What’s Missing from the Embedded Conversation
There is a temptation to talk about embedded finance as a horizontal, broad stroke solution.
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$7,000,000,000,000.
That’s embedded finance’s total addressable market in the U.S. alone, according to Bain & Company.
But that was nearly a year ago. Since then, a lot has changed.
We started to see some moderation in the stratospheric buzz around embedded finance that started with FTX. SVB and its collapse, however, was the ultimate proverbial pin – deflating the hype balloon that "every business could become a FinTech business."
We now have a more rational perspective about embedded finance’s value proposition, with use cases that are seemingly more solid and more viable, as opposed to those driven by a marketing bandwagon.
I understand the excitement.
Look at Square or Lightspeed with Stripe going beyond point-of-sale and offering loans to small business customers. Embedded finance can unlock value that hasn't been possible before and its potential is still being mapped out in the kaleidoscope of verticals and segments where it can be applied – vertical SaaS, and point of sale/transaction and marketplaces but also traditional businesses where financial services hasn't been seen as a significant driver of value and rather been a point of friction in many low to non-digitized industries.
How To Think About Embedded Finance
When talking about embedded finance and its massive potential, what’s often missing is acknowledgment of its complexity. There is a temptation to talk about it as a horizontal, broad stroke solution.
In reality, it's highly contextualized, nuanced and verticalized. There can be many different flavors and approaches to enabling embedded finance as opposed to the broad, “We-are-a-banking-as-a-service-company-and-we-are-going-to-embed-banking-into-each-and-everything.”
As a provider, business models delivering value and ultimately possessing longevity will solve for a particular vertical versus layering in a one-size-fits-all banking card product or debit product.
If you’re building a solution for the construction business, for example, you’d structure an efficient method to not only offer payments but also add access to credit or working capital, as well as figure out how to make it efficient from an order management and workflow and return all of the data from that in a useful form. All of this, specific to and customized for that particular business.
Now you're deep into that ecosystem of that vertical providing distinct value.
The Natural Adoption Curve
SaaS companies, which are in front of solving workflow problems for specific industries, whether point of sale, purchasing or supplier management, and those where there is commerce (value exchange), are natural spots for embedded finance to find its way in, in a more effective and meaningful way.
Why are they natural spots? Because they understand the customer best. They have the deepest insight into customers: their cycle of business, what risks (and rewards) are involved with each, and because they have already created technology on which companies can run their entire business.
These are the areas which can create the ‘unlocks’ to drive efficiency and real value by reducing transaction costs, overall operating expenses and newly introducing different forms of credit into the mix that drives overall growth for a business.
AI: An Embedded Finance Rocket Booster
AI can enable areas vastly where there has been generally friction. With supplier payments, for example, there could be an embedded credit solution to allow the purchasers of some construction company to buy material from a supplier. To address common back and forth negotiation on SKU selection, price and terms, AI could provide the framework to accelerate and make the entire procurement process highly efficient by shortening the negotiation and buying cycle, recommending the best payment option and then making the appropriate payment to close the transaction
Or, if a company misses a payment and needs a 30-day extension, AI can read its payment cycles more effectively, as opposed to reacting, preemptively working behind the scenes as a sort of financial planner for a business.
What’s Ahead
Two key challenge points for embedded finance…Near term, it’s the macroeconomic cycle and these high interest rates.
Capital markets are tight.
Embedded finance, even verticalized, is affected by the velocity of transactions with everything driven by availability of credit in the marketplace and in the near term, based on the Federal Reserve’s most recent policy statement, we’re facing a potentially sharper credit crunch.
Longer term, businesses will have to figure out the right set of tooling.
Infrastructure for embedded finance is fairly new and the companies set up to support the ecosystem, in a verticalized approach, are still in a maturation stage. There need to be established frameworks available to solve for nuanced workflows and use cases. One business’ need for consuming an embedded finance credit product, for example, can be very different from another’s.
Having been in the FinTech and payments space for some time now, I look forward to witnessing embedded finance’s evolution, infused with a little sobriety. Combined with committed finance, customized, embedded finance solutions will drive priceless value for verticals and industries, driving efficiencies and extended lifetime value for customers and moving us towards that $7+ trillion.
Cheers,
Sunil Singh
Co-founder & CEO of Tallied , Empire Startups Contributor
The Empire Startups Contributor Model is a chance for writers and thought-leaders in the FinTech space to share their ideas and expertise with our ever-growing audience. Our model is is merit-based and does not offer monetary compensation.
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