Embedded financial services – where any company adds financial services to its offering – is at the cutting edge of fintech. I have actually been an advocate for a long time as well.
But for many it is still amorphous what this means in practice. To make this a reality, we cover three fast-growing and exciting embedded fintech categories.
1. Marketplaces embed financial services to turbocharge their service
An e-commerce marketplace brings sellers and consumers (sometimes businesses themselves) to meet and shop – think eBay or Amazon
Embedded financial services can be a win-win.
Many merchants (especially small businesses) face a ubiquitous challenge: capital constraints. And with more capital, they would buy more inventory to sell more on the market.
While traditional financial services may be difficult to access, expensive or require personal guarantees, marketplace providers benefit from unique structural advantages. They can buy dealers cheap – after all, they are already customers. With direct insight into sales velocity, customer quality, etc., marketplaces have unique warranty data they can use. Finally, (and critically) because the funds will be disbursed and transacted on the platform, marketplaces not only ensure that the money is spent productively, they have a window to get a refund. In short, they benefit from Fintech 3D’s Trifecta.
And as a bonus, embedding financial services is good for the platform. Loan as described above driving volume. Other products, such as bank accounts, invoicing and insurance drive retention and new revenue streams.
It’s a win-win. No surprise that we have seen an acceleration of these providers in various mega-marketplaces. Amazon has Amazon Capital, which is reported to have reached over 1 million sellers and completed over $50 billion in transaction volume. Shopify similarly has its own equity program. The same is increasingly being done by smaller, more specialized marketplaces around the world. For example, Sabi a B2B marketplace in Africa (where I am an investor) has built its own business, a phenomenon I expect to see expand in the emerging category. To drive this growth, a new crop of players are emerging to further drive this category. For example, Parafin, Weavr and Credilinq offer marketplace lending as a service in the US, Europe and Southeast Asia respectively.
2. Business software vendors make money from their ease of use
A variety of software tools are emerging to facilitate everything from trucking, gyms to doctor’s offices, scheduling, logistics and supplies.
If the software works well, the customers (end companies) depend on it from day to day. In short, they become the operating system of the business.
Through this relationship, business software providers can do what embedded fintech does best: meet customers where they are and solve a real need, and monetize the simple service.
For example, Toast offers a simple software system for restaurant owners to manage their operations. But for them, fintech is where the action is – over 80% of their revenue comes from payments. They provide an easy solution for businesses and the more customers like them, the more they use it.
Another example, ZenBusiness (a former portfolio company) offers a business-in-a-box solution for small businesses, covering everything from formation to websites to business documents. Fintech is a natural extension. They can easily onboard based on how much they already know about the business, and expand the product range to their customers.
A number of software categories are ripe to become hubs for embedded fintech, particularly in payroll, ERP and others.
3. Consumer companies put their money where their mouth is
Consumer businesses build their entire existence on developing a relationship, brand and reputation with customers.
Embedded financial services can be a tool to deepen this relationship, after all they already have existing customer distribution.
For me, one of the most exciting areas is embedded insurance, to allow companies to stand by their product with customers, and improve the experience.
For example, companies such as Spot include health insurance in the experience of buying a lift pass. If you are injured during the runs, your care is automatically taken care of. In the terrible event, the experience of care is far more seamless.
I think a similar shift is underway in cars. As the world drifts (pun intended) toward autonomous software, the automaker (or software vendor) should stand by their service and build in the insurance. Tesla has already gone in that direction with their internal insurance product.
BONUS: Building the Holy Grail – a super app where services are underpinned by a financial backbone
No embedded fintech list can be complete without mentioning super apps. A superapp is a single platform that is a gateway to a number of other services. WeChat in China is the prime example. It is at its core a social network, but through it users can complete a variety of activities, from messaging, to games, to running widgets (in some ways competing with the app store).
Supporting the ability to serve customers is embedded fintech. The WeChat account is not a social network, but also a payment account with a store of value. Critically, the fintech platform is not just a revenue line. It catalyzes everything else, especially via payments.
Here in the US, many have looked to capitalize on the superapp concept. Uber
In my view, if a superapp is successful in the US (and anywhere globally), they must be a successful fintech company.
Why this is important
Where do we go from here?
Embedded fintech is poised to have a strong impact on how financial services are delivered and by whom. How it manifests will depend on where it is embedded, how it changes the original product and what the intentions are.
The stakes are high. Research from Andreessen Horowitz suggests that it can increase unit economics for many SAAS companies by 2-5x. It also allows new and stronger relationships with customers and new product categories to emerge.
One thing is clear: we are at the beginning of embedded fintech.