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What are software-led payments? We define them as payment processing functionality sold through owned or partnered software (vertical or horizontal SaaS), with a light touch or fully embedded integration with that software provider – "integrated payments".

Payment volumes are increasingly shifting towards software-led distribution channels, evidenced by rapid growth of modern acquirers. While this trend is not new, and has played out in the US over the last decade, software-led payments penetration in Europe is still significantly lower and remains relatively nascent (~25% penetration currently across the continent). We expect Europe could eventually approach levels of software-led payments penetration similar to the US (of ~60%+) except on a relative lag, as similar dynamics exist in Europe with payments functionality becoming integral for software platforms to create stickiness and a seamless experience, as it removes the need for merchants to establish direct relationships with acquiring banks or payment gateways.

The evolution of software-led payments in Europe is one of our key themes in European FinTech for the coming 5-10 years. We believe the setup for integrated payments in Europe is favourable with low penetration and a high appetite for increased usage of modern integrated solutions. We expect software-led/embedded payments to provide above-market (personal consumption expenditures price and cash-card conversion) growth for years to come, particularly as the broader adoption of SaaS solutions increases across Europe with a more fragmented ISV (independent software vendor) market which can be more local in nature and as the integration of payments within those software solutions increases over time.

Adding financial services to the embedded suite of products (capital, issuing, accounts and more) should further improve and simplify the merchant journey. There is a natural alignment of incentives between the payment processor, the software platform and the merchant to invest in embedded solutions. We believe the rise of embedded payments will coincide with the gradual decline of bank-based distribution channels penetration.

Figure 1: We estimate the software-led payments in Europe could grow to prominence in the way it has in the US

We believe the SaaS landscape in Europe is more fragmented than the environment in the US, as there are local champions from individual countries that have not yet achieved pan-European scale, particularly in vertical-specific categories (i.e. restaurant), but also within horizontal software categories (i.e. enterprise resource planning, a type of software that organizations use to manage day-to-day business activities).

Additionally, we believe the overall penetration of SaaS in Europe is lower than that of the United States, which leaves an opportunity for a two-pronged benefit to growth for payments companies with exposure to this channel:

1. the increasing adoption of software solutions by SMEs in Europe (especially nascent in Southern Europe) and;
2. the increasing penetration of integrated payments within those software solutions (usage and number of integrations increasing).

We estimate software-led payments penetration (including eCommerce) is only ~20-30% in Europe (with more penetration in Northern Europe and less in Southern), whereas penetration in the US exceeds 60%. Based on data from third party sources and our independent research, we estimate there are ~13.6k ISVs in Europe. While the precise number of ISVs varies depending on the source and how an ISV is defined, the key point remains that there are a large number of ISVs in Europe that have the potential to facilitate the payments process from their merchants in some form.

The first stages of the software-led revolution in payments began forming in the US in the mid-2010s, not long after Marc Andreessen coined the phrase "Software is Eating the World". As such, the software-led payments landscape evolved rapidly in the US, leading to high penetration levels (~64% currently in 2023, including eCommerce). Within our framework for Europe, we benchmark this to US levels of penetration of payment volumes, which has been the earliest wholesale adopter of software-led payments.

Given the rapid increase in penetration of software-led payments, processors with the greatest exposure to integrated payment swimlanes have benefited from above-market growth. Our analysis finds that software-led channels have been and are expected to continue to grow rapidly in the US, with ~1.5-2 times faster than the carded payments. Going forward, we believe similar levels of above-market growth should continue to exist within the European software-led payments market as it matures. We note that this excludes eCommerce payment volumes, that are intermediated by a software platform.