Investors’ View of Embedded Fintech

Embedded Partners

Leading VCs weigh in on how they see the growth of embedded fintech in SaaS applications.

By its nature, SaaS is disruptive. To build a successful platform and grow the business, SaaS leaders often add new products that solve additional customer pain points. But when it comes to building with embedded fintech products, from payments to payroll, there’s no playbook.

That’s why we asked several well-respected investors to share their learnings from working with dozens of SaaS companies and hearing the aspirations of hundreds more. The conversation in San Francisco in January 2023 included leaders from 40+ SaaS products, and the panel included: Seema Amble from a16z (Andreessen Horowitz), Andrew Walsh from Tidemark, and Medha Agarwal from Redpoint VC.

Below is a summary of the key learnings from the panel and the Q&A that followed.

Start by getting your core product right.

“Are the embedded services complementary and reinforcing of your core process system of record and not tangential to your offering? If it isn’t reinforcing retention of the core software, then why are you doing it?”

Seema Amble, Partner, a16z

It was unanimous among the VCs on the panel. Before you start embedding fintech, you must get your product right. That’s not to say that embedded fintech shouldn’t become a core feature in your application, but your intended customer workflows must solve your customer’s business issues first. 

Key takeaways

  • Your product must provide value around its intended functionality first.
  • Do your due diligence around build versus buy and potential partners.
  • Know your segment and how embedded fintech fits into your customer workflows.

You must earn the right to offer financial services.

“’Have I earned the right to offer financial services to my customers?’ If the answer is yes, then understand which are the most needed fintech services that make sense for your product and customers.”

Medha Agarwal, Partner, Redpoint

Great SaaS applications are built on trust. If your services work, you gain customer trust, impacting retention and revenue. The old adage move fast and break things doesn’t apply to financial services.

Key takeaways

  • Trust starts with your customer workflow.
  • Add services that solve your most important customer needs first.
  • Use partners that focus on your customer success.

Know before you go: Doing your diligence

“There isn’t a silver bullet for embedded fintech that works across all vertical SaaS applications. Instead, focus on your own control point and expand with the services that enhance your core offering where one plus one really does equal three.”

Andrew Walsh, Partner, Tidemark

It seems like a no-brainer. But, with embedded fintech, there’s so much more to it than implementation. You must consider regulatory compliance and management, data security, monitoring, and reporting, not to mention user setup and the user experience.

Key takeaways

  • Confirm that your customers want the embedded fintech service.
  • Identify the logical next steps for the business processes you deliver.
  • There is no one-size-fits-all. Add embedded services that are most relevant to all your features first.

When it’s time, lean into embedded fintech

“Add features where you’re closest to the information flow or flow of funds. For some companies, that might be payments; for others, like time-tracking software, it is closer to payroll. Find the embedded service that’s best for your customer needs and workflow.”

Medha Agarwal, Partner, Redpoint

Some industries have higher adoption rates of embedded fintech features, while others have low adoption of the same service. Therefore, it makes sense to prioritize the features that best fit your customers’ needs. Start there and build the customer experience with the logical next step.

Key takeaways

  • Analyze your customer workflow to understand where you can improve the process
  • Assess the embedded functionality and technical requirements
  • Prioritize the fintech services that are most likely to be adopted by your customers

Q&A: What SaaS Vendors want to know about embedded fintech

(The following was transcribed and edited for clarity and brevity)

Should I offer multiple options for the same financial service versus just one (like PayPal and Another)?

Medha: This goes back to breadth and depth. It’s challenging to offer a product that’s only relevant to a subset of your users, so it depends on who your end user is and whether one provider serves the need of 90% of your customers. If that’s not the case, you might have to stitch a couple together.

Are there industries that have a more challenging time getting high adoption of embedded fintech products?

Seema: Yes, some industries have higher adoption. It depends on the industry and how common it is to use those products. For example, managing working capital and cash flow via factoring is more common in some industries, and insurance in others. Some financial products have been launched with vertical saas companies that don’t exist in their industry. Generally, when there’s more education required, or more friction to sign-up (or of course less demand), adoption is lower.

Is there any low-hanging fruit or obvious plays for embedded that more companies should know?

Andrew: Ultimately, it comes down to delivering a value-added service on top of your existing control point and solving pain points that your customers are feeling. And, for your go-to-market, when selling financial products you can’t set it and forget it, it’s complicated. You need to explain why your offering is better than the status quo and deliver on that promise. It’s a heavy lift from a team and resources perspective.

When pursuing an embedded fintech approach, do you think there should be one metric North Star or multiple?

Medha: It depends on your business. I think it’s essential to know your key target metrics before you start because you have to be very clear about the goals and honest with yourself about whether these initiatives are working.

Seema: Each product varies. In addition to measuring uptake rate and collecting data to show that the product reinforces the customers experience on the platform, there will be metrics specifically showing the health of that financial product. With lending products, for example, you’re typically going to start lending on your balance sheet and need to collect a number of credit metrics as part of the confidence for your debt facility.

The bottom line: The opportunity is real

There is a reason why venture capital funding is bullish on embedded fintech. For vertical SaaS companies like busybusy, Squire, Xendo, and many more, it has proven a great way to scale their workflows, add value for their customers, and grow revenue. And these SaaS applications are adding embedded fintech for good reasons:

  • Embedded fintech incorporates SaaS products more deeply within key flows of information and funds, making products stickier while they grow.
  • Vertical SaaS companies, from Toast (restaurants) to Squire (barbershops), have shown that embedded fintech works and can add value for their customers.
  • It’s faster for SaaS applications to deliver more complete products without the tech debt and development costs of building your own.

We want to thank all the panelists and SaaS providers who participated and making our Happy Hour in San Francisco a productive and memorable event. You can follow our panelists at Seema @seema_amble, Andrew @IamAndrewWalsh, Medha @mkhandel.

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