The Next (R)evolution in Embedded Services

Here’s why more merchants and service providers are starting to embrace embedded finance.

This year marks the 25th anniversary of PayPal. While e-commerce existed in some form as early as 1979 (once any new technology arises, it’s not long before someone monetizes it), PayPal changed the game for small- and medium-sized businesses (SMBs). Sellers on marketplaces like eBay could instantly close transactions instead of waiting for a check to arrive through the mail. So, from 1998 to 2000, eBay’s user base grew a staggering 2,400% to 12 million.

Since then, digital transactions have evolved in lockstep with the growth of the Internet. Today’s broad array of embedded-payments solutions allow small and medium-size businesses to collect from customers seamlessly on their platforms. Bain & Co. estimates embedded transactions exceed $2.6 trillion per year worldwide.

But now the industry faces the compelling question of how to continue applying this expertise to keep aggressively growing. The answer is embedded finance. Imagine the possibilities opened by introducing more advanced services, including direct debit automated clearing house, business checking and savings accounts,
and more.

Removing Friction

Embedded finance poses a challenge: how to continue to remove friction from money in motion.

Embedded payments have closed the gap between the customer’s desire to purchase and their ability to do so. When it’s easy for the customer to buy, businesses don’t have to work so hard to close the sale. They can focus on adding features, improving the customer experience, and providing more safety and security.

So where is the next friction point downstream? The natural answer is that it lies between the payment processor and the financial institution. Business owners need to move money between their business platform and their financial institution, from which they then often put money back into the software to pay vendors or manage inventory or perform any number of other business activities.

Could embedded finance simplify this flow? Embedded business checking offers a solution. Service providers keep money in their ecosystem and offer a valuable service. Customers can deepen their relationship with the service provider, simplify their business operations, and diversify their banking relationships. It’s a true win-win.

A Proving Ground

Software providers, sometimes called independent software vendors (ISVs), present an ideal proving ground for embedded finance to flourish. They have an appetite for disruption, as well as established, trusting relationships with their customers (for example, SMBs). Boston Consulting Group reports that many SMBs rely on the advice of their business software providers as they make key decisions about how to run their businesses. Indeed, they depend on this source more than they do on industry publications or their bank.

Software providers are also eager to expand their solution set and have the technical know-how to quickly embed financial services into their platform. Every new solution that keeps customers within their ecosystem brings them one step closer to becoming their industry’s super app. Andreessen Horowitz estimates embedded finance can help software providers generate more cash flow by a factor of 2x to 5x. It’s hard not to get excited.

So, the next logical question is…how to do it.

Embedded payments leverage a single, existing infrastructure. The front end of this infrastructure continues to evolve rapidly, but the back end hasn’t changed much in decades. In contrast, embedded finance combines multiple legal and regulatory regimes across payment acceptance, banking, payables, accounting, and more.

The right embedded-finance partner brings “whole product” to the partnership. This partner is eager to help manage the fraud, identity theft, and chargeback risks associated with accepting payments.

A strong and effective underwriting process approves customers quickly and empowers underwriters to work with flagged customers to get an approval. If you’re evaluating embedded- finance partners now, ask them how quickly they approve the average customer and how often they resolve flagged clients.

The right embedded-finance partner also won’t hand you a bunch of application programming interfaces and wish you well. They’ll know that the hardest thing to change is existing customer habits, and they’ll have a plan to drive adoption among your customer base.

Imagining the Future

Thoughtful data collection and analysis can provide life-changing results and supercharge business growth when applied alongside embedded finance.

The possibilities are bounded only by one’s imagination. Here are just a few:

• A car-repair shop software provider notices its customer’s schedule is consistently full and extends a much-needed pre-approved line of credit to add another bay;
• A music store point-of-sale provider recognizes instrument repairs are the most profitable line of business and submits the names of five local, experienced instrument artisans looking for work to increase capacity;
• A dental-office management platform sees that the owner is nearing retirement age and proposes an employee stock ownership program (ESOP), allowing the dentist to cash out and reward his employees with equity in
  the business.

Indeed, such services as business lending, human resources, accounts payable and receivable, and succession planning may just be the beginning. Such insights and offers deepen customer relationships and create the potential to generate income.

Embedded payments succeed because they offer an essential service to businesses and a seamless experience to customers. Now, embedded finance is a bold new step forward, Think of it as money-as-a-service.

—Tom Bell is chief executive of Maast.