{"id":429,"date":"2023-08-30T14:18:40","date_gmt":"2023-08-30T21:18:40","guid":{"rendered":"https:\/\/embedded.gusto.com\/blog\/?p=429"},"modified":"2023-08-30T14:30:49","modified_gmt":"2023-08-30T21:30:49","slug":"embedded-finance-trends-benefits-and-growth-potential","status":"publish","type":"post","link":"https:\/\/embedded.gusto.com\/blog\/embedded-finance-trends-benefits-and-growth-potential\/","title":{"rendered":"Embedded Finance Services: A Practitioners Perspective"},"content":{"rendered":"

What is embedded finance?<\/span><\/h2>\n

The term \u201cembedded finance” was coined by <\/span>Matt Harris<\/span><\/a>, a fintech legend and partner at Bain Capital, in an <\/span>article in Forbes<\/span><\/a>. When a software-as-a-service (SaaS) platform provides adjacent embedded financial services to customers within the native customer journey, that\u2019s embedded finance. Or, as Matt said, \u201c…companies that use financial technology as an ingredient versus a primary business model.\u201d\u00a0<\/span><\/p>\n

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.\u00a0<\/span><\/p>\n

According to a study by <\/span>Bain Capital in 2021<\/span><\/a>, 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.<\/span><\/p>\n

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Use cases of embedded finance<\/span><\/h2>\n

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

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Additionally, specific embedded finance features aimed at filling gaps in industries, such as in mental health, are explored by <\/span>Victoria Li<\/span><\/a>, Co-Founder at <\/span>Heard<\/span><\/a>, a back-office solution for therapists. Victoria says: \u201cFor us, what\u2019s important is \u2018How 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?\u2019\u201d Heard has launched and\/or is exploring various embedded finance solutions, including benefits, payroll, tax savings, payments, invoicing and, more.\u00a0<\/span><\/p>\n

What is driving the growth of embedded finance?<\/span><\/h2>\n

The growth of embedded finance can be attributed to several factors. <\/span>Michael Rangel<\/span><\/a>, Founder and CEO of <\/span>Novo<\/span><\/a>, points out <\/span>cash management issues in traditional banking<\/span><\/a>: \u201cThe reason that cash management has become so complicated over time is because of the lack of tools built inside a traditional checking account.”<\/span>\u00a0<\/span><\/i><\/p>\n

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.\u00a0<\/span><\/p>\n

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.<\/span><\/p>\n

Blake Adams<\/span><\/a>, formerly Senior Vice President at Bain Capital, highlights the potential for <\/span>revenue generation through embedded finance solutions<\/span><\/a>. 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.\u201d<\/span><\/p>\n

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 \u2014 such as payment solutions \u2014 that are completely accepted by their customers. Other verticals, like real estate, have a tremendous amount of room to grow.\u00a0<\/span><\/p>\n

Blake Adams describes What Embedded Finance Success Looks Like.<\/a><\/p>\n

Finally, powering this growth is the rise of a <\/span>host of new embedded fintech<\/span><\/a> technology providers, <\/span>including Gusto Embedded<\/span><\/a>, 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.<\/span><\/p>\n

How big is the potential market?<\/span><\/h2>\n

The potential market is massive. A <\/span>Bessemer Venture Partners article from 2022<\/span><\/a> 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.”\u00a0<\/span><\/p>\n

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.\u00a0<\/span><\/p>\n

How embedded finance improves the customer experience<\/span><\/h2>\n

Connect embedded finance to people<\/span><\/h3>\n

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.<\/span><\/p>\n

Embedded financial services should connect to and complement the existing user experience. \u201cAre the embedded services complementary and reinforcing of your core process system of record and not tangential to your offering? If it isn\u2019t reinforcing retention of the core software, then why are you doing it?\u201d <\/span>says<\/span><\/a> Seema Amble, Partner, a16z. A customer-centric approach strengthens the bond between businesses and their clientele, leading to greater satisfaction and loyalty.<\/span><\/p>\n

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

https:\/\/embeddedblog.wpengine.com\/wp-content\/uploads\/2023\/08\/gusto_-_traditional_vs_embedded_banking_latest-720p.mp4<\/a><\/video><\/div>\n

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.<\/span><\/p>\n

As Jacob Olins, formerly VP of Financial Services at Epos Now, said in a recent interview<\/a>, \u201cOffering a vertical software solution, at its core a business management solution, means communicating to the customer through every interaction that \u2018we’re a platform that makes it easier for you to manage your whole business.\u2019<\/p>\n

“Embedded finance, payment acceptance, bank accounts, getting loans, payroll\u2026 these are all things that help customers operate their business more efficiently.\u201d<\/p><\/blockquote>\n

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 <\/a>and\/or reduced customer churn.<\/p>\n

An example is <\/span>Toast<\/span><\/a>, 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\u2019s hardware terminals and payment processing but also its team management add-on, which includes employee scheduling and embedded payroll.<\/span><\/p>\n

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,<\/p>\n

\u201cWhen it comes to the capital product we launched\u2026 we already have all [the customer\u2019s] 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.\u201d<\/p><\/blockquote>\n

https:\/\/embeddedblog.wpengine.com\/wp-content\/uploads\/2023\/08\/gusto_-_vertical_software_vs_banks-1080p.mp4<\/a><\/video><\/div>\n

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.<\/span><\/p>\n

Ability to tailor products to individual use cases<\/span><\/h3>\n

Software platforms can leverage their proprietary data to understand their customers’ unique needs and preferences. <\/span>Alexander Jekowsky<\/span><\/a>, Co-Founder and CEO of <\/span>Cents<\/span><\/a> \u2014 a vertical software platform automating the laundry and dry cleaning industry \u2014 highlights <\/span>the importance of personalized solutions<\/span><\/a>: \u201cTo 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.\u201d\u00a0<\/span><\/p>\n

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.<\/span><\/p>\n

Making business management easier<\/span><\/h3>\n

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.\u00a0<\/span><\/p>\n

Aram Muradyan<\/span><\/a>, Vice President of Strategy at <\/span>Squire<\/span><\/a> \u2014 a fast-growing <\/span>software technology platform for barbershops<\/span><\/a> \u2014 acknowledges the changing landscape: \u201cIt’s not that we\u2019re forcing barbershops to only accept credit cards, it\u2019s that customers don\u2019t want to pay in cash anymore. That trend is going to continue.\u201d\u00a0<\/span><\/p>\n

More from Aram:<\/span><\/p>\n