Secure SaaS Success: Embedded Finance as a Competitive Advantage
- 5. EMBEDDED FINANCE The Role of the Vertical OS Embedded Finance Overview Embedded Finance as a New Value Proposition Q & A AGENDA
- 6. SMBS INCREASINGLY ADOPT VERTICAL-SPECIFIC SOFTWARE SOLUTIONS TO RUN THEIR BUSINESSES 30% 49% 2018 2022 +63% The % of SMBs using vertical-specific software to run their business has increased >60% since 2018 1. BCG survey % SMBs using vertical-specific software to run their business1 71% 73% 61% 59% 55% 49% 48% 49% Digital content Healthcare Personal services Professional services Retail Field Services Restaurant Overall % of SMBs using vertical-specific software to run their business by vertical % of SMBs using vertical-specific software to run their business by vertical
- 7. Vertical software is becoming the single most important destination for SMBs…this has led to the emergence of the “Vertical Operating System (OS)” INTRODUCING THE “VERTICAL OS”
- 8. SOFTWARE PLATFORMS WILL SEE THE LARGEST SHARE OF REVENUE GROWTH WITHIN THE US MERCHANT ACQUIRING MARKET 1. Credit Suisse, 2. Expert Interviews, ISV competitor analysis Merchant acquiring revenue forecasted to continue shift towards software platforms and their payment partners/enablers Platform and payment enabler revenues expected to grow 75% from 2021 through 2026 with embedded payment penetration growing from 15% to 29% 2022 2027E $24.3B $13.5B +80% Platform and enabler revenues from US consumer payments, ’22-’27E 33% 32% 26% 14% 17% 21% 24% 33% Enterprise 2022 2027E SMB Direct Software platform Payments Partner % change +9% +4% -12% -1% $33B $45B
- 9. THE VERTICAL OS IS OFTEN THE MOST COMPREHENSIVE AND TRUSTED RELATIONSHIP FOR AN SMB “The vertical OS owns the daily workflow for all employees and the foundational customer unit. This allows it to abstract away other downstream systems of record, like Quickbooks, with proprietary add-on software” – a16z
- 10. DEFINING EMBEDDED FINANCE Happens in a trusted brand’s digital experience Happens at a moment of need Brand has control over the experience Leverages customer data already in the ecosystem to tailor the experience/offer x Requires leaving the brand’s experience/ecosystem x Involves engaging directly with less trusted or unknown third parties x Does not typically arise at any triggered time of need (i.e. random e-mail campaigns) Embedded Finance: Non-Embedded Finance:
- 11. EMBEDDED PRODUCTS WITHIN A VERTICAL OS Customers/Merchants are presented relevant products within the Vertical OS Existing data within the system tailors pre- approved offers Embedded Capital Account View Embedded Finance Vertical OS can provide centralized and reconciled data across products Customers/Merchants use the products within the same ecosystem
- 12. EMBEDDED FINANCE ENABLES MERCHANTS TO ACCESS FINANCIAL PRODUCTS THROUGH PLATFORMS THEY TRUST $58B+ Global market size for embedded finance1 2 to 5X Revenue increase per user for SaaS businesses2 that embed financial products 29% Global CAGR between 2023 and 20321 EF products Platforms ...and increase the value and stickiness of your platform. Platforms can leverage embedded finance products to integrate financial products into the merchant journey… With embedded finance you can broaden the scope of your offering while continuing to be a trusted partner to merchants, an essential component to overall conversion 1. Global market size in 2022; Global Market Insights, "Embedded Finance Market" Oct 2023 2. Andersen Horowitz "FinTechScales Vertical SaaS" Aug 2023
- 13. EMBEDDED FINANCE NOT ONLY BENEFITS YOUR MERCHANTS, BUT ALSO YOU Benefits to you Increase customer satisfaction Enhance the value of your offering, improving brand perception by 11%2 Create new revenue streams Open new revenue streams with various EF products Control and get access to new data Tailor your merchant’s experience with new visibility into financial data Benefits to your merchants Convenient, fast access Targeted offerings Access a variety of financial products and receive capital funding in days Review personalized financial offerings based on your business as only 32% of SMBs feel their bank understands their needs3 Revenue from embedded Finance $58B 1.Publicis Sapient, "Making Embedded Banking Work", 2023 2.McKinsey Loyalty Benchmarking Database 2022 3.J.D. Power Small Business Banking Satisfaction Study, March 2020
- 14. SMBS INDICATE STRONG DEMAND FOR EMBEDDED PRODUCTS FROM THEIR VERTICAL OS 84% Of business would explore financial products from their business software tool if they were offered 76% Are willing to pay a premium for such a one- stop shop solution across financial products Unit, Airwallex, a16z 2-5x Increase revenue per user by embedded financial services into their platform
- 15. 15 THERE ARE A NUMBER OF COMPELLING USE CASES TODAY, AND WE’RE STILL IN EARLY INNINGS Lending Issuing Treasury management 2 Consumer deposit accounts to allow employees to receive and hold cash 3 Virtual accounts to allow banking segment funds for management 4 Closed-loop digital wallets to support micro payments 5 Open-loop digital wallets to pay across networks from one centralized wallet 1 Merchant deposits account to help separate personal/ business finances 1 3 Virtual credit card issuance to allow real-time activation and instant use 4 Card program mgmt. tools to efficiently perform card activation, deactivation, blocking, and dispute resolution 2 Rewards based on transactions to increase loyalty and drive purchases Commercial credit card issuing to manage employee cashflow/expense 4 Pre-approved unsecured working capital loan based on transaction flows 6 Earned wage access for gig workers to draw down on salary 7 Trade financing for cross- border lending 8 Embedded overdrafts to enable user instant access to short term fund on a deposit 5 Secured loans for employees based on salary 2 Merchant cash advance to access credit based on merchant revenue 3 Digital and physical POS financing to consumers through BNPL 9 Just in time funding for purposeful funding over an invoice on a virtual card 1 Invoice factoring to access capital faster based on receivables 4 Accounts payable automation from invoice scanning, through to payout to prioritize payments for identified suppliers 5 AI based order-to-cash / receivables solutions to reduce DSO, increase collection rates and reduce fraud losses 2 Save-now-buy-later treasury mgmt. to help merchant reach savings goal 3 Cash / liquidity management forecasting and insights to recommend how and when to pay 1 Supply chain financing to access capital based on confirmed orders 6 Instant settlement via prepaid card debit card, TCH RTP 2 Digital payment gateway for card not present transactions 3 Multi-currency payments to support different countries 4 Cross-border payments for international supply chain management 1 POS payments for card present transactions at merchants 5 Unified payment engine to make across-border / channel payments while capturing information from physical invoices and ERP systems 7 Low-cost closed loop payments to gig workers and merchants 6 Procure to pay B2B one- stop-shop to offer suppliers sourcing, one view of payables and receivables and access to Supply Chain Finance Payments Deposits Emerging Opportunities 1 Payroll 2 Insurance
- 16. 16 SMB DEMAND FOR DEPOSITS AND CARDS IS HIGH ACROSS VERTICALS; MCA STRONGER IN HIGH-VOLUME VERTICALS; TRADE FINANCE STRONG IN B2B / LARGE TICKET VERTICALS Strong Limited or none Medium Demand intensity: Demand by industry vertical Merchant demand for deposit accounts, cards and embedded A2A spans industries, as these are core to day-to-day operations Trade finance has strong demand in big ticket industries, i.e., Healthcare2 and B2B, where invoices are commonly used Merchant cash advance is most demanded by high-volume/small ticket firms, including retail, restaurant, grocery with more predictable revenues but lower margins Limited evidence of demand for cross-border payment capabilities by SMB merchants, although some demand by retail and B2B (sometimes facilitated by marketplaces) Larger ticket Higher-volume Restaurant Transpor- tation1 Gas Retail Healthcare Grocery Lodging & Hotels B2B Product Cross-border payments Unsecured loans Debit card Merchant cash advance Trade finance Credit card Embedded A2A Category Lending Deposits and money management Instant settlement Merchant deposit account 1. Taxi, bus and truck companies, movers and other transportation businesses with or without own fleets 2. Healthcare finance is a large market, but product specifications have differences vs. trade finance Source: McKinsey 2022 SMB Survey, N=500 respondents; Question asked: “Which of the following financial and business management products do you use today?”, “Which of the following financial and business management products are you most likely to use in the next 6-12 months?”; ISV and merchant expert interviews
- 17. 17 THE HIGHEST VALUE EMBEDDED FINANCE OFFERINGS REMAIN CONSUMER PAYMENTS, B2B LENDING, AND BAAS Payments Lending Cards $21 Billion $1.3 Billion $11 Billion Estimated 2027 US Market Size by Product
- 18. PAYMENTS REMAINS THE LARGEST EMBEDDED OPPORTUNITY
- 19. 19 EMBEDDED PAYMENTS IS THE FIRST STEP TOWARDS BECOMING A FINANCIAL COMMAND CENTER FOR CUSTOMERS
- 20. Increase Revenue and Margin Comprehensive Product Set Customer Retention Customer churn reduced; embedded payments increase switching cost for the end customer Cleaner Customer UX Payments embedded within the platform makes for a stronger UX and more frictionless ecommerce Increase ARR; generate a large share of transactions fees charged to end users, increase TEV PAYMENTS ANCHOR YOUR BUSINESS EXPERIENCE Embedded payments help move your platform towards an "all-in-one" vertical solution
- 21. EMBEDDED LENDING IS A BROADLY APPLICABLE AND HIGH DEMAND PRODUCT WITH SIZEABLE REVENUE OPPORTUNITY
- 22. SMBs do not have sufficient cash buffer Half of all small businesses hold a cash buffer of less than one month Traditional bank applications are long It takes an average of 6 weeks for a merchant to go through a standard bank process Lenders charge predatory rates Alternative lenders can charge up to 350% APR SMBs denied due to poor credit scores Banks and alternative lenders may take personal credit scores into account TRADITIONAL FUNDING IS FAILING SMBS *Source; Credit Suisse
- 23. BENEFITS OF EMBEDDED CAPITAL Increase GMV* Merchants see an increase in GMV after taking capital Drive loyalty** Merchants will take a second or third offer Expand your offering** Merchants more likely to try a new product offered by platforms 36% 89% 87% *Source: Shopify **Source: Parafin, December 2022
- 24. EMBEDDED CARD ISSUANCE AND BAAS ARE SEEING STRONG EARLY ADOPTION SIGNALS
- 25. TRADITIONAL EXPENSE MANAGEMENT LEAVES SMBS IN THE DARK Difficult to see where money goes Fragmented picture of spending with expenses scattered across spreadsheets, paper receipts, and personal cards. Slow & Painful process Time-consuming manual expense reports and reconciliations are a hassle for everyone involved. Inaccurate Data & Hidden Costs Manual expense tracking is prone to errors. “Misc. expenses” often hide duplicate or unnecessary spending. Budget Overruns Limited visibility often leads to exceeding budgets; jeopardizing financial goals.
- 26. BENEFITS OF A CARD ISSUING PROGRAM Benefits of a Card Issuing program Engagement and Retention New Revenue Streams Unlock Transaction Data
- 27. SCALING EMBEDDED FINANCE EXAMPLE Software Platform C A P I T A L I S S U I N G A D D I T I O N A L U S E C A S E S Phase 2 Phase 2 Phase 3 and beyond P A Y M E N T S Phase 1 Airwallex Integration into the right Embedded Finance proaccess to an ever- increasing suite of products leverages the existing automated funding flows and data exchanges to ensure a seamless experience for software platforms and their customers EF Provider Suite
- 28. 28 A COMPREHENSIVE EF SOLUTION BRINGS VARIOUS TOOLS WITH A RANGE OF PRO-, LOW-, AND NO-CODE INTEGRATION OPTIONS Ready-to-use email templates for merchant product offers Off-the-shelf product offer and application widgets to embed into your existing platform All-in-one portal to manage embedded financial offers, review program analytics, and troubleshoot technical issues APIs for servicing metrics on your merchants’ active EF products to integrate into your platform Merchant portal Login-free portal for merchants to review and understand embedded finance use cases, apply, and see high-level servicing details on active products Marketing- ready email campaigns Embeddable widgets Developer portal Servicing widget APIs
- 29. VARIETY OF EMBEDDED WHITE-LABELED EXPERIENCES Widget Offer page Merchant dashboard Email offer Widget Merchant dashboard
Editor's Notes
- #6: SMBs in US
- #7: Why the growth in vertical specific software to run a business? Deep expertise tailored to the vertical. Customer flows, stakeholder engagement, value added services relevant to the industry. The software “understands” the user. Highlight some of the vertical specific language I nthis storage unit example: ”facility websites”, “tenant insurance”, As a result, these vertical operating systems are becoming the single most important destination and relationship in the eyes of an SMB. Spending 80-95% of their time in that specific software compared to others.
- #8: One of the common products within these vertical operating systems is payments. Why? Businesses need to be able to accept payments. Doing so in the same user flows and leveraging the common system makes business operations much easier for the SMB and creates a better end consumer experience. Here is snapshot of verticalization of SaaS on US acquiring.
- #9: It’s not just payments though. Here are some examples of common vertical OS platforms. Expansion into more and more value added services like marketing, sales, HR,…..The vertical OS is sitting on lots of customer data, employee data, and financial/business operations data. It knows more about that business than any other stakeholder. As a result, it has the ability to abstract away traditionally horizontal products and embed them into that platform further enhancing the relationship
- #10: So, to recap, we’re seeing rapid adoption by SMBs for vertical specific software. Those platforms are becoming the central source of truth for data, customer and employee workflows, and increasingly offering an expanded suite of historically horizontal products. You can start to see where embedded finance enter the conversation….before we go any futher, let’s align on the definiuton.
- #11: For the visual learners. Walk through a merchant experience across offers (take a working capital loan), application (prepopulated/pre approved data), product utilization (payroll, charge card),. And data reporting (charge card, bank accounts).
- #12: Engaage with financial products through trusted relationship Presents a broader suite offerings to customers that will aid in front book sales and increase stickiness Large market that is growing
- #13: For you – EF offerings improve brand perception by 11%, create new revenue, and interestingly, give you access to new data for your customers For merchants, convenient and fast….32% of SMBs feel their ban understands their needs – you know them better than their bank!
- #14: Makes sense intuitively, but what does the data say? Clear data showcasing the desire form SMBs The seamless experience and trusted relationship are the value drivers in the mind of a SMB Major opportunity to better monetize the customer base
- #15: Let’s get more specific. We’ve talked about “embedded finance’, but what types of products does that actually entail? Review each category. Then share some examples.. What’s interesting is that none of these are necessarily net mnew financial products. They are existing financial products that fit well within a software platform offering. Now, there are some creative cases that can emerge which are net new like closed loop digtal wallets – leveraging embedded bank accounts, charge cards, etc. But most just bring these existing products inside. HERE IS MY TAKE - WE’RE STILL IN EARLY INNINGS. THERE ARE A LOT OF THINGS THAT SOUND GOOD AND MAKE SENSE. BUT DATA STILL NEEDS TO PROVE OUT ADOPTION. AS SAAS THINKS ABOUT HOW TO ENGAGE ON THIS, THINK ABOUT WAYS YOU CAN ENGAGE IN LOWER COMMIT FASHIONS? FIND PARTNERS THAT CAN ENABLE MULTIPLE USE CASES, IDEALLY USING EXISTING RELATIONSHIP DATA, FINANCIAL FLOWS, ETC.
- #16: Quick view on the demand across a few common verticals by these products MCA/Flex Loans in strong demand across common verticals Unsecured loans (difference is floating interest rate and less of a flat fee like MCA) in larger ticket….these are larger offerings typically Strong demand for credit card, debit card, deposit account across industries A2A – tehre are some really creative use cases at play here with potential to create some closed loop environments
- #17: The three data points here may look familiar to many software platforms in the audience. These slides from Bain Cap launched a massive rush into the market for EF providers a few years back. We’re just over the halfway mark and they’re mostly on point. The takeaways remain the same. Afte
- #20: Option 1
- #21: The three data points here may look familiar to many software platforms in the audience. These slides from Bain Cap launched a massive rush into the market for EF providers a few years back. We’re just over the halfway mark and they’re mostly on point. The takeaways remain the same. Afte
- #22: Option 1
- #26: Increase platform stickiness and session frequency / duration as customers rely more on you for everyday needs. Earn interchange revenue on card spend and deposit interest on funds held in the account. Streamline your merchant’s expense management process and help them build credit. Utilize transaction data to analyze spending behaviors to build out tailored loyalty and rewards programs.
- #27: Sample of how partnering with the right EF provider can future proof your platform for EF
- #28: What are the traits of a strong EF Provider?