Vertical Fintech is the new Vertical SaaS

Just two and a half years ago, A16z’s Angela Strange put a name on a movement by predicting that every company would become a fintech company by deriving significant revenues from financial services. Today we’re already living in that world.

The growth of financial services has been a boom for many companies in Fintech, but it’s also meant a commoditization of certain darlings like embedded payments, pushing down margins and limiting innovation to whatever can be done as an API call. Stripe is as interchangable as Adyen, Paypal, and Square. In this case, the real winners are the SaaS companies that went vertical and built bespoke solutions, not the payment providers behind them. As we kick-off 2023 we are left with one question, where is the real growth in Fintech and payments?

The answer is the last frontier: B2B payments that truly own their verticals and offer true financial innovation. This is the area I’m excited about at Inventure.

Vertical=Moat

The verticalization of software has been an exciting area for investors over the past 7–8 years. The narrative makes tons of sense; industries that have been overlooked for decades are presented with a solution addressing their specific pain points instead of a one-size-fits-all approach. This trusted solution expands within an account by solving even more problems, expands within the entire industry as it becomes industry standard and finally expands to include payments thereby increasing value, stickiness and building a gigantic MOAT.

Assuming that your industry of choice is growing 20% YoY then you are too. Who wouldn’t want to buy into this.

Looking at payments, fifteen years ago we saw the arrival of a number of payment providers attempting to go vertical. The solutions that survived were primarily built for e-commerce, as this was where the volumes were. These are the Klarna, Checkout.com and Mollie’s that we are so familiar with today. Their success is not only due to catering to the unique needs of e-commerce but also in their ability to grow vertically within their accounts by simplifying the back-office payment administration. Checkout.com is a great example where they solve for not only processing payments but also act as a payment gateway and acquirer, thereby taking out the middlemen.

SaaS cleared the field

At this time, few if any payment providers focused on the bespoke needs of verticals within the larger untapped B2B market. This is due in large part to the fact that SaaS solutions hadn’t entered these B2B areas yet and therefore no one was driving the digital revolution. Quite simply, the verticals weren’t ready and equipped for the change.

Since then, verticalized SaaS companies have been very successful entering established verticals that were traditionally served by pen, paper and excel and digitising them. Noteworthy examples of this are Servicetitan who serves trade workers (plumbers, electricians, pest control) and Watalook who serves salons/beauty professionals. In both of these cases, software was provided to solve an acute pain point. That pain point being the administration surrounding the business which was taking time away from generating revenue. Software solved this so that the business owners could spend more time doing what they do best, be it unclogging kitchen drains or cutting hair.

Payments weren’t driving this revolution but became part of it.

Once the mindset for change was in place, the next obvious step to further monetise this segment was to embed white label payments into their service offering, thereby making these SaaS companies, payment facilitators (referred to as a payfac) or in other words a fintech company.

As an example to tie this all together, take a look at Toast which is a vertical SaaS who is also a payfac that provides software solutions with embedded payments for restaurant chains. Toast’s customers now have a unique tech stack that enables them to run their back-office, kitchen display, handle payments for all types of restaurant experiences and leverage all of this proprietary data to increase guest engagement. The payment part of this technology is powered by an underlying payment processor.

But an interesting turn of tides has happened along the way. As more SaaS companies started doing this, the payment providers have now become a utility in a very commoditized market. Including payments in your offering is as ubiquitous as offering an API to access your offering. This has resulted in the vertical SaaS companies being the benefactor through their unique value added services, and not the behind the scenes embedded payment provider. Merchants today are willing to spend a larger percentage of revenue on unique software and less on transaction fees.

B2B vertical payments are next

While payments in general are becoming more commoditized, B2B payments is somewhat of a final frontier for fintech and there is still massive growth potential in this area especially in vertical B2B payments. However, In order to succeed you once again have to leverage technology that is truly innovative and unique and that solves an innate pain point that a horizontal payment provider can’t solve for

So which industries are ripe for a verticalised payment solution? Our checklist contains the following:

• Industries that have high frequency transactions (restaurants, transportation, service industry, to name a few)
• Low digital maturity where most of the work has been done manually on paper or via a spreadsheet
• Massive market that spans across all continents
• Needs across markets are similar (You want to avoid having to create bespoke systems for each market, assuming that you will need to enter multiple markets for this to be really big)

My favourite example of a vertical payment provider that is harnessing novel technology is Vayapay. A major challenge for transportation operators is that they cannot recognise their traveller’s purchases cross channels, which limits the passenger’s journey and hinders operators from accurately mapping rider flows. Vayapay has developed a payment technology platform that enables the transportation provider to connect any travel purchase to the actual transportation ride, whatever payment means and channel the passenger uses. This means that Vayapay’s customers can now link cross channel payments with cross channel rides. Vayapay’s added value payment platform has allowed them to beat out traditional payment giants such as Nets and Swedbank for these coveted high volume contracts.

Below are additional examples of the companies whom I believe are addressing a vertical that checks the above boxes and who are leveraging novel payment technology to solve a big problem.

The next few years will be defining for which fintech sub-segments survive or die. The market has not been friendly towards fintech’s in the past 6 months and I predict that this will continue over the next few quarters even with all of the dry powder out there. The recent economic downturn has taught us a lot about what really matters in fintech which is volumes, volumes, volumes. We have a better understanding of what fintech services can naturally scale to high volumes and what services could only reach scale via exorbitant unsustainable spending.

Fintechs with a B2B customer base, focusing on payments, embedded finance or those simplifying underlying financial infrastructure are the areas which Inventure is most excited about. But most importantly, we are looking for founders who think global from day one as they understand that this will be necessary to deliver on the volumes and scale needed to be the winner.

From my experience overseeing Tink’s 10,000 developer strong platform I have seen just about anything and everything being built within fintech over the past few years. Whether you are a fintech founder looking for scaling advice or a VC and want to exchange fintech investing tips then please don’t hesitate to reach out to me here.

This post is in Inventure’s series of What we’re looking for in Fintech. Follow Inventure on Medium or Linkedin to catch Kevin Lösch’s next post on embedded finance.