Fig. 01
The vertical software market has been on a fantastic run in the last few years. Scaled leaders like Toast, Shopify and Service Titan have built excellent platform offerings and become full-stack operating systems for their industries. They have demonstrated the power of a multi-product vertical strategy, enabling deeper market penetration, as well as stronger growth efficiency and net retention than is typically achieved by horizontal peers.
There are clear tailwinds supporting greater verticalization across the software market. The level of customer expectation around UX is higher than ever, and horizontal solutions simply can’t cover every edge case for every industry. Meanwhile, rapidly improving AI is driving down the cost of building software and expanding revenue opportunities for technology vendors. Automating more complex tasks that previously relied on human labour is allowing technology companies to tap not just into software budgets, but far larger services revenue streams.
This combined potential to target deeper addressable markets with lower build costs is transforming the economic potential for vertical software businesses. Industries previously thought of by investors as too small to deliver venture-scale returns now suddenly look like potential goldmines.
We think that this trend towards verticalization will also accelerate in the fintech space. The fintech landscape and infrastructure stack has matured considerably over the last decade, significantly reducing the cost and complexity for many companies to either access or embed financial services products. Still, many industries and use cases are underserved, even at the level of the financial product — the account, payment, loan or insurance policy. Imagine you’re running a small construction business: working capital is the lifeblood of your business, but you need a credit provider that understands the cyclical nature of your industry, the complexities of your supply chain, and the unique risks involved in large and long-term projects. A generic credit product simply won’t cut it.
Vertically-tailored financial products are clearly needed in credit and insurance. Complex customers and industries require supportive risk capital providers and specific underwriting expertise. The optimal design of a working capital or protection product also varies significantly by industry and use case. Ferovinum in the UK set out to solve exactly this kind of challenge for wine and spirits producers that struggle to use their inventory as collateral. In other industries, we see a need for vertically-tailored accounts and payments products. For example, in the travel space, regular corporate cards are a poor fit for transactions that are high-value and typically higher-risk. In the non-profit sector, payment providers need appropriate entities and governance structures to tax-efficiently handle the collection and payout of donations.
The financial software systems and workflows that sit upstream and downstream of these financial products are similarly important to delivering effective customer outcomes. Again, as is true for the broader software space, horizontal players simply have less capacity to build financial software that can so tightly map to the intricacies of a particular vertical — its workflows, controls, and regulations — or build the same breadth and depth of integrations with adjacent, industry-specific software vendors. Automotive dealerships are a good example, where a company like Aufinity’s payments platform is designed to support the industry’s complex procure-to-pay and order-to-cash processes that involve the customer, dealer, OEM and fulfilment partners, and tightly integrates with a fragmented landscape of dealer management systems. Similarly, in the US healthcare market, Cedar is aiming to improve billing operations and customer payments by deeply integrating the patient journey with a wide landscape of healthcare operators, insurers, and financial assistance providers.
This opportunity to provide an otherwise inaccessible financial product, as well as to differentiate in the surrounding software layer, makes us believe that vertical fintechs should be both a compelling wedge and moat in many verticals. Whilst AI is likely to tear down the cost of building software, regulated financial products have robust barriers to entry. And sitting in the money-flows, so close to the P&L of their customers, powerfully positions vertical fintechs to become a core system of record. Vertical payments and credit business are likely to find opportunities in software categories like accounts payable (AP) and receivable (AR), treasury management, perhaps even accounting. It’s not hard to imagine that such a player might one day grow into a full-stack vertical ERP.
Several interesting European companies are following this kind of path. Nelly started out as payment instalment payments provider for healthcare clinicians, but streamlining billing and assuming an important working capital role for their customers has positioned them to expand into areas like factoring and expense management. Their aim is to become a broad financial operating system for their customers. Similarly, WeTravel started in AR by helping OTAs to manage the specific complexities of collecting and reconciling payments in group travel use cases, and has since extended into AP with a supplier payments portal as well as inventory management. Meanwhile, Cloover has extended its support for SME renewables installers from tailored customer financing solutions to quote generation, project management, and lead generation.
Of course, not every vertical will benefit so significantly from a vertical-specific fintech offering. But in our view, it is likely to be a compelling wedge in industries with some of the following traits:
- Deep end-markets that are neither too fragmented, nor too consolidated
- Where financial transactions are higher-value or higher-risk
- Where financial workflows are of greater complexity: they may involve a mix of online and offline processes, require multi-step or multilateral approvals, and multi-party processing
- And where there is a relatively fragmented landscape of existing industry-specific ISVs.
Taking a step back, we’re not surprised to see plenty of activity in industries like retail, agriculture, financial services and travel, producing fast-growing vertical fintech businesses such as Klarna, Wayflyer, Oxbury, Vitesse and WeTravel. But it’s noticeable, at least in Europe, that there are relatively fewer disrupters today in sectors where we’d expect significant appetite for such an approach — not least construction, logistics and healthcare.
With the rapid advancements in AI described earlier, we expect this picture to change considerably. The declining cost of building software will allow fintechs to extend their integrated software offerings more quickly. And if vertical fintechs can successfully become a core system of record for financial data, they will also be well-placed to build extremely effective AI products for their customers. The access, understanding and control of a specific industry’s data model should allow them to train and deploy highly performant models that deliver greater value than comparable horizontal offerings, capturing a significant share of revenues that will flow from services to agentic software in the coming years.
In the last decade of vertical software, the biggest beneficiaries in fintech were horizontal infrastructure businesses, the companies that helped other platforms to embed and monetise financial services. Looking ahead, we think value will accrue quickly to more explicitly vertical fintechs: with a powerful wedge into large and underserved industries, they will be strongly positioned to drive value from AI addressing higher value and higher complexity financial workflows.