Guest Post: The Future of Payments is Vertical

By Sean Donovan, Co-Founder at Finix 

Payments is eating the software industry. As the barriers to owning your payments stack rapidly disappear, vertically-focused software businesses with deep expertise in specific domains are poised to become the next titans of the payments industry.

Companies like Stripe and Square set the stage in the late 2000s by eliminating the traditional headaches associated with card-based payments: building and managing digital payments infrastructure, delivering a great user experience, keeping fraud under control, and regulatory compliance. By removing these barriers, first-generation digital-native payments platforms uncovered a massive market opportunity, with several now commanding multi-billion dollar valuations.

Next, came a wave of online marketplaces with payments strategies deeply integrated into their core lines of business – Airbnb, Instacart, Uber and a great many others – are breakout successes.

Fast forward to 2019 and a next shift is underway: technology that enables bringing payments in-house is fueling a new crop of vertically-focused SaaS companies that recognize the opportunity to generate significant payments-based revenue by becoming payment facilitators rather than relying on merchant referral deals with acquirers or third-party payment service providers.

For years, these service providers have been quick to say that becoming your own payment facilitator is too costly. If you were an independent software vendor (ISV) trying to transform into a payment facilitator, you were on your own. But recent advances in technology are changing the game. It’s now possible to build and manage your own payments stack (with your own acquiring relationship!) on hosted infrastructure, similar to the way Amazon Web Services makes it easy to build and manage software applications.

Until recently, the process for becoming a payments facilitator was considered too expensive and time-consuming for most companies. That’s because the traditional path to payments facilitation costs, on average, millions of dollars and takes 2-3 years to complete—and that’s before taking operations and ongoing maintenance into account. In a world where getting paid no longer needs to be a cost of doing business, however, companies are remiss to ignore an opportunity to unlock such significant new streams of capital.

In particular, vertically-focused businesses that provide enabling software for seemingly “niche” industries like wellness, hospitality and even lawn care are now gravitating towards becoming their own payment facilitator—and their success offers a window into the future of payments. Clubessential, for example, is a SaaS provider  disrupting the $23.5 billion dollar golf course and country club industry with highly accessible digital tools that were once limited to tech-savvy Silicon Valley companies, including modern payments processing. With more than 6,000 customers now using the platform, the company has experienced 500% growth over the past two years.

Other examples include Mindbody and Lightspeed POS, companies that have built highly-successful businesses around point-of-sale and customer management software that is purpose-built for companies operating in specific industries. Mindbody, which was recently acquired by Vista Equity for $2B, helps gym and yoga studio owners run nearly every aspect of their businesses, starting with payments. The same goes for Lightspeed, which went public earlier this year, but they focus on small- to medium-sized retailers.

Against this backdrop, it’s becoming increasingly clear that the next billion dollar payments company will not come from the traditional payments world. It will be an innovative software provider that possesses a deeper understanding of its target market than any general-purpose solution ever could—while also exercising more control over the payments experience by owning, managing and monetizing its payments stack from end-to-end.

As the traditional barriers to payments facilitation fade away, it’s time for companies relying on third-party payments service providers and merchant referral deals to rethink their strategy. Just as nearly every company on the planet has become a software company in recent years, every software company is now becoming a payments company.

Looking ahead, the ability to fully own and customize payments will define the success of a new generation of companies. Will yours be one of them?