Why add embedded financial services to your product or service ?
“In the not-too-distant future, I believe nearly every company will derive a significant portion of its revenue from financial services. Every company will be a fintech company”.
Angela Strange, general partner at a16z partner at Andreessen Horowitz, describes the major trend currently unfolding in financial services.
We’re talking about embedded finance.
It’s the third phase of the fintech disruption. In the latest years, we’ve seen the unbundling of financial and banking services. Fintechs offered specific products to niche customer segments. It’s now time to re-bundle, in a unique platform.
You might have witnessed it already with every company claiming to be a ‘super-app’ or the ‘all-in-one solution for X’. They strive to become a superstore for their customers. All services, under one roof. A trend expected to have a bright future. According to Business Insider, it will represent a $7.2 trillion opportunity by 2030.
You’re interested in the topic but still not sure if it’s the right move for you? In this article, we’ll drive you through the benefits of embedded finance, and how to choose between buying a financial service or building your own.
Embedded finance: the concept behind the buzzword
What is embedded finance exactly?
As with any shiny concept, the word is frequently used, but not always understood. A quick recap about embedded finance:
What is it?
While it’s currently making headlines, embedded finance isn’t new. Think about the last time you purchased a big electronic item, like a computer. Apple or la FNAC probably offered to add a warranty extension to your cart and to pay in installments. This is what embedded finance is all about: offering financial products and services to customers, at their point of need.
The main difference is that embedded finance is now available to everyone. Where only large retailers could afford it before, today, any company can add financial services easily to its customer journey.
Who is embedded finance for?
To name a few: fintechs, marketplaces, and SaaS. Embedded finance makes sense for a wide range of companies. You don’t have to be a financial company to benefit from it.
What type of financial services can be embedded?
People use embedded financial products every day, without realizing it (that’s the point). For example, in the UK, 60 % of adults have used embedded financial services as part of their checkout process when shopping online.
This is an obvious use case of embedded finance. But they are many more: payment cards, instant loans, insurance products… It can all be integrated directly into your SaaS, marketplace, or other business activity.
Basically, any type of financial service can be embedded.
A tour of embedded financial services
You get the gist but you’d like some examples? Let’s go for a quick tour of companies that have integrated financial services.
Malt — Get paid now
When a freelancer does a mission on Malt, they are paid right at the end of the mission instead of waiting for the traditional 60-day payment terms on the invoice. To offer this, they partner with Defacto to finance the freelancers immediately and reimburse when the buyer pays the mission (30–60 days later).
Tesla — Integrated insurance
When you purchase a car from Tesla, you can buy your car insurance directly from them as well. You don’t need to go to a third-party insurer anymore.
DoorDash — Credit
DoorDash, the food delivery service, has partnered with Parafin to offer convenient access to capital to restaurants, with cash advances. They can check their eligibility directly on their DoorDash interface. If they can benefit from the service, they receive the money in 24 to 48 hours. Repayments depend on performance and can be customized by the restaurant.
Uber — Payment cards
Uber uses embedded finance for its drivers. They have access to a payment card, offered by Uber. Instead of receiving their salary at the end of the month, they can spend their earnings on a daily basis.
Shopify — All services, under one roof
Shopify is the poster company for embedded finance. Their initial mission was to offer online store management software. They have branched into financial services: a whole embedded finance Shopify ecosystem exists now. It’s currently the main revenue driver for Shopify. A few examples of the services they offer:
- Shopify Capital is a lending solution for SMEs
- Shop Pay is a 1-click checkout button — meaning an embedded payment system behind it — for e-merchants to implement on their websites
- Shopify Balance is a money management account, built to ‘skip the bank’
Why embedded finance is (probably) interesting for your company
Some companies need to embed financial products from the start, to be able to build their activity. Some others, at a later stage, to develop new services. You’re in the second category? Let’s see what you could gain from embedding financial services into your product. And what’s the key ingredient to make it work.
4 benefits of adding financial services to your customer journey
Did you know that six of the world’s top seven companies are ‘ecosystem companies’? They offer an end-to-end journey to their customers. Embedded finance falls under this trend, matching customers’ demand for integrated experiences.
Take Louise, who is buying furniture online for her new apartment. She chose a houseware marketplace. She’d love to buy most of it at once, but she can’t pay for everything right now. Her options? Asking her banker for a small loan, or waiting to complete her purchases. Lucky for her, she doesn’t need to wait or make any effort to find a solution. The marketplace offers a buy-now-pay-later option. She pays a quarter of the whole amount when placing the order, and will pay in 3 installments for the rest. She’s happy. She even added a piece of furniture she was hesitating upon. As the payment is split, she can allow herself to get it now.
This example shows that embedded finance increases convenience for customers. The marketplace offered a solution to Louise, meeting her exact needs. She bought everything she wanted, spending more money than she thought initially. Louise is likely to check this marketplace first for future home purchases.
What’s in it for you? In a nutshell:
Embedding products massively improve the customer’s experience. It’s a way to delight them even more.
Here are 4 direct benefits of embedded finance for your company:
Improvement of the customer lifecycle with your brand
By offering more services matching customers’ needs, retention gets better. It boosts customer loyalty and generates a better lifetime value from one customer.
Higher adoption rate of existing features
Louise bought more furniture thanks to the embedded BNPL option on the marketplace. Embedded financial products drive the average basket’s growth and boost the conversion rate.
Possibilities of upsell and cross-sell
You don’t have to offer the embedded financial product to all your customers. It can be gated for customers meeting specific criteria. Example, for a SaaS: you add the finance features for some plans only (Gold / Plus).
New source of revenue, to share with your partner
By embedding financial services, your value chain grows. Even if you share revenues with your partner, your company will make higher profits. As a card issuer, for example, every transaction earns revenue. It’s interchange. You can take a piece of it. Some fintechs in the US are free because they earn money from interchange only.
You bring more value and features to your customers by embedding financial services. This means more differentiation, retention, and in the end, revenue.
You still need convincing? Have a look at some results from Shopify:
By 2020, the 10,000 largest Shopify merchants using Shop Pay were enjoying a checkout-to-order rate 1.72 times higher than that of merchants who didn’t enable Shop Pay. Additionally, customers using Shop Pay purchase 35% more on average, and have 6% higher cart values than non-Shop Pay customers. — Source
The number 1 ingredient for success
For embedded finance to work for your company, you have to remember one key ingredient. Make sure it’s part of your core strategy. It may sound a bit silly to say this, but it’s the number 1 reason for success.
First, make sure you’re adding value for your customers. Interview them. Learn their pain points. Keep their needs in mind, all the way.
You won’t have volume if the product doesn’t make sense. The revenue share is the cherry on the cake once usage for your customers is here.
Then, if integrating a financial service into your product is relevant, remember: it will mobilize your teams. Development and product are at the forefront, but you’ll also need finance, marketing, sales… If you’re launching an additional product in your business, the entire company needs to be behind it. Prepare your teams accordingly.
Build or buy: how to choose?
It used to be prohibitively expensive to build your own banking features. Now, it’s a hundredth of the cost. This leads to their democratization.
If you’re considering adding financial services to your business, you’re probably hesitating between building your product in-house or buying an off-the-shelf solution. Both have pros and cons. Here is what you need to know to make your choice.
Build: tailored solution, huge resources needed
If you build your own financial services, you ensure they are tailored to your company. It’s an interesting option if you want to build something that isn’t available on the market. You also have full control over the product roadmap and the feature set.
The main downside is the resources you need. Financial, but also human resources and time spent. Given that your team will need to keep your core business running, you’ll probably need to hire people. Does the ROI make sense? Especially in the long run: you have a continued responsibility to update and maintain the product. Given the requirements of building your financial services from scratch, the time to market is longer.
Consider the regulatory and compliance landscape as well. Financial products come with a full set of regulations and risk assessments to handle. Your company bears the risks, in an industry you may not be familiar with.
Buy: fast deployment, product constraints
Choosing a packaged embedded product makes sense to alleviate the cost of building your own. Especially if your challenges are clear, common, and addressed by existing solutions. You will save on development and maintenance costs.
Opting for an off-the-shelf solution also allows for a fast deployment. Regulatory compliance is handled for you. You can implement and test a product much faster than on your own.
What are the limits of buying an embedded finance solution? Of course, you’ll have a recurring fee to pay to your partner. Depending on the subscription conditions, it can become quite burdensome. You also won’t have full control over the product, which can bring delays in some developments. That’s why choosing the right partner is key.
Embedded finance opens a wide range of possibilities. You can branch into new activities much more easily than in the past. You’re ready to jump on the trend?
