Embedded Finance Services: A Practitioners Perspective

Embedded Partners

What is embedded finance?

The term “embedded finance” was coined by Matt Harris, a fintech legend and partner at Bain Capital, in an article in Forbes. When a software-as-a-service (SaaS) platform provides adjacent embedded financial services to customers within the native customer journey, that’s embedded finance. Or, as Matt said, “…companies that use financial technology as an ingredient versus a primary business model.” 

Embedded finance is different from traditional referral agreements. First, the user experience is more integrated. Second, both the SaaS platform and the hosting fintech platform have some degree of economic ownership of the profits and risks from the offering. Finally, the SaaS platform typically uses proprietary data assets in order to offer customers a better financial product experience than a traditional financial institution. 

According to a study by Bain Capital in 2021, financial products, such as inline payments, embedded into various software platforms accounted for 5% of all financial transactions, and by 2026, that figure is estimated to jump to 10%, or $7 trillion. This growth of the embedded finance market will likely continue in the future, and everyone from venture capital firms and private equity funds to small and medium businesses is taking notice.


Use cases of embedded finance

Embedded finance finds application across various industries and use cases. One notable example is the accounting profession. Herman Man, Chief Product Officer at Bluevine, emphasizes the efficiency gains that accountants can achieve through banking solutions tailored to their needs:

Additionally, specific embedded finance features aimed at filling gaps in industries, such as in mental health, are explored by Victoria Li, Co-Founder at Heard, a back-office solution for therapists. Victoria says: “For us, what’s important is ‘How do we help therapists be the best therapist they can be? How do we remove some of the pain points they see when running their business?’” Heard has launched and/or is exploring various embedded finance solutions, including benefits, payroll, tax savings, payments, invoicing and, more. 

What is driving the growth of embedded finance?

The growth of embedded finance can be attributed to several factors. Michael Rangel, Founder and CEO of Novo, points out cash management issues in traditional banking: “The reason that cash management has become so complicated over time is because of the lack of tools built inside a traditional checking account.” 

There are several drivers of the growth in non-financial companies adopting embedded finance strategies. The first and most obvious driver is that legacy processes associated with traditional financial institutions continue to move online as these processes become digitized. Much of this shift has already happened, but there is still room for growth. 

The second driver is that more and more software platforms realize that their tools are more entwined with their customers’ daily workflows than a traditional bank. This means they can better customize embedded financial products than traditional financial institutions. They have a treasure trove of proprietary data and have built trust with their users, which them acquire new customers and streamline the customer experience.

Blake Adams, formerly Senior Vice President at Bain Capital, highlights the potential for revenue generation through embedded finance solutions. He says: “The playbook for embedded finance is pretty clear now, and it has the potential to drive a significant amount of revenue across the right business.”

Blake also talks about vertical maturity. Verticals such as e-commerce, health and wellness, and food delivery have a high number of embedded financial products — such as payment solutions — that are completely accepted by their customers. Other verticals, like real estate, have a tremendous amount of room to grow. 

Blake Adams describes What Embedded Finance Success Looks Like.

Finally, powering this growth is the rise of a host of new embedded fintech technology providers, including Gusto Embedded, that offer customizable financial services offerings through application programming interfaces (APIs). These new platforms enable SaaS brands to offer payments, payroll, bank accounts (via banking-as-a-service or BaaS), lending, cards, and more without building the backend infrastructure and compliance systems from scratch.

How big is the potential market?

The potential market is massive. A Bessemer Venture Partners article from 2022 points to the market opportunity in moving financial services from a standalone business model to a key ingredient in the software stack of SaaS companies. In the same episode above, Blake Adams says, “The embedded finance market is massive. The US SaaS market today is worth $107 billion, and the US market for just payments and insurance is $450 billion.” 

The feeling among investors and their strategic partners is that this is a trillion-dollar industry, and over the next 10 to 20 years, the growth will be explosive. A lot of resources are being dedicated to enabling the growth of this market to create new revenue streams, find new areas of monetization and increase cost savings. 

How embedded finance improves the customer experience

Connect embedded finance to people

Embedded finance is all about creating a seamlessly integrated customer experience. By incorporating financial services directly into software platforms, businesses can offer their customers a unified environment where they can access financial services without the need to navigate multiple systems. Many are also looking to mobile apps to change the customer and employee experience in positive ways to achieve success.

Embedded financial services should connect to and complement the existing user experience. “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?” says Seema Amble, Partner, a16z. A customer-centric approach strengthens the bond between businesses and their clientele, leading to greater satisfaction and loyalty.

Edward Kim, Co-Founder and Head of Engineering, Product, Design, and Data at Gusto, describes the difference between traditional versus embedded banking in this short video:

It starts with the customer benefit. SaaS platforms need to design the offering to stand out from traditional banking services or other status quo options. Those that can provide a customer experience that is native, data-rich, quicker and more efficient than the customer can get through traditional service providers will be well-positioned for success.

As Jacob Olins, formerly VP of Financial Services at Epos Now, said in a recent interview, “Offering a vertical software solution, at its core a business management solution, means communicating to the customer through every interaction that ‘we’re a platform that makes it easier for you to manage your whole business.’

“Embedded finance, payment acceptance, bank accounts, getting loans, payroll… these are all things that help customers operate their business more efficiently.”

A second factor to consider is the cost to acquire and the cost to serve. SaaS platforms that can acquire and service customers more efficiently because the experience is integrated into the software platform can reap significant benefits. Additional benefits often come in the form of higher margins and/or reduced customer churn.

An example is Toast, a food service industry point of sale and management service. It makes a majority of its gross profits and revenue from payment processing services, such as running a customer’s credit or debit card for a meal. Additionally, 30% of new restaurant customers choose not only Toast’s hardware terminals and payment processing but also its team management add-on, which includes employee scheduling and embedded payroll.

A third factor is access and risk. An example is lending to small businesses. A small business owner can’t just walk into a bank and get a loan unless they’ve had a bank account there for a long time and can show a record of positive cash flow over years or even decades. As Nathan Gill, Chief Product Officer of Epos Now, says,

“When it comes to the capital product we launched… we already have all [the customer’s] operating history, we already understand that their business is growing and that it’s growing in a profitable way. So we don’t need to ask for their tax returns. We don’t need to have all that back and forth. One day, that customer opens up Epos Now and is presented with a capital offer that they can accept and be funded in the exact same day without all that bureaucracy. We are taking all those steps away, automate it, so that these merchants can focus on growing their business.”

A technology company or software platform can solve that lending problem because they have access to more data and know those small businesses and their day-to-day operations better than any bank. That means they can extend credit to more small business owners than a traditional financial institution.

Ability to tailor products to individual use cases

Software platforms can leverage their proprietary data to understand their customers’ unique needs and preferences. Alexander Jekowsky, Co-Founder and CEO of Cents — a vertical software platform automating the laundry and dry cleaning industry — highlights the importance of personalized solutions: “To really have a powerful product in your space, you have to feel the pain and know what it’s like to need a solution as an owner or operator.” 

By customizing offerings to meet the specific requirements of businesses, embedded finance ensures that customers receive relevant and meaningful financial solutions, such as tailored loans for working capital or expansion.

Making business management easier

Embedded finance simplifies business management for owners and managers by consolidating various functions into a single platform. From scheduling to tipping and benefits administration, all these features can be seamlessly integrated, eliminating the need for juggling multiple systems. 

Aram Muradyan, Vice President of Strategy at Squire — a fast-growing software technology platform for barbershops — acknowledges the changing landscape: “It’s not that we’re forcing barbershops to only accept credit cards, it’s that customers don’t want to pay in cash anymore. That trend is going to continue.” 

More from Aram:

By embracing digital payments and incorporating financial services, businesses can keep up with evolving customer preferences while streamlining their internal operations. As Blake Adams says: “The software platforms that are more vertical and know the most about their customers have the right to serve them ancillary products and services.”

Embedded finance and vertical SaaS

Bessemer Venture Partners ‘State of the Cloud’ report highlights many of the benefits associated with vertical-specific platforms. Increasingly, monetization via embedded finance is a primary objective for vertical SaaS companies rather than a “second act.”

Jim McGinnis, formerly the Chief Executive Officer at MyCase (now part of Affinipay), says: “I think the future is the verticalization of payment processing companies and other specific solutions.”

Finally, Fractal Software, a leading vertical SaaS investor and incubator, continues to track the evolution and success of vertical software companies via public and private market valuations. The 2022 State of Vertical SaaS report shows both growth and resilience:

“Fractal’s index of vertical SaaS companies in public markets is above its pre-pandemic highs, and in private markets, investors continue to mint vertical SaaS unicorns. This reflects a broader trend in the digitization of every industry, which shows no signs of slowing.”

Embedded finance beyond payments with embedded payroll

Gusto, a leading provider of payroll and HR solutions, recognized the growing importance of embedded finance and took the initiative to launch Gusto Embedded. Gusto Embedded Payroll empowers software developers to enhance their offerings and deliver greater value to their customers via tailored in-app payroll and benefits. 

Through Gusto Embedded, SaaS partners are transforming the financial landscape for small businesses. By integrating payroll functionality via Gusto Embedded, end customers gain improved visibility into their financial health, enabling better cash flow management and operational optimization.

Gusto Embedded brings powerful payroll capabilities to developers across various platforms via APIs and user-friendly guides but also comprehensive developer support to ensure a seamless integration experience. Gusto offers software providers a trusted payroll partner with over a decade of experience managing complex payroll regulations and compliance requirements. The scalable infrastructure handles diverse payroll aspects, including benefit deductions, pay schedules, and tax filing.

Tomar London, Co-Founder and Chief Product Officer at Gusto, says: “Businesses are starting to lean into customizing APIs like Gusto for their specific situations now because it helps them launch to market quicker.”

By leveraging embedded payroll, businesses can streamline their payroll and HR processes, enhance accuracy and compliance, and gain access to additional features and functionalities tailored to their needs.

The future of embedded finance 

VC firms all over the world are making significant investments in embedded technology, and the money will continue to pour in as long as the projections for exponential growth continue to rise. There is a fundamental shift in how consumers look at their finance options, and there is a sense of freedom in the market as they can choose non-traditional options that don’t rely on visiting a bank branch. 

Enablers of embedded finance are moving toward offering suites of services. They are improving integration processes and making life easier both for the consumer and their various bank partners. Their ownership of real-time, contextual data that banks don’t have access to gives these software platforms an advantage in many situations.

For more on the future of embedded finance, check out Embedded payroll, economic uncertainty, and SaaS 3.0 with Gusto co-founders.

Visit https://embedded.gusto.com/ to learn more.

Brian Busch Brian is currently Head of Marketing at Gusto Embedded; the only payroll API with 10 years of experience and actionable data behind it. Before joining Gusto, Brian held leadership positions at Cloud Elements, Kapost, and Captricity. He holds a BS in finance and a BA in philosophy from Boston College and an MBA from the Cal Berkeley Haas School of Business.
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