Podcast Summary: The Path to Exit – Ep. 20

"Understanding SaaS FinTech & Payments Opportunities with Utopaya"
Host: Mike Lyon, Vista Point Advisors
Guest: Brian Abernathy, Founder & Principal, Utopaya
Release Date: September 10, 2024

Overview

This episode of The Path to Exit explores the integration of payments and fintech into vertical SaaS businesses, focusing on how founders can leverage these opportunities for greater value—especially in the context of M&A. Host Mike Lyon and payments strategist Brian Abernathy dissect why and when to embed payments, address valuation drivers, highlight common pitfalls in partnership contracts, and discuss how buyer strategies (especially private equity) are evolving in today's market.

Key Discussion Points & Insights

1. Why Integrate Payments Into Vertical SaaS?

• Industry Shift: Combining SaaS's sticky, recurring revenues with high-margin payments businesses creates stronger, more valuable companies ([00:19]).

• Beyond Economics: Integrated payments enhance core product value and customer experience by streamlining workflows, which ultimately drives retention and revenue ([03:13]).

  Brian (03:38):

  "The North Star of integrating here should always be on creating value and efficiency for your customers. And once you do that, you create the opportunity for your software business to capture revenue."

  Examples:

  • Restaurants: Integrated POS and payments system enables quicker table turnover and higher revenue ([03:38]).
  • Healthcare: Payment integrations automate ledger updates, reducing billing confusion and improving collections ([04:00]).

2. **Identifying a Payments Opportunity

([05:06])**

• Core Question: Are transactions happening between your client (the software user) and their customer using credit cards, ACH, or similar methods?
• Rule of Thumb: If end customers are paying your SaaS customer via card or ACH, there’s likely a payments opportunity ([05:43]).
• Counterexample: Software focused only on B2B insurance adjudication in healthcare may not have a payments play ([06:05]).

3. **When and How to Pursue Payments Integration

([07:04])**

• Timing: Use a take rate (e.g., 50–75 basis points) on aggregate payment volume to estimate revenue impact. If compelling, consider investing ([07:30]).

• Ownership Spectrum:

  • Referral Model: Minimal effort, outsourced sales/support, ~50% split of profits ([08:10]).
  • Managed/Branded Offering: Bring sales, support, and branding in-house; higher economics but more complexity ([08:50]).
  • Full PayFac Model: Take on maximum responsibility, can capture up to 90–95% of transaction economics ([10:46]).

  Brian (08:10):

  "There are a range of different operating models... from a very hands off, referral program... to owning more of the process—branding, support, sales—making it feel cohesive."

  Key Insight: Be brutally honest about your resources, risk tolerance, and willingness to handle compliance/risk ([08:35]).

4. **Critical Role of Contractual Terms

([10:46])**

• Commercial Terms:

  • Referral: Expect ~40–60% of economics.
  • More ownership (sales, support): 70–80%.
  • Full PayFac/PayFac-as-a-Service: Up to 95% ([10:46]).

• Contractual Pitfalls:

  • Beware exclusivity and non-solicitation clauses that lock you in, restricting future changes or buyer strategies ([12:00]).
  • Boilerplate agreements can block key flexibility if you anticipate M&A ([13:24]).

  Mike (13:24):

  “If you get slightly better economics but you’re locked into a bad contract, that could actually destroy value… Think about your likely exit horizon and do some modeling around that to make sure you’re not putting yourself in handcuffs.”

5. **Choosing the Right Payments Partner

([15:00])**

• Tech Alignment: Ensure your prospective payments partner offers the features your customers need (e.g., recurring billing, tokenization, terminal solutions, tap-to-pay).

• Specificity Matters: Gym software requires advanced recurring capabilities; retail POS systems need robust hardware and features ([15:00]).

• Technology Diligence: Technical fit can be more important than economics ([16:05]).

  Brian (15:00):

  “It’s not just about processing transactions… it’s the featured sets that align to your software that create value and efficiency for your customers.”

6. **Beyond Payments: Other Embedded FinTech Opportunities

([16:39])**

• Field Services Example: Integrating quick loan pre-approval at point-of-sale drives conversion for big-ticket items like roofing ([16:39]).
• Leverage Data: Holding the “system of record” advantage, vertical SaaS platforms can power innovative fintech products—credit, wage advances, embedded insurance—by leveraging real-time business data ([18:05]).
• Brian’s Take (18:05):

  “Your ability to see the performance of a business historically and in real time puts you in a very advantageous position to not only underwrite and tailor terms, but to offer them at the right moment.”

Memorable Quotes

• On the intersection of SaaS and Payments:
  Mike Lyon (00:57):

  “There’s great value in combining this highly profitable business model [payments] with this sticky recurring revenue model, which makes both businesses more sticky.”

• On contract negotiation and exits:
  Brian Abernathy (12:40):

  "Those agreements can become quite a problem down the road… Be very careful of those types of clauses."

• On technical diligence:
  Brian Abernathy (16:05):

  "The technical diligence side of this is extremely important… that’s where the magic is unlocked."

Key Segment Timestamps

| Timestamp | Segment/Topic | |------------|-------------------------------------------------------------| | 00:19 | Episode theme: SaaS + payments integration | | 01:50 | Brian’s background & the founding of Utopaya | | 03:13 | Customer experience reasons to integrate payments | | 05:06 | Identifying payments/fintech opportunity in your SaaS | | 07:04 | When & how to execute; spectrum of ownership | | 10:46 | Deal terms, economics, and contract pitfalls | | 13:24 | Contractual limitations effects on valuation and exit | | 15:00 | How to evaluate and select payments partners | | 16:39 | Non-payments fintech: lending, wage advances, insurance | | 18:05 | Leveraging data for advanced fintech products | | 20:04 | Takeaways & contact info |

Conclusion

Payments and embedded fintech are game-changing opportunities for vertical SaaS founders, not only boosting valuations but directly increasing client stickiness and satisfaction. However, founders must run rigorous diligence—not just on numbers, but technology, contracts, and long-term flexibility. Strategic thinking now means fewer roadblocks at exit, higher multiples, and an offering that delights customers.

Contact:

• Brian Abernathy, Utopaya: brian@utopaya.io ([20:34])
• Vista Point Advisors: For more founder resources, visit vistapointadvisors.com/for-founders