Financial technology (fintech) is transitioning from a stand-alone vertical into a horizontal opportunity. This, in essence, is the genesis of embedded finance. Companies across industries – from retail to technology to banking – are embracing fintech as part of their technology stack and business model to deliver a richer, stickier and more lucrative user value proposition. This article serves as a primer on the embedded finance market opportunity, and the fintech-as-a-service vendor ecosystem that has emerged to power it.
The evolution of fintech
The early days of fintech primarily saw startups come to market with a distinct financial services offering, such as lending or P2P payments, targeted at end users. New entrants like Venmo and LendingClub built a business by unbundling specific banking products/features, and acquiring users one by one. Today, fintech is increasingly considered an infrastructure layer that existing B2B and B2C organizations can build on to create new products and value propositions for their own customers.
The examples of companies embedding fintech capabilities to better serve their customers are plentiful:
- Shopify Inc. offers payment processing, working capital, money accounts and payment cards to help its merchant customers better run and grow their business (vendor partner: Stripe)
- DoorDash Inc. provides working capital to its merchant partners to invest in the growth of their business (vendor partner: Parafin)
- Citizens Financial Group Inc. has launched a branded “buy now, pay later” (BNPL) service to acquire new customers and better compete with third-party BNPL providers (vendor partner: Amount)
- Google offers virtual cards for Google Pay users to spend their cash balance online in-app or in-store more easily (vendor partner: Marqeta)
- Uber Technologies Inc. provides drivers with a branded bank account and a debit card to receive instant payouts and spend earnings (vendor partner: Green Dot Corp.)
Essentially, fintech is evolving into more of an ingredient that’s getting baked into the services consumers and enterprises are already deploying. Instead of operating alongside the day-to-day activities of consumers, employees and enterprises, financial products are increasingly becoming enmeshed within them. This trend, we believe, provides a pathway for fintech to deliver greater value and utility to users.
The business drivers for embedded finance
Why are more companies offering embedded fintech services to their customers? There are three tried and tested business drivers that we see moving this trend forward:
Drive revenue growth. Perhaps the most obvious reason for B2C and B2B companies to move into fintech is to increase average revenue per user. Generating per-transaction revenue can be a force multiplier for growth, as SaaS firms like Toast Inc. and Shopify have demonstrated. Similarly, offering a lending product enables platforms and marketplace business to catalyze growth for their customers, creating multiple opportunities (e.g., increased transaction volume as the business grows) down the line. It’s important to note that embedded finance revenue comes at essentially zero additional customer acquisition cost.
Enhance the user experience. Traditionally, most financial products were not built with a strong focus on design and user experience. This can be particularly problematic when considering how deeply ingrained various financial services are within many technology vendors’ user experience. Common outcomes include servicing issues, process delays and data reconciliation challenges, which can all lead to customer dissatisfaction and churn. When a company takes greater ownership over the financial processes that are core to how users engage with its product(s), that directly translates into enhancing control over – and refinement of – their user experience.
Increase product stickiness. Financial services are inextricably intertwined with the daily activities of consumers and enterprises. Directly offering financial services, therefore, enables technology firms to increase product engagement. It also provides an avenue to deliver greater value and become a more indispensable partner. Ultimately, this can serve to boost retention. As Blackbaud Inc.’s chief financial official, Anthony Boor, emphasized during the company’s Q4 2020 earnings call, “Our payments business is very, very sticky,” pointing out that customers using its payments service generally exhibit higher retention rates than those that do not.
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