Embedded Finance: The New Big Revenue Driver

Embedded Partners
Embedded finance podcast with Blake Adams, Senior Vice President at Bain Capital.

Welcome back to the SMB Tech Innovators podcast blog series powered by Gusto, where we explore the intersection of FinTech, vertical SaaS, and how software combats the rising complexity of running a business. Our goal is to share stories, advice, and best practices from the leaders and investors behind today’s cutting-edge platforms. 

Today, we speak with Blake Adams, Senior Vice President at Bain Capital. Embedded finance has gained some traction in recent years and it’s expected to continue rising significantly. Based on estimates, embedded financial services will generate a whopping $51B in revenues in 2026, up from $21B in 2020.Today, Blake discusses the role that embedded finance is playing across multiple industries and why it’s become such an increasingly massive opportunity for companies.

(The following was transcribed and edited for clarity)

One of the reasons that I was so excited to bring you on to the show is your recently announced report, which I think is really one of the best reports out there. Why were you all compelled to work on something like this?

Embedded finance continues to be a juggernaut. But I think as I and the Bain Capital team looked at the landscape of content and information out there, we thought it was largely qualitative in nature. We thought there was an opportunity to bring a more quantitative aim to really understand the size of this opportunity. What’s the growth profile? How did the economics work across the various stakeholders? So that’s really where we thought there was an opportunity and really leaned in heavily to try to quantify the size of some of these things. And also really just speak in a little more detail about, you know, our point of view on how the lens, the ecosystem, and the landscape of power centers will be shifting over time.

I’m not really sure if the term “embedded finance” even existed 10 years ago. How do you define embedded finance?

We think about it as when a software platform provides an adjacent financial service to customers, with three criteria. First, it’s delivered through an online platform experience that’s native to the customer journey. Second, the platform has some degree of economic ownership of the profits benefited from that offering. So it’s not just a referral mechanism. They’re actually participating in the financial upside of delivering that customer Offering customer. And then the third is where the magic really happens, is when the software platform has proprietary data assets about that customer with which they can use to offer a financial product better than a legacy financial institution. Today these offerings are mainly banking, payments, lending, and insurance, but we’re seeing more and more of these opportunities pop up across compliance, in tax and accounting, human capital management, payroll, and benefits.

In your report, you share the percentage of US financial transactions done via an embedded financial services platform will double in less than 5 years. What’s driving this change?

There’s a few drivers. The first is financial services just continue to come online and move from offline legacy processes to being digitized. The second thing is more and more software platforms really realize their right to win and convert and sell through some of these offerings because they know their customer better than any bank does. They have proprietary data and a ton of trust and credibility with their customers. We see this continuing to be a dynamic and part of a multi year, if not multi decade, generational shift. And lastly, I’d say is vertical maturity. Some verticals like E-commerce, health and wellness, food delivery, have very high penetration of embedded finance, while others, like real estate, are still in their infancy. But we expect to see adoption in many more verticals pick up steam over time.

Why is there so much venture capital being invested in embedded solutions?

The market is just massive. In our recent study we compared just the US market. Today, it’s a $107 billion dollar market. I think the thesis and hypothesis that you’re seeing from a lot of investors is hey, call it a trillion dollar market of payments, insurance and bank and in lending, if you can even chew off 10%, and frankly, we feel there’s a chance that it could be 20 or 30%, there’s just a ton of market opportunity. So I think you know, with that is like the overall overarching thesis folks have really put a lot of money into enabling the ecosystem of software plus those software companies that are navigating between the software platforms and banking and regulatory institutions to bring some of these offerings to bear.

You mentioned that some markets are adopting these solutions more quickly, why do you think that is? 

Basically, it’s do you have something where you can stand out from a Chase or a large legacy financial institution? And, you know, I think the customer benefit can come in three avenues. One, the customer experience. Can you provide a customer experience that’s native, that’s data rich, that is quicker, more efficient, than the customer can get otherwise? Second is cost savings. Can you offer this offering at a lower cost than others. Toast is a great example, the point of sale software company that makes the majority of their gross profit and revenue from payments. They make their money on payments and they use that to subsidize their hardware, which they lose money on. And they’re able to do that because they’re getting that payment revenue. And then the third thing is just access and risk, which access for a lot of small businesses, for instance, it’s hard to get for a loan for example. And, you know, part of that is because there’s very limited data on these business owners and it’s hard for you to walk into a bank, and, you know, build up a lot of confidence in that relationship. If it hasn’t already been a multi year, partnership between between the small business owner and the bank, software platforms can solve for that problem, because they have access to data, they frankly know more about that small business owner than any bank likely does, and can use that to underwrite and extend credit.

Whenever I hear about embedded finance the first thing that people talk about is payments. How do you think about all these other new offerings? 

I think payments is typically one of the first offerings to land because it’s a lot higher on the maturity curve, like the motion and the playbook, so to speak, is pretty clear now. That being said, I’d say the growth and the opportunity moving forward is going to be for more and more of these additional products and services, like benefits and payroll and tax compliance. We’re also seeing, you know, some interesting plays. So I think, as we think about what this market looks like, 5-10 years from now, it’ll be a much more balanced sort of composition across all these different offerings.

What are the conditions that need to exist to actually explore embedded finance opportunities?

There’s a couple questions that we want to ask. What do we think the Attach opportunity looks like for this platform? And then there’s just a second question around what do we think the net revenue economics look like, for this platform and this customer? And then there’s another piece, which is what are the add on services that we can use to continue continuing to grow the business? And all of these are informed by a set of micro questions like, what’s the payment mix, between credit card and other rounds of payment? Like how acute is a customer problem that we’re solving? And can we drive a ton of efficiency and customer benefit just on the workflow for payments, this is typically in the form of like reconciliation, where I will have to manually reconcile an invoice with payment with a payment that’s received. And it’s all sort of automatically done by the same provider. So I think there’s like a set of questions and a framework that you can take to really evaluate some of these opportunities. But it’s largely around, you know, one of the big questions is just around adoption. And why, like, what do you have to believe, that suggests you have a right to really win an outsized share of your own customers and convince them to go from, you know, buying your software to buying your financial services?

Listen to the entire podcast with Bain Capital SVP, Blake Adams, also available on Spotify

Review the full report analysis, Embedded Finance: What It Takes to Prosper in the New Value Chain.

Updated: December 13, 2023

Somrat Niyogi Somrat is the Head of Business for Gusto Embedded Payroll and previously oversaw Gusto's strategic partnerships, technology ecosystem, distribution partnerships and the developer ecosystem. Prior to Gusto, Somrat ran Business Development at Clari and founded two venture backed companies -- Miso, a pioneer in social television, and Stitch, a smart sales assistant which sold to SugarCRM. Somrat graduated from The University of Texas at Austin with a BS in Computer Sciences.
Back to top