Embedded finance is everywhere
You have probably used embedded finance in your daily life as a consumer— paying for an Uber ride with your connected bank account, making an online purchase with Apple Pay, checkout using an e-wallet, or sending money to your friends using Venmo.
Today, more and more non-bank companies are providing banking services such as payment (WeChat Pay), insurance (Airbnb Host Protection Insurance), lending (Amazon Lending), and wealth management (Chime). As a business, you can easily integrate embedded finance solutions, e.g. offer customers checkout using Stripe, “pay later” options using Affirm, or build your own digital wallets using Solarisbank —as an in-app, in-browser, and native banking feature.
Angela Strange, General Partner at a16z captures this trend perfectly—every company will be a fintech company and encourage companies to adopt embedded finance as a monetization lever. There are more exciting opportunities to deploy, and how you can expand revenue streams as a business. Let’s dive deeper.
Key players in the ecosystem
- Non-bank companies offering financial services: Uber Wallet, Lyft Cash, Apple Pay, Google Pay, Samsung Pay, WeChat Pay, Alipay, Facebook Pay, Amazon Pay, DasherDirect by DoorDash, Instacart Mobile Checkout, WhatsApp Payments, Grab Pay
- Non-bank companies offering lending services: Shopify Capital, Amazon Lending, Square Capital, PayPal Capital, Toast Capital, Walmart
- Buy now, pay later (BNPL) solutions: Affirm, Afterpay, Klarna, Bread, Sezzle, Splitit, Perpay, Zip (formerly Quadpay), Pay in 4 by PayPal, Hokodo, GoCardless
- Embedded insurance solutions: Trov, Cover Genius, Clyde, Boost Insurance, Tint, Extend, Element, Open Insurance, Salty
- Payment facilitators (PayFac), provide payment gateways: Stripe, Square, Paypal, Venmo for Business, Adyen, Braintree, Chargebee, 2Checkout, Authorize.net
- Financial data aggregators, connect open banking data to businesses: MX, Finicity, Plaid, Yodlee, CashEdge, Mono (Plaid for Africa), Brick e.g. customer data, account data, and transaction data
- Banking-as-a-service (BaaS providers), help companies integrate financial stack: solarisBank, Synapse, Galileo, Marqeta, Railsbank, Bankable, Treezor, 11:FS Foundry, Cambr, ClearBank; BaaS with B2C offerings: Starling Bank, Fidor Bank, BBVA
- Neobanks, digital-only mobile banks: Chime, Revolut, N26, Wise, Current, Aspiration, Varo, Monzo, Starling, Monese; Business or corporate cards: Brex, Mercury, Novo, Ramp, Stripe Corporate Card; India-based neobanks: InstantPay, Niyo, Open
- Crypto-banking-as-a-service: Nium, OpenPayd, Vesto
What problems do they solve?
- Payment processing without going through a third party. According to a16z, a native digital payment experience can boost 2x ~ 5x revenue per customer. Stripe lets you embed checkout and payment methods on your website or mobile app. Square helps you create your own point-of-sale on any iOS or Android device. Finix helps companies accept payments, manage payouts, and onboard merchants.
- Increase conversion rates with flexible payments. “Buy now, pay later” (BNPL) solutions like Affirm, Afterpay, Klarna allow online businesses to finance online purchases for shoppers. According to McKinsey, BNPL boosts sales conversion in categories like apparel, laptops, and beauty products; 20% of research respondents say that they would not have made a purchase without installment options.
- Serve the unbanked or underbanked. Plaid provides services for people with bank accounts. Brick differentiates by serving people who are underbanked in Southeast Asia; Mono serves the African markets where the majority of the population doesn’t have access to bank accounts or lending services. The same solution can emerge in different geographies due to different financial regulations.
- Help businesses access bank transaction data. Companies like MX, Finicity, Plaid connect businesses to financial institutions, aggregate financial data, and provide personalized financial services. So that users can see their savings, credit card, bank balance, investment, mortgages from various linked banking providers in one place, and make transactions in a native workflow.
- Provide an alternative to traditional lending services. Bank loan approval is a difficult process for self-employed entrepreneurs and freelancers. Shopify offers small business loans between $200 to $2,000,000 to its merchants. Toast, a restaurant management app offers restauranters between $5,000-$250,000 loans for restaurants that already work within the Toast network. GrabFinance by Grab offers loans to drivers to improve cash flow.
There are different ways to create multiple revenue streams and monetize in the embedded finance space—either as a provider, enabler, or facilitator. For example,
- Payment transaction fees. Most common in payment processing solutions. For example, Stripe charges 2.9% + $0.30 per transaction in the United States to accept card payments online; and different rates for international transactions. Square charges a flat rate of 2.75% for in-store transactions; 2.9% + $0.30 per transaction for online transactions. Affirm charges merchants a fee whenever shoppers utilize the “pay later” option at the checkout.
- Factor rate or flat fees. Most common in non-bank companies offering lending services to their existing clients. Shopify Capital charges a 10% remittance rate of your daily sales revenue until the full amount of advanced cash has been fully repaid. Square Capital offers flat fees repayment by charging a percentage of your daily card sales through Square. PayPal Working Capital also uses the same model. This model provides predictable revenue by earning a share from sales and you don’t have to take less if merchants repay faster.
- Lending interests. The opposite of flat fee repayment. Grab offers cash loans for drivers and charges an interest rate depending on the terms of the loan. Udaan, a B2B trade platform in India offers working capital for its retailers and charges around 15-18% interest rates.
- Subscription. Acorns, the investing app offers a Personal & Family subscription bundle, instead of charging transaction fees. According to Forbes, the company added 2 million users between March 2019 and March 2020. Klarna charges $30 per month (on top of transaction fees and variable fees) for their “Express Button” product.
There are massive opportunities for building in the embedded finance space. This section explores the market evidence, what the future of fintech will look like, and answer the “why now” question for your investors:
- Increasing demand for fintech solutions among the millennials and Gen Zers. By the number: 37.5% of Gen Zers would only choose a digital bank. They represent $3 trillion in spending, are digital natives, and are familiar with the mobile-first experience, on-demand, and peer-to-peer transactions experience.
- Rising expectations for eCommerce experience. Online shoppers now expect a one-click payment, in which payment data is filled in automatically from the previous purchase. For merchants, one-click checkout increases their revenue by an average of 20%. Embedded finance solutions are well-positioned for providing speed, flexibility, and native integration for users.
- Banking-as-a-service (BaaS) is the main catalyst for embedded finance. BaaS providers like Starling Bank, BBVA, solarisBank have been established to help non-bank companies access payments, banking, lending, and security components. It’s easier than ever before to leverage third parties APIs and build new fintech solutions for niche markets. Similarly, the rise of embedded finance will drive the demand for new BaaS solutions.
- Amazon’s recent partnership with Affirm. Amazon offers “pay later” options for items over $50. Take that as a signal, more and more consumer and D2C brands will become “micro-financing” companies to finance consumer purchases who don’t have upfront cash but intend to split purchases into zero fee installments. Solutions like Affirm, Klarna will rise to capture the e-commerce space and potentially explode into other industries.
- Contactless payments will drive the demand for embedded finance. COVID-19 accelerates customer adoption of Apple Pay, Google Pay, and other mobile wallets for retail purchases. According to Forbes, over 83% of the 1,000 survey respondents have used contactless checkout in the past year. Solutions that enable contactless payments will help traditional retailers to adopt digitization.
- Online marketplaces are the potential adopters of embedded finance. Airbnb offers Host Protection Insurance programs. Fair allows consumers to lease a car using their smartphone. In the future, any online marketplaces will likely offer different financial services to their customer base. Solutions that turn any marketplaces into a fintech-lending-insurance-payment company will help create additional revenue streams for businesses.
- Affirm for cryptocurrency. Zip, a BNPL solution has recently begun accepting bitcoin as a form of payment and is integrating cryptocurrency trading functionality (source). As alternative currencies (Bitcoin, Ethereum, Litecoin, etc.) continue to explode, solutions like Affirm but allowing eCommerce merchants to easily integrate “pay later with crypto” will thrive in the future of the Internet. One example is @pay, a “buy now, pay later” alternative powered by blockchain.
- Influencers/creators banking solution. Brex targets banking for startups. Lance targets banking for freelancers. Successful creators (e.g. YouTubers or Instagram influencers) who are making a 6-figure from multiple income sources need to find a way to organize their finances. The solution: All-in-one-card to pay business expenses, create embedded checkout for client payments, separate business and personal finances, calculate tax deductions, and view all income sources in one place.
- Help any businesses offer embedded insurance. Automotive companies offer car insurance for car owners. Shopify offers shipping insurance for online merchants. What if businesses can drag-and-drop various insurance products from a marketplace and offer embedded insurance products that integrate natively in an invoice; customers can one-click purchase and have access to an interface with their insurance details?
- Integrate embedded finance in your existing business: Use Tint (no-code insurance) or Trov to offer insurance products for your customers. Scale your eCommerce revenues by adding a “Buy now, pay later” button using Affirm, Afterpay, Klarna. Scale your SaaS revenue by offering in-app wallet/credit (using any BaaS providers) to increase customer loyalty when they leave a review or refer a new customer.