Embedded Fintech - The Great Rebundling

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As most readers would know, the cloud has enabled tremendous unbundling across software and services. Users can now adopt any permutation of point solutions that most optimally suit their needs. This is vividly apparent in financial services, a sector in which offerings have become extensively fragmented. As illustrated in the graphic below, businesses can now solicit financial products from an increasing array of vendors - products that have, for the most part, historically been provided by banks.

Although this chipping away at financial services by software-enabled upstarts is not necessarily a novel development, the extent of it has clearly been dramatic. In response, we believe that a great rebundling of financial services is underway driven by a) the need to simplify the software and subscription stack; b) the optimal point of consumption residing in a contextualized offering; and c) the desire to reduce costs and focus on core offerings. We think that banks, software platforms, and other aggregators are the natural rebundlers of financial services and will refer to them as “platform customers” whereas their customers will be referred to as “end customers”. 

The number of software solutions and subscriptions that a business must now manage has become unwieldy. SMEs can often be using over 200 individual applications while enterprises, on average, use well over 350. Not only is this vendor clutter an administrative burden on companies, but the convoluted spend can often get lost in budgets until rigorous cost reduction exercises are undertaken. Platform customers can solve this problem for their end customers by consolidating many of these fintech products through a provider like Monite, that offers white labeled accounts payable and accounts receivable software along with a payment gateway that can be embedded into platform customers’ offerings. This not only consolidates spend and vendor management for end customers, but also leaves the potential for additional cost savings by bundling with other platform services.

Contextualized offerings simplify the end user experience by being available at a natural point of consumption. This optimal point of consumption largely depends on where the user “lives”, or spends most of their time. This may take the form of an ERP for finance professionals, a platform like Shopify for eCommerce businesses, or even a neobank for certain SMBs. Rhino portfolio company FISPAN, for example, provides an API orchestration layer that allows banks to embed their offerings within commercial banking customers’ accounting and ERP systems. These contextualized services enhance customer stickiness with an improved experience through streamlined onboarding, unified dashboards and tools, and reduced costs with leaner teams and fewer vendors. Furthermore, the insights that access to this customer data generates allow for the availing of additional financial products at the most appropriate time. Accordingly, banking executives are starting to recognize the importance of APIs as a means to deliver financial offerings in a way that maximizes customer centricity.

As noted throughout, the embedding of fintech allows for both a consolidation of vendors and a streamlining of workflows, which ultimately reduce the burden and cost of building or sourcing a back office for end customers. These costs are now embedded in your platform of choice - where you live. Platforms will often subsidize these offerings when bundled with other products and services. Additionally, the funneling of demand through platform customers allows for scale economies that can also be passed on to end customers. These two benefits provide for more comprehensive expense optimization than would otherwise be obtained if such solutions were procured in isolation. With such solutions provided by a single vendor, we would also expect enhanced interoperability. Platform customers are able to enhance LTVs through this additional share of wallet while also minimizing CAC since customers are already native to their core offerings.

Embedded fintech solutions can be expected to drive significant value for both end customers as well as the platform customers on which they’re embedded. For platform customers, embedded fintech enhances revenue generation through increased pricing and the ability to underwrite new products, while lowering distribution costs via delivery to a native customer base. Platform customers are also able to better focus on their core offerings. For end customers, a contextualized offering enhances and streamlines their experience with these services, allowing for an increased focus on their core businesses, while reducing costs and administration with the consolidation of spend and vendor relationships. All parties benefit from a more comprehensive view of the end customer to optimize delivery and consumption of the most appropriate financial products. With the prevailing macro environment forcing a re-evaluation of budgets, we see opportunity with another strong tailwind accelerating the rebundling of financial offerings.

If you’re a founder building embedded fintech solutions, we’d love to hear from you.

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