Should You Expand Further into Embedded Finance?
Firmly planted at the center of their business customers’ operations, software companies provide the essential tools businesses need to succeed. Now, many are expanding into financial services traditionally offered by other providers. These services include things like deposit accounts and lending.
You could think of the expansion into payments as the first wave of this trend. Payment programs were traditionally sold by merchant acquirers and ISOs. But over the past several years, many software companies started offering payments embedded into their platforms (often by becoming payment facilitators).
These providers have integrated payments with other services they offer and simplified them – making it easier to scale and offer a better merchant experience than with a referral program.
Payments proved the concept could work; now many are going further into offering other financial services. Providers who embedded payments into their other services are now offering deposit accounts, account-linked card products, working capital and larger-term loans and even insurance products and escrow solutions.
Today’s most visible examples come from the entities that led the way into payments. Companies like Square and Stripe have subverted traditional ideas of who can offer financial services since their inception.
Now Square, which even operates its own bank, offers small business loans from $300 to $250,000 to its sellers. And true to its history, it makes the terms straightforward. Instead of charging interest, it charges a flat fee, and sellers pay back their loans automatically through a percentage of their daily Square sales.
For its part, Stripe offers a product it calls Stripe Treasury, which enables its customers to embed financial services into their own platform. With help from bank partners, it offers platforms the technology to create accounts, offer digital wallets, and issue cards.
These are just a few examples – these companies are quickly expanding the banking and financial services their customers can get directly from them.
But according to Rick Oglesby, president of AZ Payments Group, the offerings are going beyond these broad, high-profile solutions to more specialized niches as well. As just one example, software platforms in the property management industry are enabling tenants to finance security deposits, he said.
Why have these companies stepped into territory that was historically left to its own providers? According to Mike Bradley, senior vice president of growth for Infinicept, the reason is simple. Companies have started offering these services because of the value they provide for their merchant customers.
“For customers of these embedded financial services, this mode of distribution [getting short-term financing, for example] through your relationship with your payment provider becomes more seamless and more tailored to that merchant’s needs,” Bradley said.
These new providers are able to add these new offerings this because of what Bradley calls “disaggregated finance.”
“The monolithic value chain that was a bank is now being broken down into many discrete, a la carte services,” he said.
These new a la carte offerings have created new, strong business models and opportunities, Bradley said.
Oglesby agreed. As a result of this movement, he said, companies that enable embedded finance offerings – such as banks, merchant acquirers and other fintech companies – have begun investing heavily in their product sets to offer these more expanded options.
That has allowed software companies to incorporate new services into their own platforms with relative ease. In addition to deepening and strengthening their relationships with their customers, the offerings are providing new revenue streams as well.
And many software companies already embedding payments within their platforms have found that going farther is a natural fit.
“What is currently evolving is the recognition that embedded payments companies provide a critical aggregation point in terms of numbers and deep insight into those merchants,” Bradley said.
“And notice that we use the term ‘embedded payments’ companies, and not just ‘payments companies,’” he said.
“By definition, embedded payments companies have far greater data set for a given merchant than a traditional payments company – the embedded payments company ‘metadata’ of the merchant and its transactions enables these new modalities of financial services.”
The hot new thing is not without its challenges, however. Navigating the players, their offerings and the regulatory structures that impact the different types of financial services creates some hurdles.
“It’s still early in the adoption cycle, so it’s tough to source niche solutions. Even the broad market products are new and offered by only a few enablers,” Oglesby said.
So, is offering these new services for everyone?
Both Bradley and Oglesby say companies should take a careful look at what makes sense for their own customers. And start by building out from what you have, Oglesby said.
“They should build their business cases around high-probability, more-proven revenue streams and product, like payments. They can then incrementally expand into additional areas,” he said.
Beyond considering the most appropriate financial services for your own company, you should also take a look at what your requirements would be for market coverage in the geographies you’re hoping to reach, Bradley advised.
Finally, you’ll need to evaluate your options for integrating the services into your platform.
While it may not yet be your company’s time to expand into embedded finance, Bradley says that time is likely coming.
“Embedded finance will become a competitive imperative. Established embedded payments companies have already launched embedded finance – or, you can bet, will do so in the near future,” he said.