side than collecting fees on payments processed.

Depending on your business model, why stop there? Think of embedded payments as the gateway to other financial services you can provide your customers with.

Embedded lending

One such example is embedded lending, which allows you to also earn interest. Just as providers like Finix open up new revenue opportunities via payment facilitation, there are other companies that offer embedded lending as a service. This option is another way to provide high value to your customers as it gives them easy access to additional funds, as well as a way for them to offer their customers better experiences and faster approval times than traditional financing methods.

Embedded lending is also simple to implement and doesn't require a lot of development resources, which makes it an ideal option to incorporate into your growth strategy.

Physical and virtual card issuing

Another high-value option to consider adding to your revenue strategy is issuing. Technology today has made way for companies to issue their own cards, whether physical or virtual, making it possible for them to earn a share of interchange revenue. Examples include corporate card programs, digital wallet support, cards for fuel and trip expenses, travel, virtual corporate accounts, and more.

Fact: Interchange rates can be lowered.

This myth is so common that many companies never even question it—especially if they’re using a provider like Stripe that uses blended or flat rate pricing for the majority of their customers. While a straightforward model, with blended pricing, you have no idea how fees are split or where the money’s going. You also don’t have the opportunity to get lower interchange rates, even if you’re qualified.

How interchange can be lowered

Interchange fees are based on your industry’s risk profile. The higher the risk, the higher the fee. Risk is determined by your company’s merchant category code (MCC). With blended pricing, you pay the same rate regardless. But you also have the opportunity to lower interchange through Level 2 and Level 3 processing (L2/L3).

L2/L3 involves collecting more data at the point of sale and applies only to qualifying B2B transactions made with participating cards. Ultimately, taking advantage of Level 2 and Level 3 processing or accepting higher interchange rates depends on the customer experience you’re after.

Requiring more data at the point of sale adds a bit of friction to the payments experience, but the reward is lower rates and greater revenue. Another benefit to L2/L3 that can outweigh any downside is that because you’re collecting more data, it’s harder for bad actors to commit fraud and easier for your company to win chargebacks.

Fact: While subscription software revenue initially has a higher gross margin, gross margin on payments net revenue can actually surpass software gross margin as the customer relationship matures. This is because payments typically have higher net revenue retention and require less work to maintain over time.

Don’t let gross margin calculations trip you up. Once you embed payments into your product or service, payments revenue has the potential to outperform subscription revenue in the long run—and with less work.

The more you understand the behavior of your customer, the easier it is to monitor transactions in an automated way and manage disputes to limit chargebacks. You’ll dedicate less customer service resources on a per-payment volume basis as your ability to manage payments improves. In addition, payments revenue is stickier and can help you weather down markets. Payments revenue more than pays for itself over time.

Fact: With a provider like Finix, you can embed payments into your product with minimal work and investment on your part. We do most of the heavy lifting while still allowing you to tap into that previously unattainable trillion-dollar market.

Beyond subscriptions: unlock your company’s true revenue potential

Payments revenue for SaaS is still in its infancy. Legacy companies still dominate the payments industry, but we’ve been seeing a rapid shift to embedded finance as demand for digital products and services grows. Company leaders need to start thinking creatively when it comes to growing revenue and offering value to their customers to remain competitive in the future—especially in over-saturated markets.

The good news is, modern payments companies give you unrivaled flexibility and the ability to create additional revenue on your terms, and with less effort. All while offering your customers extraordinary value and excellent experiences.

Now that you know the facts from the myths, you can start planning your strategy for how to capture your share of the untapped, trillion-dollar payments market.