Payments are an ideal entry point for software platforms into financial services. A payments relationship generates data, trust, and inevitably, additional banking needs. This creates the bedrock for software platforms to offer a full suite of embedded finance capabilities to further enhance their revenue, user experience and customer retention objectives. Every software platform that is offering payments – or even considering it – should have a broader vision around the long-term opportunity in financial services. Embedded finance, not embedded payments, is the endgame.
Three Near-Term Embedded Finance Opportunities for SaaS Platforms
Working capital is among the most logical first steps from payments into embedded finance. As a provider of both software and payments, software platforms have deep visibility into the performance and sales dynamics of their customers’ businesses. This puts software platforms in a position to make more informed lending decisions and take automatic repayments as a percentage of daily sales. Moreover, it enables software platforms to catalyze the growth of their customers’ businesses, creating multiple opportunities (e.g., increased transaction volume as the business grows) down the line. Toast, for instance, has offered its working capital product, Toast Capital, for approximately two years and in 2021 originated over $100m in total loans. Shopify, which has offered Shopify Capital since 2016, advanced more than $324m in Q4 2021 alone (up 43% year over year). According to 451 Research’s Voice of the Customer: Macroeconomic Outlook, Business Trends, 2022 Outlook survey, nearly one in five (19%) businesses with fewer than 1,000 employees intend to take out a loan or line of credit in 2022.
Expense cards represent another area of opportunity. Software platforms can enable their customers to issue expense cards to their employees, complete with customizable spending controls. In doing so, they can generate interchange revenue based on the transaction volume generated via their cards. We also see an opportunity for software platforms to deliver integrated expense reporting capabilities as part of their software package, which could create an additional monetization opportunity.
As software platforms get further along in their embedded finance journey, offering a money management product can transform the platform into a financial operating system for their customers. This is an account through which customers can receive expedited sales deposits, deposit funds and make payments. Coupled with a card product, the account can function much like a traditional bank account, allowing customers to make purchases and withdraw cash from their balance. Software platforms can generate both interest revenue (on total funds stored) and interchange revenue (on card transactions), along with providing detailed, granular reporting on their customers’ finances. Shopify Balance, offered in partnership with Stripe via the Stripe Treasury product, is among the best examples of what this looks like in the wild. Launched in January 2022, Shopify says “thousands of merchants” are already active users.
As software platforms get deeper into embedded finance, it’s easy to see additional areas for expansion. Payroll, insurance, purchase financing and even investment products such as 401(k) all represent relevant areas in which capabilities can be delivered. Software platforms should be guided by one key question in embedded finance: “How can we make our customers’ financial lives easier?”
