Where embedded fintech works: three models that are growing fast

The future of innovation is global. We discuss it here.

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This post was originally published on my Forbes column here.

Embedded financial services– whereby any company layers financial services into its offering – is all the rage in fintech. Indeed, I’ve also been a longtime proponent.

Yet for many, what this means in practice remains amorphous. To make this real, we cover three rapidly growing and exciting embedded fintech categories.

1. Marketplaces embed financial services to turbocharge their service

An ecommerce marketplace brings merchants and consumers (sometimes businesses themselves) to meet and transact – think eBay or Amazon on the consumer side and Alibaba on the business side.

Embedded financial services can be a win-win.

Many merchants (particularly small businesses) face a ubiquitous challenge: capital constraint. And with more capital, they would purchase more inventory to sell more on the marketplace.

Whereas traditional financial services can be hard to access, expensive or require personal guarantees, marketplace providers benefit from unique structural advantages. They can acquire merchants cheaply – after all they are already customers. With direct insights into sales velocity, customer quality, etc, marketplaces have unique underwriting data they can use. Lastly, (and critically) because the funds will get disbursed and transacted on the platform, marketplaces don’t just ensure the money is spent productively, they have a window into getting paid back. In short, they benefit from the Fintech 3Ds Trifecta.

And as a bonus, embedding financial services is good for the platform. Loans as described above drive volume. Other products, like bank accounts, invoicing and insurance drive retention and new revenue streams.

It is a win-win. No surprise we’ve seen an acceleration of these providers on various mega marketplaces. Amazon has Amazon Capital, which is reported to have reached over 1 million sellers and completed over $50b in transaction volume. Shopify similarly has its own capital program. Increasingly, so do smaller more specialized marketplaces all over the world. For example, Sabi a B2B marketplace in Africa (where I am an investor) has been building out its own operations, a phenomenon I expect to see expand in the budding category. To fuel this growth, a new crop of players are emerging to power this category further. For instance, Parafin and Credilinq provide marketplace lending as a service in the US and South East Asia respectively.

2. Business software providers monetizing their ease of service

A range of software tools are emerging to facilitate everything from, trucking, to gyms to doctors’ offices scheduling, logistics and supplies.

If the software works well, its customers (the end businesses) depend on it day-to-day. In short, they become the operating system of the business.

Through this relationship, business software providers can do what embedded fintech does best: meet customers where they are and solve a real need, and monetize on the ease of service.

For example, Toast provides a simple software system for restaurant owners to manage their operations. But for them, fintech is where the action is – over 80% of their revenue comes from payments. They provide a simple solution for businesses and the more customers like them, the more they use it.

Another example, ZenBusiness (a former portfolio company) provides a business-in-a-box solution for small businesses, covering everything from formation to websites to business documents. Fintech is a natural extension. They can onboard easily based on how much they already know about the business, and expand their range of products to their clients.

A variety of software categories are ripe to become centers for embedded fintech, notably in payroll, ERP and others.

3. Consumer companies putting their money where their mouth is

Consumer companies build their entire existence into developing a relationship, brand and reputation with customers.

Embedded financial services can be a tool to deepen this relationship, afterall they have pre-existing customer distribution.

For me, one of the most exciting areas is embedded insurance, to allow companies to stand by their product with customers, and improve the experience.

For example, companies like Spot embed healthcare insurance into the experience of purchasing a ski lift ticket. If you get hurt during the runs, your care is automatically taken care of. In that awful event, the experience of care is far more seamless.

I believe a similar shift is underway in cars. As the world drives (pun intended) towards autonomous software, the car manufacturer (or software provider) should stand by their service and embed the insurance. Tesla has already been going that direction with their in-house insurance product.

BONUS: Building the holy grail - a superapps where services are underpinned by a financial backbone

No embedded fintech list could be complete without mention of superapps. A superapp is a single platform that is a gateway to a range of other services. WeChat in China is the premier example. It is at its core a social network, but through it users can complete a range of activities, from messaging, to games, to running mini programs (in some ways rivaling the app store).

Underpinning the ability to serve customers is embedded fintech. The WeChat account is not a social network, but also a payments account with a store of value. Critically, the fintech platform is not just a revenue line. It catalyzes everything else particularly via payments.

Here in the US, many have looked to leverage the superapp concept. UberUBER +3% has been trying to expand beyond ride sharing (mimicking perhaps innovation elsewhere). Notably, AppleAAPL +1.9% has been building out its own wallet services, with a credit card, buy-now-pay-later and a broader range of payment offerings.

In my view, if any superapp is successful in the US (and anywhere globally), they will have to be a successful fintech business.

Why this is important

Where will we go from here?

Embedded fintech is poised to have strong impact in how financial services are delivered and by who. How it manifests itself will depend on where it is embedded, how it changes the original product and what the intentions are.

The stakes are high. Research from Andreessen Horowitz suggests it can increase unit economics for many SAAS businesses by 2-5x. It also allows new and stronger relationships with customers and new product categories to emerge.

One thing is clear: we are in the early innings of embedded fintech.