Menu Close


Our perspective on the fintech world

Why SaaS is Eating the Fintech World

Fintech pricing will increasingly migrate to a SaaS model with subscription fees, since percentage-based fees are often not aligned with the underlying costs associated with payment transactions.

Over the past five years, startups in a growing number of industry segments have leveraged the Software-as-a-Service model (commonly known as SaaS) to create companies of enormous value. The mother of SaaS companies is surely Salesforce with a market cap of over $173B, but also consider Slack, Shopify, and ServiceNow. These companies typically charge a monthly or annual access fee and provide their service via the cloud. However, the payments world (and certainly the payment providers that I’ve worked for) has primarily been one of percentage-based transaction pricing – think MasterCard interchange fees or PayPal transaction fees, which are a percentage of the transaction value.

In many payment use cases, percentage based pricing is justified. For example, when you purchased that 65-inch flatscreen TV online last Christmas on your MasterCard card, the merchant paid an interchange fee that was some percentage of the cost of the purchase (yes, there is often a fixed portion of the fee as well, but this is negligible for larger transactions). The banks supporting the transaction (on the issuing and acquiring sides) are extending you credit and / or taking risk on the transaction. As a result, their costs increase with the size of the transaction. Thus, a percentage fee aligns with the service provided.

However, there are other cases where a percentage based transaction fee is far less warranted, which I saw firsthand during my time working at MasterCard. When MasterCard processed your flatscreen purchase, they also charged a small fee (referred to as an “assessment” fee) bundled in the fee that the merchant pays. This is also typically a percentage fee. However, for these standard transactions, MasterCard is just managing data passing across its network. MasterCard takes no risk on the cardholder side or the merchant processing side. As a result, their cost structure is wholly disassociated from the size of the transaction (i.e. for the card networks, processing the data for a $1 transaction is the same as for a $100,000 transaction). So how do they justify a percentage based fee rather than a flat fee per transaction? Oligopoly market power, primarily.

SaaS pricing models, with subscription pricing charged on a monthly or annual term based on a specific service tier, have material benefits for both customers and providers. For customers, this pricing model is predictable and transparent. And for the provider, subscription pricing offers a degree of customer lock-in and a range of upsell opportunities over time.

A number of companies in the payments space are employing a hybrid pricing model., which had a very successful IPO last December, charges both a subscription fee plus a range of transaction based fees for various actions such as bank transfers. And now, with their recently introduced international payments service, they are charging a percentage based fee on currency conversion in the form of a markup on a “competitive” exchange rate. (As an aside, it’s also worth noting that surprisingly ~20% of their revenue comes from interest they make on holding customer funds – I doubt most of their customers are aware of this!).

And some payment companies are emerging that tout a move away from transaction fees entirely. Based on a recent discussion I had with their CEO, Paystand, a B2B accounts receivable startup, is betting that companies will prefer a predictable, flat cost structure over a per transaction fee model that costs the company money every time they receive a payment. Paystand charges a flat rate subscription fee to enable their clients to avoid high cost transaction fees and embark on a “journey to zero”, as they put it. They focus on migrating clients away from costly card payments to lower cost bank to bank transfers. However, with an average annual subscription cost of around $30k, prospective clients need a large number of high cost transaction to justify such a hefty price tag.

Percentage based fees for payments transactions are probably here to stay, particularly when a provider’s costs increase with the size of a transaction, through access to credit or increased risk for example. However, the success of SaaS providers in other industries is clearly influencing a new class of fintech companies. As startups continue to carve away at the legacy providers, I suspect that this so-called ‘journey to zero’ will further impact the current prevalence of percentage based fees and we’ll see more and more SaaS models in payments.