March 29, 2023

The Future of Finance is Embedded

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We at TheVentureCity view the future of tech as more connected and integrated, and finance will be at the core of all decision making and customer experiences. For that reason, we are bullish on emerging trends and startups within embedded finance. Embedded finance is not a new idea, but what is new is the growing number of applications and opportunities emerging within the space. A space that has previously been dominated by consumer payment options with little differentiation is seeing new methods for disruption across every industry and across the value chain. We are excited about what the future holds in the space in industries where core value propositions and finance are still separated. 

What is embedded finance?

Embedded finance is the integration of financial services into non-financial product and service experiences to enable more cohesive customer purchasing experiences. Embedded finance is at work when an e-commerce merchant provides product insurance, a coffee shop app offers 1-click checkout, or a department store offers loyal customers branded credit cards. The embedded finance market grossed $54B globally in 2022, and according to Future Market Insights it is projected to grow to $248B in the next 10 years.

According to Plaid, 88% percent of companies that implement embedded finance capabilities report increased engagement, and 85% say that it helps them acquire new customers. Embedded finance has become a necessary part of non-financial companies’ tech stacks in order to provide superior customer experiences. 

Current state of embedded finance

Embedded finance is already all around us. Retailers, software firms, marketplaces and platforms, telecom companies, and Original Equipment Manufacturers (OEMs), to name a few segments, have all seamlessly incorporated financial products to provide better customer experiences and increase customer wallet share and engagement. The biggest use cases that have amassed market share thus far involve consumer payments and lending, but many more are emerging quickly. 

Source: Chris McCann, Partner at Race Capital

Some core products these companies have deployed include deposits, payments, card issuance, and lending. For example, buy-now-pay-later (BNPL) grew exponentially over the past 5 years, a core product offering within the unsecured lending vertical that has allowed marketplaces and retailers to attract new customer segments and incentivize stronger spending behavior. 

Source: McKinsey & Company

These core embedded finance product offerings are not all created equal from a revenue generation perspective. Consumer payments has led the way historically as the greatest revenue driver within embedded finance.  

Source: Bain & Company

We are excited about emerging embedded finance applications (many in the B2B sphere) that stand to grow substantially given new technology advancements and untapped market opportunity. Some include insurance, investing, customer loyalty apps, digital wallets and DeFi, accounting software, and many more. 

Embedded Finance Value Chain

A few key buckets of distributors have emerged that have adopted embedded finance products in meaningful ways. However, they do not have the capabilities to deliver end-to-end solutions themselves given their specific core competencies, difficulty associated with standing up complex technical financial solutions, and time needed to develop strong capital sources in cheap and regulated ways. For those reasons, they typically work with technology providers and balance sheet providers to complete the value chain. 

Source: McKinsey & Company

Technology providers (fintechs) provide the platform through which distributors can access, customize, and offer embedded-finance products. Companies like Marqeta, Unit, Bond, and Alviere operate platforms that offer distributors products such as deposits, money movement, and lending. 

Balance sheet providers (banks) offer access to capital for financial products. They often partner with technology providers (and in many cases are leveraged through open banking) to create an integrated embedded-finance offering for distributors, and also are building their own technology solutions for distributors. For example, Stripe partners with Goldman Sachs and other banks to offer payment solutions to platforms and third-party marketplaces.

The race between banks innovating and fintechs disrupting

Fintechs are successfully inserting themselves in the finance value chain between balance sheet providers and distributors due the speed, ease of use, digital nature, and technical sophistication they offer. The fintech vs. bank war to acquire market share draws parallels to Marc Andreessen’s infamous article Why Software is Eating the World: fintechs are gobbling up customers quickly while the legacy, large incumbents struggle to innovate and adapt to changing consumer preferences. 

Where does this war stand today? Banks still dominate most segments of the financial services market, according to a report from Boston Consulting Group titled "Embedded Finance and BaaS: Unlocking the Full Potential of Open Banking". BCG found banks hold 70% share of higher margin segments such as mortgages, loans, and credit cards. Banks also have an 80% share of lower margin businesses such as savings accounts and checking accounts. However, the tide is slowly shifting in favor of the newcomers as fintechs continue to capture more market share due to their speed of execution, ability to cheaply and efficiently acquire customers, and nimbleness to adapt to changing market trends. Some banks are fighting back though - Cross River Bank is an example of a bank building in-house BaaS architecture to capture more of the value chain as a balance sheet + technology provider.

Company Spotlights

We at TheVentureCity have been actively investing in the embedded finance space for years. We are constantly looking into verticals where opportunity for disruption exists for fintechs offering superior financial transparency, data, and speed. Here are some portfolio companies of ours that are reaching new heights and blazing new paths within embedded finance. 

RecargaPay (São Paulo, ‎Brazil) - RecargaPay is a Brazilian super app that is a complete ecosystem of financial services and mobile payments. Their product offerings range from bills, transportation cards, loans, prepaid credit cards, gift cards, prepaid tv, and many other services. RecargaPay has been able to capitalize on multiple revenue streams - they started as a consumer play where they own the consumer relationship through an app. However, they have moved to B2B embedded payments to grow their user base and product offerings. 

Boopos (Miami, Florida) - Boopos believes that entrepreneurs deserve access to financing options, regardless of their personal connections, credit history and other limiting factors. Boopos built an intelligent, fully automated loan underwriting system that provides fast, flexible, and fair financing options. Boopos focuses on financing SaaS and e-commerce business acquisitions and helps buyers to find ideal target companies.

Devengo (Madrid, Spain) - Devengo embeds real-time payment solutions into B2B company products to create remarkable experiences. Their API enables business customers to automate account creation and send and receive money in real-time automatically and programmatically. Devengo’s primary use cases relate to real-time payroll, payment initiation service providers, and instant refunds.

Gigapay (Stockholm, Sweden) - Gigapay is a fintech building an accounts payable solution for the creator economy that offers a one-stop solution for compliant creator payouts. Their solution removes friction related to tax reporting, payout flows, and removing the legal and administrative friction in vendor onboarding while also facilitating scalable instant payouts to a high-volume of creators for task-based digital work.

Goin (Barcelona, Spain) - Goin is a super app to help people save. Goin helps users save more from payment and income, make fixed contributions, and improve habits to increase their overall financial wellbeing. 

Uelz (Madrid, Spain) - Uelz helps businesses manage and customize customer payments from a single platform. Uelz allows businesses to offer different payment methods to customers, allowing for more flexibility. Uelz partners with businesses to help them automate their customer subscriptions and one-time payments in seconds. This involves form of payment, automatic payment retry, protecting payment data, and easy integrations. 

Looking to the Future

We at TheVentureCity are consistently monitoring trends within the embedded finance space to find startups that are building within sub verticals that stand to benefit most from fintech disintermediation. Below is a figure that describes well how some industries have effectively incorporated embedded finance applications, while others are more nascent and open to disruption. 

Source: Bain & Company

Forecasting where there may be exceptional opportunities, we can refer to Statista’s research of where different subsects of embedded finance are seeing indicators of strong growth. Their research aligns with our worldview: payments will continue to lead within the space and enable new industries to capitalize on better consumer digital experiences. Embedded insurance stands to grow tremendously going forward, in addition to lending. We forecast the number of B2B applications to expand exponentially, whereas traditionally consumer use cases have led in the space (ex: P2P payments, BNPL, travel insurance, etc.).

Source: Statista

There is tremendous opportunity outside of just these three areas though, especially in the enterprise fintech space. Already, $114B has been deployed into nearly 3,500 companies across several sub verticals (as of Q4 2022). Payments leads the way unsurprisingly, but several other categories are emerging as interesting trends within this growing space. We are interested in new enterprise fintech applications which bring alternative, non-obvious use cases to underserved industries where finance is unincorporated into traditional tech stacks. Products that facilitate better transactions, easier user experiences, or more streamlined value chains with less intermediaries are of great interest to us. 

Source: Pitchbook

For us, we see tremendous opportunity in the embedded finance space. At the intersection of experienced and passionate founders, novel technology advancements, product-led growth, and undisrupted large markets that stand to benefit from fintech disruption - that is where we are eager to invest next in embedded finance. 

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