Savvy investors have been keen on a more subdued type of fintech that has gone unnoticed in the past few years: startups that are adopting embedded finance. Embedded finance—which enables any merchant or company to integrate financial services into their products—roughly tripled between 2020 to 2021 and is expected to reach a whopping $230 billion in revenue by 2025. In recent times, the integration of fintech products has become easier because of the constant innovations happening in the financial infrastructure.
The advantages of embedded finance are not just limited to unravelling new revenue streams for a business, but it comes with numerous other benefits, both for the businesses and customers. Some of them include enhancing the customer experiences, helping the businesses understand their customers, spending patterns and needs, and improving customer loyalty. Venture capitalists (VCs) firmly believe that startups adopting embedded finance will form the framework for the next phase of fintech innovation.
This lucrative embedded finance can take various forms—embedded payments, insurance, credit, investments, open banking etc. One can now witness embedded finance in both ‘traditional fintech’ as well the most talked about: crypto. These offerings are predominantly API-driven, and rather than redirecting a customer to a third-party website, they are integrated directly into the product.
Stripe and Plaid, two of the embedded finance companies— were early to the race, with Apiture and Yapily being the more recent ones. The VCs believe that customer-facing crypto wallets or digital banks are not the future; embedded finance would be the next big thing. Their portfolios also show that the trend is shifting, with more VCs now investing in embedded finance companies. Bain Capital Ventures, with almost $105 billion of assets under management, is one of the firms setting up this trend as one of their partners, Matt Harris, is encouraging companies worldwide to adopt embedded finance as a strategy.
Investors believe that if companies are solving a customer problem, then they can directly go to the customer. However, a significantly better way to get access to that customer can be via software. Startups providing software to fintech companies and other businesses are bagging more investments than any other fintech sector. Additionally, investments into these embedded finance companies have been steady in 2022, even though valuations have been shrinking. Melas-Kyriazi, a partner at Bain, also mentions that the leading embedded finance companies are the ones that leverage data.
Gocardless, a payment gateway that recently launched its open banking system, secured an investment worth $312 million recently. The CFO, Catherine Birkett mentions that putting payments and accounting in one place helps simplify business operations. She adds that this, along with the fact that embedded finance fintechs offer convenience, makes for a great pitch to the investors.
Furthermore, it is not ideal for a company to declare itself as an embedded finance company and pitch to investors at a nascent stage. Most of the VCs emphasize that the companies should present a strong pitch that is backed by strong financials. There have been various warnings surrounding the bifurcation of the fintech market between the firms serving consumers and the infrastructure companies. The former might be negatively impacted, while the latter is sure to thrive.
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