Bips and Takes VS SaaS: The Battle for the Future of Commerce and Finance

In our recent post, “Fintech and Commerce Are About to Get More SaaS-y”, we pointed out how the current market context and prevailing market trends will drive fintech and commerce companies to embrace SaaS-based revenue models over the long term. We focused on fintech because we believe the shift from transaction-based revenues to SaaS-based revenues is underway. But as we point out below, several commerce companies have already embedded subscription-type revenue into their core business model.

Account-based financial products and e-commerce platforms have long relied on transaction-based revenue models. Credit-based financial products and e-commerce solutions (such as BNPL platforms) rely mostly on interest-spread-based models. While these revenue models tend to do very well in economic expansions, they tend to underperform in economic downturns.

The following chart shows the typical monetization strategy for a range of financial products and e-commerce solutions. We find two prevailing models across these products:

• Models that rely on charging basis points (“bps”, pronounced bips). These include credit-sensitive models that charge an interest rate on credit balances (typically expressed as an APR), payments companies that charge a percentage of processed volume (typically expressed as the MDR) and investment management companies that charge a percentage on AUM.
• Models that rely on take rates (“takes”). These include commerce and marketplace companies that enable B2C, B2B, or C2C transactions, loyalty platforms, and Buy Now Pay Later (BNPL) platforms, all of which charge merchants a commission for transactions made on their platforms.

Many of these companies enhance revenue by charging ancillary fees, which can include listing fees, late payment fees, maintenance fees, and others. But the core models rely on bips and takes.

In a world where consumers and businesses are accustomed to creating, sharing and consuming digital products/services through subscriptions, it is hard to justify why even some of the most innovative companies in commerce and fintech continue to rely on the legacy model of “bips and takes”. Take the Buy Now Pay Later (BNPL) platforms, which introduced a whole new category in the online payment experience. These models charge consumers interest on spend (bips) AND charge merchant commissions on sales (takes).

Path dependency and long-established industry norms can make it difficult for incumbents to change pricing (though we will revisit this idea in future postings). There are some notable exceptions, of course. In commerce, Amazon touts over 200 million Amazon Prime Members worldwide, while Costco has over 118 million members. While these memberships might represent a fraction of overall revenue, they build loyalty and thus maximize the customer relationships over the long term.

SaaS Pricing Strategies Present a Better Way Forward
Early-stage startups should consider SaaS pricing as a better mechanism for long-term sustainable business models. Commerce and Fintech companies should create subscriptions based on tiers, starting with basic pricing that considers the underlying cost associated with running their platform. This is particularly important for payment processing companies, which still need to pay the underlying legacy network and interchange fees. But they can layer different tiers for added value services, at higher incremental margins.

This is not to say that commerce and fintech companies should eliminate transaction-based fees altogether. In fact, more and more SaaS companies are adopting usage-based fees to scale quicker alongside tiered pricing. In a 2023 survey, OpenView Partners found that 3 out of 5 SaaS companies now use some form of usage-based pricing, while nearly 50% take a hybrid approach (usage-based subscription plans).

Most of the current commerce and fintech industry has the pricing model upside down. These companies are largely charging “bips and takes” first and then adding on fees for value-added services. Again, this is largely due to path dependency in their respective industries. Once SaaS pricing is implemented, commerce and fintech companies can add on usage-based pricing or tack on specific transaction fees. This will ensure that the core revenue model is relatively more stable through the economic cycle and the added usage-based fees can scale up or down at relatively higher margins.