The pandemic lit the fuse for the explosion of SaaS applications aimed at digitizing workflows to accommodate a new hybrid workforce. SaaS applications proliferate organizations today, making up 70% of company software use. And even though the SaaS market is predicted to grow over the next several years, competition is fierce under the pressures of economic uncertainty and crowded categories. Organizations are also becoming more selective when it comes to SaaS purchases. Security, compliance, costs of duplicate or underutilized apps, and lost employee productivity are topping the list of concerns created by the growing number of SaaS applications in use within a single organization.
As 2023 approaches, Independent Software Vendors (ISVs) operating under a SaaS model have the opportunity to use market trends and challenges to their advantage. With each major trend presented below, a solid payments strategy can provide a way to flow with the current rather than swim against it. Here’s a look at how ISVs can leverage payments to up their game plans for 2023.
Trend One: Market Consolidation
SaaS players looking to compete are opting to add features to their offerings, giving buyers an all-in-one solution. Robust feature sets aren’t built overnight, however, leading many ISVs to add them through acquisitions. Over the past several years, big names like Adobe, Salesforce.com, Intuit, and others simply buy up smaller, attractive shops instead of competing against them. Additionally, acquirers, such as banks and other financial institutions that enable merchants to accept credit card payments, are jumping on the acquisition bandwagon, purchasing ISVs in order to access their loyal and established merchant bases. And not to be outdone, private equity firms will continue to buy groups of companies with complementary offerings to build “super ISVs.”
Prepare for Market Consolidation with Payments
Payments should be part of your strategy if you’re preparing for an acquisition or even an IPO in 2023. Partnering with a payment processor to share in payment processing revenues is an effective way for ISVs and SaaS businesses to boost the bottom line, increase valuations, and catapult to the high-growth stage — making your business highly attractive to future investors. A payments strategy is also useful as ISVs, and SaaS businesses prepare for economic uncertainty, as a strong payment revenue plan will help shore up other deficiencies.
New payment models, such as traditional payment facilitation and payfac-as-a-service, also offer increased revenue shares versus traditional Independent Sales Organization (ISO) or referral-based payment models. Additionally, ISVs that become payment facilitators have greater control of their customers’ experiences and retain ownership of their merchant base instead of the payment provider, further enhancing an ISV’s valuation.
Trend Two: The Rise of Vertical SaaS
Vertical SaaS companies tailor their software to processes unique to their industry of expertise, as opposed to horizontal providers that satisfy a common need across a variety of businesses. For example, a vertical SaaS in the field service industry may include features like accounting, mobile point-of-sale capabilities, CRM, and service request management. These businesses have already seen staggering growth and are predicted to keep rising to the top. The Fractal SaaS index, a baseline metric for vertical SaaS businesses, experienced an increase in total market cap from about $179 billion in early 2020 to a little over $441 billion toward the third quarter of 2021.
Embedding Payments in Vertical SaaS Offerings
As vertical SaaS businesses continue to craft unique offerings for their industry, payments are a piece of the puzzle that should not be overlooked. An integrated payments solution with a robust API can be embedded directly into the software to offer a customized and seamless customer checkout experience. Additionally, built-in payments can increase retention rates as customers come to depend on the software for all of their business needs. To top it off, the vertical SaaS also benefits by receiving a portion of payment processing fees, which translates to a steady stream of extra revenue.
Trend Three: SaaS Sprawl Threatens Security
As a byproduct of the new distributed office model, employees started developing their own personalized tech stack — downloading unapproved SaaS apps at will. This phenomenon, known as SaaS sprawl or shadow IT, is a trend in which the number of applications in use within an organization can no longer be effectively managed by IT administrators. Knowing where sensitive data resides and what controls are in place to protect it are fundamental for information security teams. Employees running rogue with unknown and unapproved SaaS applications, multiplied by the varied security practices of said software providers, equals a significant risk of a data breach for organizations. As IT managers implement higher security and compliance standards, SaaS companies will also have to evaluate their practices to ensure they meet these new requirements.
Security with Payments
SaaS providers working to adhere to more stringent security standards can utilize the built-in protection of an integrated payments provider. The Payment Card Industry Data Security Standard (PCI DSS) is an information security standard for organizations that handle branded credit cards from major card companies. Payment providers typically offer PCI compliance baked into their solutions, in addition to advanced security protocols such as 3-D Secure, tokenization, and fraud filtering at the gateway level. Given the sensitive nature of payment card data, SaaS companies that partner with a payment provider offering PCI compliance and other security measures will stand out to discerning IT administrators.
No longer a simple matter of transferring funds, payments provide an opportunity for ISVs to differentiate themselves from the sea of available SaaS options. A well-planned payments strategy in 2023 can position ISVs for success as they face the trends and hurdles ahead.