The Aperture Guide to Monetizing Vertical SaaS and Marketplaces with FinTech

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TL;DR: Vertical SaaS companies are the most recent wave of innovation in the way. Their scaling path is accelerated by the possibility of monetizing ancillary services, mostly FinTech, after offering the core software free or inexpensive. The inflow of venture capital in vertical SaaS and embedded finance led to the symbiotic creation of an ecosystem. Vertical SaaS and marketplace commercial leaders can now leverage this ecosystem to monetize their software across at least 8 FinTech services to reach a monetization potential of ~2.5% of GMV. The realization of this monetization potential takes a specialized team or external advisors to realize.

We are convinced of the great potential of Embedded Finance, even during the FinTech downturn (see here). To further drill down on our core belief that embedded finance is here to stay, we want to zoom in concretely into a market segment that is the poster child of embedded finance: Vertical SaaS and marketplaces. Vertical SaaS and marketplaces went through a symbiotic boom in VC and public market financing from 2020–2022. This development created a full ecosystem of FinTechs that early-stage vertical SaaS companies can bank on to take their next steps along the monetization journey. Monetizing software via FinTech can be very profitable and we see enough evidence to estimate that potential per software platform. A challenge for these companies to solve is that revenue is needed to get financing in the current VC winter, but a FinTech team is needed to launch the complex embedded offerings. This team requires an investment that is difficult to finance before the FinTech revenues come in. Additionally, the skills needed for the go-live of a complex FinTech vertical span several functions (strategy, marketing, product, software development, legal, and compliance) and are not easy to hire full-time. External advisors and a structured project can overcome these challenges, get across these obstacles, and monetize north of 2.5% of a platform’s GMV.

The Vertical SaaS hype over the last years created many new start-ups, while mature vertical SaaS companies proved the potential

According to Google Trends, vertical SaaS is a relatively recent phenomenon, which is still gaining popularity. The rising attention is expressed in high valuations in private and public markets: The top 5 verticals SaaS providers alone raised $2.5bn in venture capital after the pandemic.

It just makes sense for vertical SaaS to form the next era of software. First, we only had large-scale custom integrations through SAP, IBM, and Co, to cover the specific needs of individual customers. Then, we had the rise of the cloud and the more nimble, flexible, and connected SaaS products that came with it. This made custom software integration in the mid-market possible. Vertical SaaS is the next evolution of specialized but standard and focused on the long tail of software clients, relying on cloud infrastructure, global distribution, and effective software frameworks to service ever more digitally savvy customers.

Vertical SaaS players like Toast piloted a genius scaling model: Offer the software for free and monetize through ancillary services — mainly of the financial kind. This is the perfect model for VC: High up-front R&D effort is necessary to nail the functionality of the software products, but the rapid scaling and monetization strategy promises a hockey-stick-like return.

Embedded finance start-up founders are encouraged to focus on vertical SaaS products and we see more solutions in that space. At the same time, start-up founders of vertical SaaS companies are motivated by the existence of a FinTech ecosystem and leverage it more in their monetization strategy. The respective sales of both encourage more VC investment.

What resulted was a FinTech ecosystem that is holistically able to ensure the roll-out of FinTech services across software platforms, vertical SaaS players, and marketplaces.

We mapped 150+ of these players in the ecosystem above. Please reach out here if you would like to add someone in the various categories. This ecosystem presents a huge opportunity for vertical SaaS and marketplaces: The increased choice makes it likely that they will find services for their respective region and use case, right out of the box. Also, we observe new embedded finance start-ups to close the “end-to-end” offering gap, which established players like Adyen, Worldpay, and banks left. Start-ups founded with embedded products in mind sell better to embedders because they offer a solution including operations support, compliance features, and risk-sharing. On top of that, the increased choice of embedded finance providers will lead to competitive pricing.

The downside of choice is the difficulty in embedding the right FinTech provider: The selection of the right partners for vertical SaaS companies and marketplace FinTech monetization is crucial, and we recommend a careful selection from longlisting, over screening to a structured RfP.

Before we dive deeper into the execution of embedded finance integrations, let’s first explore the payoff of thinking across finance verticals, when conceptualizing a monetization strategy as a software company.

Real numbers, real opportunity: Monetization potential of FinTech for platforms

The unit economic potential of embedded finance is often referenced, but not outlined in numbers. At Aperture, we have an overview of various FinTech monetization streams and experience on the conversion and take rate. That’s why we just published a live calculator for platforms to estimate their FinTech monetization potential. You can access it here.

We have a sample for a platform depicted above By our estimate, a software platform with $1bn in GMV will likely be able to monetize up to 2.75% of that GMV using all the FinTech verticals we scored, which would lead to monetization potential of up to ~$28mn in additional revenue. If we want to sense-check that, let’s look at Shopify: Shopify made between 50% and 75% of their ~$5.6bn in revenue from FinTech services. This leads to FinTech revenues of about $3bn or about 1.5% with the verticals account, lending, and payments. Our calculation above would have suggested a full potential at 100% conversion of about 2%. So our potential calculator is likely even underestimating the true potential in some cases.

The icing on the cake is the high margin: ~65% on average across verticals. Software platforms will not have a tangible use case for all these forms of Embedded Finance and Insurance products. Additionally, every FinTech vertical potential is calculated with its parameters. For example, working capital financing does not only depend on the GMV but also the typical share of COGS of the SMEs, while customer financing is calculated based on GMV alone. Therefore, monetization potential will not only depend on GMV and several merchants.

We use this calculator as a guide to showcase the total size of potential and spread between the verticals. Our recommendation:

  1. Try out the calculation for your company using our proprietary calculator here.
  2. Reach out to discuss a more concrete calculation, based on your exact parameters.
  3. Estimate the ramp-up in conversion rate to lay the foundation for an ROI calculation for an embedded finance integration.

We observe that certain verticals are superior in their theoretical value. B2B insurance is highly profitable, even if executed as a lead generator with a 100% margin, but the conversion rate platforms can expect is highly dependent on their customer relationship. Lastly, it’s unlikely that platforms will execute all verticals at once, but they need to build a roadmap of which to build when, and why.

FinTech monetization is difficult to achieve without subject matter expertise

When we schedule a project, we budget 6–12 months for a larger FinTech vertical to go live in a certain region. The typical timeframe consists of about 50% or 3 months of the actual IT implementation, but conceptualization, partnership selection, contracts, and building the organization take months and cannot always be done in parallel.

To be fair, some FinTech services can be activated within days in terms of the actual financial service but embedding them properly in a user journey takes time and resources. Additionally, the execution is often quite complex and requires a combination of FinTech know-how, compliance understanding, legal support, strong customer understanding, UX design, product management, and IT development.

To be concrete, we believe that a good team to launch a vertical is made up of the following:

  1. FinTech or vertical program manager
  2. FinTech analyst
  3. Product manager
  4. 1–2 full-stack developers

This leads to a full team of ~4 FTE over at least 6 months. To run a FinTech vertical as a SaaS company, the capacity likely does not change but shifts to more operations FTE, which we showcase in the operating model for a payment vertical below:

Additionally, there will be capacity needed in at least two support functions: Marketing and Finance.

We believe that there is a strong need for a team to execute the various FinTech verticals, which is a substantial investment. We analyzed 35 vertical SaaS companies and their team structure to examine this. Here are our top three findings:

This likely does not include any additional capacity in services like finance, marketing, and customer service, which will likely consist of another 1–2 FTE.

The needed investment in a FinTech team poses a chicken-and-egg problem for vertical SaaS players in the current ecosystem, in which VCs want to see revenue traction and long runways: How can we hire a team to build the monetization feature if we can’t get more budget without the additional revenue?

Aperture solves this challenge for vertical SaaS start-ups:

  1. We know the verticals with the best input/output ratios.
  2. We build our advisory services on existing material and thus massively shorten the time spent on building out the monetization features.
  3. We bridge the capacity gap with our team and can agree on success-based pricing.

The key is to engage advisors that consist of the right combination of strategic know-how and entrepreneurial pragmatism. Templates, process knowledge, and experience in contracting accelerate the integration and will thus save resources vs. staffing an own internal team.

We suggest a methodology of six steps to build embedded finance offerings over 6–12 months, which we tested in 12+ projects

Independent of whether vertical SaaS companies or marketplaces engage an external advisor, we suggest going through a 6-step process to build out an embedded finance offering.

This methodology, which we have tested in 12+ embedded finance projects, covers:

  • Analyzing user needs and designing a proposition
  • Evaluating the feasibility of embedded finance solutions and necessary partners
  • Screening and cooperating with partners from longlist to contract signing
  • Building the proposition and testing it
  • Taking it to market and continually growing adoption

On top of a systematic approach, close collaboration with innovative enablers is required. Through our work with FinTechs, we are in touch with the market and bring in an accelerated connection to preferred partners on top of our project and process know-how. Feel free to look at our research which contains various market maps across different FinTech verticals.

If you want to monetize your software with FinTech, assemble a team of experts across FinTech verticals to get the necessary subject matter expertise

Because experience and subject matter expertise are necessary to deliver embedded finance projects more efficiently than hiring an entire team, the Aperture ecosystem poses a fundamental advantage to our services. While our core team consists of experienced senior consultants, with experience across verticals, partners cover the very specific vertical questions.

For example, we work with our partners Simon and Paul on the specialized field of embedded insurance and bring this highly profitable vertical into your monetization strategy if you have the chance: Build a “kitchen cabinet” of advisors in FinTech, who can bridge the gap in industry know-how for your team and make the right introductions to FinTech partners.

Embedded finance offers vertical SaaS platforms a great ecosystem to expand their monetization potential if they can get a team into structured execution

Embedded finance is not just a trend; it’s a transformative force, shaping the strategy of vertical SaaS and marketplaces. This dynamic intersection of technology and financial services has propelled vertical SaaS models into the spotlight of VC over the last few years.

Financed with large sums, vertical SaaS companies like Toast have pioneered innovative scaling models, offering free software that is monetizing through financial ancillary services. What’s remarkable is the resulting symbiotic relationship between FinTech and vertical SaaS, which led to the creation of a maturing ecosystem of more than 150 companies, we mapped.

While many vertical SaaS companies focused on building the base software product over the last years, the aforementioned FinTech ecosystem offers substantial monetization potential for platforms. This monetization potential stems from various verticals which we estimate to sum up to a value of 2.5% of GMV with high margins of up to 65%. Launching a FinTech vertical is challenging, requiring time, expertise, and resources. A well-rounded team is crucial and consists of 6 FTE for more mature vertical SaaS players. If companies want to bridge this in the early stage of the monetization journey, Aperture comes in to help.

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