Eric Button

In Embedded Fintech, the Platforms Win

F
intech used to be difficult. In the same way that launching a website in 1997 took some work, building a fintech app in 2009 was more difficult than it is today. The “picks and shovels” to make it an easy process hadn’t yet been built.

On the other hand in 2009 the competition was...banks. All one had to do was build a fintech product that didn’t suck.

These strategies still work to an extent, but the competition is no longer other banks, but other fintech products. And with thousands of market entrants the opportunity isn’t what it used to be.

The barriers to entry to build in fintech have fallen while customer acquisition costs have steadily climbed. Facebook and Instagram ads no longer offer an attractive CAC, further squeezing entrants with weak differentiation in brand and product. A fintech that just “looks pretty” doesn’t sell like it might have in 2010.

Enter the primitives

The platform as a service

With the growth of fintech came the growth of fintech building blocks. A Banking-as-a-Service platform allows a startup to launch a neobank in weeks, not months or years. A card-issuing service such as Marqueta allows a company to issue credit cards with the call of an API.

So in 2021 the winners were not the hundreds of DeFi lending app startups (most of which are struggling to differentiate themselves); rather it was the crypto custody solutions such as Prime Trust and SendWyre these startups used to stay compliant. For the privilege of using these API’s, startups paid hefty fees.

We have fully entered the “picks and shovels” stage of fintech.

Embedded Finance

B2B tech is in the middle of the embedded finance boom. SaaS platforms are discovering that they can 2-5x their revenue by embedding financial products inside their software. A decade ago, a construction management software may have charged a $200/mo subscription for their scheduling and employee management software. After embedding a third party’s payroll product, they can now take a fee from every paycheck that passes through their platform.

With embedded finance, all parties win: The SaaS platform can keep users within their ecosystem, the fintech provider can tap into large markets with just a few partnerships, and the customer gets a smoother user experience. The only loser might be the fintech company that refuses to offer their product as embeddable.

This is why A16Z insists that “every company will be a fintech company”—the economics of embedded fintech are attractive enough that it’s inevitable.

When a childcare company already uses Procare to run all their processes, they will likely use Procare’s embedded payroll (in this case powered by Check) instead of using a standalone payroll product on the side.

We are still at the early stages of the embedded finance revolution. Every company really will be a fintech company.

The power is shifting

The rules are changing. The building blocks of fintech are becoming more modularized and commoditized. It is easier than ever to create a fintech product by tapping into one or more off-the-shelf API’s.

And the revenue expansion that embedded finance provides for SaaS platforms means that niche platforms can command far more revenue than they might have a decade ago. Embedded finance has enabled Mindbody (business management software for the wellness industry) to transform their revenue model and achieve unicorn valuation far sooner than it might have.

As the modularization of fintech continues we can expect the inevitable commoditization of these embeddable primitives. Customers just don’t care which card issuer is at work behind the scenes. (This is not to say that embedded fintech providers are doomed).

But well-established niche SaaS platforms now have brilliant outlook. They have brand value, scale economies, and a captive audience just waiting for embedded financial products. The power is shifting from the generic finance providers to the fintechs who are willing to deliver their product as an embedded solution.

As goods in a market become commoditized, the platforms assume more of the power. It’s bad news for mediocre fintech products, and great news for platforms with strong market share. And since a niche platform often has the best chance at delivering the best experience to its customers, niche platforms will thrive.

I suspect we see more entrepreneurs enter a small niche to build a SaaS product, but with every intention to monetize through embedded financial services. Working in a tiny niche makes more sense now than it might have before embedded fintech.

Conclusion

The “picks and shovels” era for fintech is here. It’s easier than ever to build, and tougher than ever to reach your audience and give them a differentiated product.

It’s a law of nature that as commoditization in a marketplace occurs, the power shifts toward the platforms in that marketplace. In B2B we’ll see SaaS platforms thrive as they embed financial tech and upgrade their revenue model in the process.

In consumer we’ll see the winners differentiate with creative marketing, technical innovation (DeFi, looking at you) and strategic partnerships with influencers and brands to bring down customer acquisition costs. And frankly we’ll see a whole bunch of losers who can’t acquire quality customers for a low enough cost.

The barriers to entry in fintech are dropping, and they won’t stop. On a long enough timeline we might even see a wave of no-code fintech primitives. I wouldn’t bet against it.