Tearsheet’s Briefings for Outlier members give a deeper and contextual weekly look into banking, payments, blockchain, marketing, green finance, and embedded finance. Subscribe to Outlier to get full access to Tearsheet content.
It’s a new year folks, and our new year’s resolution has been to sharpen our products and continue to keep you in the loop regarding all things finance.
Tearsheet’s new Embedded Finance Briefing for Outlier members does just that. This briefing is on embedded finance and will sit alongside similar regular updates in banking, payments, lending, marketing, and green finance. Every other week, you’ll get a bird’s eye view of what’s happening in embedded finance, why it matters, and where this is all going.
Embedded Finance circa 2022: 6 trends
The nature of the financial institution is changing, and as banking evolves, so do the platforms that support it. Embedded Finance extends banking products outside the four walls of a bank and into user experiences within industries like transportation, technology, retail, accounting, and small business software -- turning every app, software, retailer, and business into a bank.
With the uptake of Embedded Finance, consumers are showing that they want to bank with the brands they love.
We see 6 trends emerging and continuing to play out this year:
- Fintech + Payroll: As the nature of work changes in the gig economy, it offers an expanded set of opportunities to provide banking and payments products connected to the paycheck (whatever form it takes). Payroll firms like Gusto and Ceridian have launched wallets and other financial tools to bank their clients' employees. Data firms have turned their sights to aggregate employment data in their offerings to financial firms. As FIs use employment data as an input into their banking and underwriting practices, the income statement is joining balance sheet information to power a whole new world of opportunities.
- Big Tech: Big Tech’s move into finance is a great example of Embedded Finance. With billions of users, large technology firms are introducing and expanding financial products and services in partnership with third parties, including ‘buy now, pay later’ specialists and lenders. Big Tech isn’t launching standalone products -- these offerings are intimately connected into their ecosystems, enhancing sticky user experience and driving profits. Shopify, for example, uses Shopify Capital to lend money to merchants using its e-commerce platform.
- Banking Niche Communities: When financial products and services get integrated into experiences people are used to, magic can happen. Banking, payment, investing, and insurance products become seamless when they’re embedded into software and apps in a user’s everyday life. For example, Squire provides business software to the 100,000+ barbers and hairdressers in the US. By collaborating with Bond, an Embedded Finance infrastructure provider, the Squire Card helps barbershops manage their cash flow, and allows barbers to receive instant payments, pay bills, track expenses, and get early access to earnings.
- Moving From Debit To Credit: The early days of Embedded Finance were predicated on cards and predicated on debit. That’s changing. We’re beginning to see the first major steps in moving towards embedded credit card products. Credit Cards as a Service were slower to the game because credit is inherently harder to do. Deserve, for example, was early to the move to credit cards as a service. The firm has worked with FIs like Sallie Mae to significantly reduce the time-to-market to launch credit cards, handling all the major parts of a program, including banking partners, card networks, processor integrations, credit facilities, and go-to-market.
- An SMB Renaissance: After being underserved for so long, SMBs are finding new products and services available to them. In the vacuum created by traditional FIs, fintech and technology players are zeroing in on SMB banking and finance. Embedded Finance for SMBs decouples banking from banks. So, things like accounting and bookkeeping platforms -- which small businesses spend a lot of time managing -- can become the heart, brain, and soul of an SMB’s operation. Take Intuit’s QuickBooks, for example. Millions of small businesses use Intuit’s bookkeeping and accounting products. The software company has its own Embedded finance offerings: QuickBooks Cash for SMBs and more recently, Money by QuickBooks for soloprenuers and freelancers. Both solutions turn financial software into banking products, helping clients get paid quickly and giving them greater visibility into their finances. Marketplaces are increasingly turning to Embedded Finance to help SMBs sell more on their platforms -- a win-win for both parties. With rich data on their merchants, Shopify, Amazon, and Walmart offer varying forms of funding. Bypassing a traditional loan application, the platforms proactively screen merchants with high quality cash flow to offer them merchant cash advance and term loans.
- The Mainstreaming of Crypto: Traditional institutions inhabit a spectrum of blockchain adoption -- some have launched products and others are still planning to. But they’re all talking about it. Most of the early crossover products are around trading coins. Paxos enables PayPal and Revolut customers to buy, sell, and hold cryptocurrency. ZeroHash provides embedded crypto infrastructure to tastyworks, MoneyLion, and Wirex. For custody, US Bank, Bank of New York Mellon, State Street, and Northern Trust have announced plans to verify and safeguard digital assets. Anchorage Bank, Fireblocks, and NYDIG provide technology and sub-custodian services to this market. Coinbase provides prime brokerage services, too. Decentralized finance also has its own version of embedded. Take high yielding savings accounts like the type Compound offers. The blockchain company’s Compound Treasury takes financial institutions’ deposited dollars, converts them to stablecoin, lends out the stablecoin, and returns 4% interest rates to its partners’ clients.
Quote of the Week
“New industries will evolve and break into the financial services realm with the increased use of embedded finance. More and more companies will seek to partner with local banks in order to provide “embedded” banking services, particularly payments. Embedded finance allows for greater personalization. This was not a possibility five to seven years ago, but has changed due to more democratized software behind payments and banking systems, lower costs, and a greater ability to branch out with emerging technology.” -- Ahon Sarkar, general manager at Q2
One of the most popular early use cases for embedded finance were neobanks. Built upon 3rd party banking infrastructure, most neobanks were merely marketing and experience front ends for traditional banking products and services. We're now seeing new industries entering into financial services, marrying their traditional user journeys and value propositions together with new financial tools. We typically use the example of Mindbody (yoga studios), Honeybook (photographers and solopreneurs), and Squire (barbershops) to demonstrate the power of embedding financial services into other 3rd party platforms servicing a niche audience (in these cases, small businesses).
In terms of personalization, getting access to third party info creates opportunities. You can imaging the power Intuit's QuickBooks has given the view into the cashflows of its SMB clients. It's a treasure trove of potential actionable advice -- including offers for loans, to move money between accounts, investments, and factoring. That goes way above and beyond the view a traditional FI has into a business.
Dollars invested (in millions) by VCs into embedded finance
2021 was a bountiful year for fintech all around. Embedded firms also saw their fair share of investment. Galileo ramped up after being bought by SoFi in 2020. Marqeta went public. Rapyd raised $300 million (which came 7 months after another $300 million round). Unit and Alviere raised $50 million apiece.
What we're writing
- ‘People don’t care about privacy’: How payment app Mezu pivoted to become embedded finance platform Alviere
- ‘We are going to take everything that Gusto built and make it available as a platform’: Gusto’s Tomer London
- Is partnering with Big Tech an opportunity for banks?
- How Intuit builds embedded finance around customer benefits
- “We have no intention of becoming a bank”: Is Big Tech really a threat to banks?