The Rise of Payments-Based SaaS and Inter-Vendor Integration Revenue Sharing
For decades, we have all seen the cost of doing business climb. Yet, companies investing in new technology stacks demand cost-effective solutions, with subscription-based platforms being preferred. So, how can big (and little) technology companies continue to grow and be profitable in the hospitality technology space? Enter the ever-increasing Payment-based Software as a Service and Inter-Vendor Integration Revenue Sharing trends. In payment-based software as a service, all or part of the core solution being purchased is paid for through a mandated or sometimes optional use of a card payment platform that the vendor owns or resells. For inter-vendor revenue-sharing models, vendors agree to divide the generated revenue of the sale of joint integrations. This is often done without the knowledge of the purchasing consumer company, with the split rarely being equal. So, how did this all evolve? I look back at my past to help lend insight.
In 1997, I joined a small yet well-established multinational hospitality technology company, Visual One Systems (acquired by Agilysys in 2006), as a product manager and later advanced my career into sales. The company was owned by Dave Burroughs, a visionary later honored as an inductee into the HFTP International Technology Hall of Fame. While this was during the height of the .com boom, cloud platforms and n-tier architected solutions had yet to become the norm. When a software developer in Dave’s company was assigned to program something new, they had far more tasks they were responsible for than software engineers of today. This included writing the code, building the database tables and scripts, creating the user interface, and designing printable reports that could be run from the module. This approach kept development teams small, as a single developer would handle multiple process duties. It's important to note that this was before cloud and subscription-based software, which meant the software was a capital expenditure. Hotel and restaurant companies purchasing the software had to invest significantly in hardware running in onsite server rooms or hosted in offsite data centers in which they owned or leased space.
It is almost impossible to create a new technology platform in today's world that is not cloud-based and subscription-oriented. Moving towards cloud-based services can help companies reduce infrastructure and labor expenses by decreasing their managed technology footprint. However, this transition has increased costs for vendors. A single software development engineer is no longer enough to develop a new module, and several team members are now required to accomplish the same task. For instance, a new event booking screen in a sales and catering solution developed by a modern technology company would likely involve a product manager, business analyst, business logic code developer, database developer, UX/UI developer, reports developer, web developer, quality assurance analyst, and other functional roles working on its release. In comparison, in the pre-cloud era, a single developer performed many or, depending on company size, all of these tasks independently.
Cloud solutions vendors must also employ cloud architects, database administrators, and cybersecurity analysts. They need to bear the costs of the cloud provider of their choice, such as Alibaba, AWS, Microsoft Azure, Oracle, etc. Software development companies face additional expenses when expanding internationally, including the need to deploy their solutions in multiple cloud instances worldwide and extra labor costs to support global customers. Considering all these factors, it is evident that it was far easier to profit from selling software before the advent of the cloud than today in a very cloudy world. Industry giants like Oracle, who own their cloud hosting platform, have an advantage as they can better control rising costs.
The Rise of Payment-based Software as a Service
While it still needs to win popularity contests in the United States, the global trend of paying for mission-critical software through credit card transaction fees is rapidly rising. While I need help pinpointing which company was the first to start the trend, Square is most likely a contender to that claim. Several years before Toast Point-of-Sale came out with a cloud-based restaurant point-of-sale that businesses pay for via credit card transactions, Square had a retail point-of-sale solution based on the same model. However, both Toast and Square were built around the premise of generating income through payments and did so by incorporating mission-critical software into their stack. As we look into recent acquisitions made by payment platform provider Fullsteam of Maestro PMS, MegaSys, IQWare, and Resort Data Processing, and partnerships between companies like Stayntouch, Mews, and Agilysys with major global payment providers like Adyen, we can see that mission-critical software products are now integrating payment platforms as an essential part of their offerings. This integration helps to offset the rising costs associated with developing, hosting, cyber-securing, deploying, and supporting the core solution in the cloud. As a result, the entire platform becomes more profitable for the vendor and potentially more cost-effective for the buyer.
This trend has also made mission-critical solutions more affordable for small business owners. Now, a small restaurant or lakeside inn owner can afford quality technology solutions to run their business as long as they agree to use the payment platform provided by the vendor.
Why aren't larger companies as enthusiastic about this trend? Although this model is gaining momentum in North America, it still has a long way to go to win over leading industry analysts and many C-level hotel technology professionals I have spoken to. These professionals have told me that they do not want to be mandated to use a payment platform tied to a core solution. Industry influencers sometimes tell their hotel company customers that such a mandate is a con rather than a pro when it comes to new technology decision-making. Although the short-term costs may be lower, their analysis often suggested higher long-term costs. Larger hospitality operators have a high volume of payment transactions through bars, restaurants, banquet departments, and front office operations. To help reduce card payment fees, they attempt to select a single payment platform for their entire operation to negotiate lower rates. This allows them to have their property management system, point-of-sale system, sales & catering solution, and even back-office accounting solution seamlessly connected to a single card payment platform. They could potentially lose their preferred processing rates if they were to replace any of these mission-critical solutions with a new system that mandates a different card payment platform. Having multiple payment platforms inside an enterprise also creates user frustration, as payment reporting might no longer be consolidated, making auditing more difficult. To maintain streamlined operations, a company must switch all its solutions to the new payment platform or use consolidation business intelligence tools. Although they can do so, it would make the project far more extensive, and there may even be penalties for changing card payment providers depending on the company's contract term.
Like any other product or service, mandating a specific payment solution for a core solution reduces the impact of competition. As a result, the company's ability to negotiate transaction rates weakens as the threat of competition is removed.
Integration Revenue Sharing
Another trend on the rise is integration revenue sharing between vendors. This practice has been going on for decades; pre-cloud was less prevalent than today. It involves companies agreeing to do some type of revenue share for building and promoting integration between the two companies. Often, the share is unilateral in that the core solution does not share any revenue back to the surrounding solution. A prime example could be a housekeeping solution splitting a small percentage of their subscription fee to the property management system provider; in exchange, the PMS vendor will more aggressively promote the housekeeping solution and potentially even go as far as resale it. Suppose the PMS vendor has developed enough of these revenue share partnerships with companies they integrate. In that case, it can help them reduce the price of the core solution to the buyer, but not everyone is always a winner. Often, the royalties paid by the surround solution vendor have little to no impact on the core solution’s sales representative commissions. So, in this example, the PMS vendor sales representative has no incentive to promote the housekeeping application; they will tell their customer to pick whatever housekeeping solution they prefer where an integration exists because their only goal is to sell and get paid on the PMS subscription.
Revenue sharing between vendors has spurred a new dynamic in sales and marketing, especially of the larger mission-critical solutions. It used to be a sales representative would provide a potential buyer with a long list of available integrations via a sales document. However, these revenue-sharing relationships have contributed to the development of online marketplaces where vendors prominently promote their integrations on each other’s websites. It has also created “pay-to-play” models where vendors pay each other for the privilege of integrating and, in some cases, reducing or waiving their fees to the actual technology buyers.
What’s Next?
I broke my crystal ball a long time ago. With the rapid advancements in technology, companies are now doing unexpected things that were once thought impossible. However, some predictions about what's coming next seem clear. This includes the strategy of mergers and acquisitions. It can be puzzling when a company performs a “Crazy Ivan” and purchases another company that is not in their usual field. Still, it can result in exciting innovations that impress us all. Will more card payment processing companies acquire core solutions to generate more revenue from card transactions? Most Likely. Will surround technology solutions continue to leverage integrations to mission-critical systems and do revenue shares as a business development strategy? Absolutely. Everyone expects that if the global economy remains strong and the pandemic gets further away in the rearview mirror, merger and acquisition activity will continue to advance and potentially accelerate. We will likely experience another period of significant consolidation in the technology industry. Payment providers are expected to play a crucial role in this process as the adoption of mission-critical systems being paid for through payment transactions increases. As consolidation occurs, larger technology companies will emerge, making smaller firms more eager to enter revenue-sharing agreements. So, fasten your seat belts - it's going to be an interesting ride!
