Embedded finance is about taking products that are traditionally thought of as being banking services — such as checking accounts, loans, insurance and more — and abstracting them into a service package that any company can offer as an additional revenue stream to their customer base. Soon enough, nearly every aspect of traditional banking will become integrated as a seamless and invisible feature into every industry’s product or service experience.
For example: say that you are running an accounting SaaS. Why not offer the ability for customers to also generate invoices, get them paid, and hold those funds until salaries are due? Where the original revenue model was monthly subscription fees to the accounting software, now you can also make money by offering financial services.
Another example: imagine you sell high-ticket items — like cars, solar panels, or electric bikes — to consumers? Would it then not be convenient for those buyers to immediately buy insurance right along with their purchase? And while we’re on it, maybe some buyers want to take out a loan to finance their purchase?
Embedded finance allows virtually any company to find ways to offer financial services alongside their main experience at a fraction of the complexity and costs that would have been possible even five years ago. In much the same way that Stripe some 10 years ago enabled developers to take credit card payments on their website with just a few lines of code, so a consortium of embedded finance providers are enabling any company to offer checking accounts, saving accounts, insurance, credit and more at a fraction of the traditional complexity.
Embedded finance is already here. It is just a matter of where you look
Even though this third FinTech wave is still in its infancy, successes are already available in a multitude of markets and industries. Let’s explore a handful of examples, to make it clear where this is headed.
BigTech are all in finance now
Whether it’s an Apple credit card or an offering from Google, Facebook or Amazon, all the big tech companies have now supplemented their software and hardware offerings with extensive financial arms. In the case of Google and Apple these services had an obvious point of integration with their respective app stores, and in all cases they have an enormous user base to immediately tap into. Financial services also provide subtle lock-ins to bring users deeper into the respective company’s ecosystem.
Meanwhile, Chinese tech giants like Tencent and Alibaba are playing a somewhat similar strategy — which we will discuss separately, below.
Tesla to become “a major insurance company”
Elon Musk announced last year that Tesla wants to become a major player in the insurance market. The electric car maker already sells car insurance along with their Tesla cars in the state of California, and plans to roll out insurance offerings across the United States.
The Tesla cases clearly illustrates how embedded finance can allow companies to offer better financial services than banks potentially could: the company plans to leverage the data from its cars’ computers to calculate the appropriate risk profile — and therefore insurance rate — of each driver. Access to the appropriate data enables Tesla to offer a seamless, smooth and competitive insurance experience. According to the Tesla CEO, access to more accurate data should translate into roughly 20% cheaper insurance.
Visa invests in Gojek, the Indonesian-born superapp
Even though the name Gojek might not ring a bell for most westerners, Gojek is a behemoth in Southeast Asia. It offers all your on-demand needs, packaged into one single “super app”: ordering food, transportation, digital payments, hyper-local delivery, and a dozen other services. To give a sense of scale: Gojek completes more daily food orders than Grubhub, Uber Eats, and DoorDash combined, and also executes more trips than Lyft per day.
Within many of its native markets, where banking penetration is low and most transactions are still cash-based, Gojek offers a way for millions of people to leapfrog the entire banking industry and simply have an account with Gojek. Visa invested in a 2019 Series F fundraising to help bring that vision to reality, and the Gojek financial services arm “GoPay” is amongst the fastest growing within its portfolio of services.
Other rideshare companies ranging from Lyft to Grab and others are in a very similar position, all offering increasingly sophisticated financial services to its user base alongside ride sharing alone. Uber jump early on the embedded finance offerings as well, but has since pulled back from financial services.
WeChat and Alibaba are bringing bottom-up financial inclusion to the Chinese market
Chinese superapp WeChat — owned by Tencent Holdings, and the largest standalone mobile app in the world — started its life as a messaging platform much like Whatsapp or Facebook Messenger, but now also offers a complex set of financial services. Due to its wide distribution and deep coverage within the Chinese market, it was only natural for people to want to transact financial transactions via their WeChat app, too. WeChat Pay is now the dominant mobile payment network in the Chinese market.
AliPay originates from the Alibaba family of products, and offers similarly mobile payment services that both challenges and supplements the WeChat Pay network in providing extensive mobile payments coverage in China.
MindBody makes 50-60% of it’s revenue in financial services
MindBody is the definitive leader in class scheduling software for fitness studios, yoga studios, dance studios, and similar. While its logical base revenue model as a SaaS company is a monthly or annual subscription offering, the company now makes over 50% of its revenue by enabling transactions natively on its platform. The money is no longer primarily in the software offering, but rather in being able to capture value on every yoga course and boxing class scheduled.
Stripe valued at $95 billion
In April Stripe became the most valued private venture-backed company in the US, when it’s Series H fundraising put the company valuation at $95 billion dollars. While the company started off in 2010 as a service that offered easy credit card payments for developers, it has since expanded its product range to cover a wide portfolio of embedded finance offerings. It makes it trivially easy for practically any company to offer everything from point-of-sale payments to fraud management, credit risk assessments and much, much more.
Stripe processes hundreds of billions of dollars per year in transactions, of which it charges 2.9 percent of total transaction value and 30 cents for each payment transaction. According to the Wall Street Journal the company reported $7.4 billion in revenue last year. That payment processing network is now expanding to offer deeply integrated financial services into any product or service imaginable.
Where banking and financial services used to be standalone functions, they will now come invisibly embedded into all other business functions
The further unbundling and rebundling of financial services is driven by deep fundamentals: financial services and transactions never truly stand alone — they are always embedded into other functions in our lives. Whether it’s messaging, social, ride sharing, CRM or accounting, in all cases the financial function is simply a component of the actual job being done. In a continuous push to make traditional banking services more and more of a background utility, developers can now simply plug the SDK of any specific unbundled banking activity they might need directly into their application workflow, and make financial services run seamlessly run in the background.
As embedded finance options become more widespread and more easily available to all developers, this trend is unlikely to stall or reverse. As of 2021, the embedded finance trend is only getting started. Others have argued that fintech will simply be the next technology stack of the internet: first connectivity, then cloud, then the ubiquity of mobile, and now embedded fintech to allow financial transactions as part of the basic infrastructure of our connected digital world.
As a happy side-effect, this new paradigm will also give hundreds of millions of extra users access to financial services that they simply didn’t have before. Platforms like AliPay, WeChat Pay, Grab and Gojek have each unlocked access to basic financial services for millions of users. Embedded finance is an exciting development in our western world, but potentially even more disruptive and live-changing in developing economies.
At Vacuumlabs, we are excited to play at the forefront of these developments with a multitude of our clients and partners. Curious to learn more about embedded finance? Listen in on our recent Banking on Air episode with Nick Heller (CEO at tomato pay) and Kevin Stefton (co-founder of untied) that inspired this article and provides more in-depth industry background.