What’s Topical: SaaS + Payments Playbook
Source: ExactPay
Last week, we covered Tribute Technology, which is a great example of vertical software + integrated payments strategy. Today’s edition dives into exactly how the strategy works. But first, some background:
Software PE investing has evolved significantly over the years, with each era giving rise to now-prominent investment firms:
- On-Premise to SaaS Transition (2000s–Mid-2010s)
The shift to cloud-based software delivery fueled the rise of today’s top software PE firms, including Vista, Thoma Bravo, Insight Partners, and Francisco Partners.
- SaaS + Payments (Mid-2010s–Early 2020s)
Investors recognized the ability to monetize transaction volumes within software ecosystems, particularly in e-commerce and service industries. This approach propelled the next wave of firms, such as PSG, Cove Hill, and Accel-KKR, while Vista, Thoma Bravo, and others quickly adopted the strategy.
- SaaS + Payments + AI (Early 2020s–Present)
AI integration is the latest frontier in software investing. However, no clear leader has emerged in the PE space, as firms continue experimenting with AI-driven efficiencies and automation.
Despite AI dominating industry headlines, payments remain a key lever for PE firms to drive revenue growth in vertical software companies. Some notable SaaS + Payments (more commonly known as “Independent Software Vendors” or “ISVs”) deals include:
- Silver Lake’s $2B acquisition of Evercommerce from PSG (2019) – Software for healthcare providers, beauty salons, spas, and home services
- EQT’s $2B acquisition of Storable from Cove Hill (2020) – Self-storage management software
- Global Payments’ $925M acquisition of Zego from Vista (2021) – Multi-unit property management software
- Accel-KKR’s acquisition of Tithe.ly (2022) – Church and ministry management software
- Vista’s acquisition of Portside (2024) – Corporate jet management software
Payments 101: How It Works & Economics
When you use your credit card to make a purchase, a complex network of companies instantly communicates in the background to process the transaction. This process incurs fees for merchants, which is why some businesses—like restaurants—offer discounts for cash payments (and no, it’s not just about avoiding taxes!).
Let’s break it down using a restaurant as an example:
You (the Customer) present your credit card to pay for your meal. The server swipes, taps, or inserts it into the credit card reader.
The card reader transmits the transaction details to the Card Network (e.g., Visa or Mastercard).
The Card Network forwards the transaction request to the restaurant’s bank, known as the Acquiring Bank (can be any commercial bank e.g., Wells Fargo), which handles merchant transactions.
The Acquiring Bank then connects with your credit card’s sponsoring bank, known as the Issuing Bank (can be any commercial bank e.g., Bank of America or Barclays), which reviews and approves the transaction.
Once approved, the Issuing Bank transfers the funds to the Acquiring Bank, which then deposits the money into the restaurant’s account—minus processing fees.
For online purchases, the process is similar, except instead of a physical card reader, you enter your payment details through a payment gateway.
Source: NTT Data
This entire process isn’t free—in fact, the global credit card processing market was valued at over $500 billion in 2023. Every transaction incurs fees, which are split across various players in the payment ecosystem.