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Leah Asdell
Hi everyone. Welcome to The PayFAQ: The Embedded Payments Podcast brought to you by Payrix and Worldpay. Today, we’re going to turn the tables and interview our regular host, Ian Hillis, Head of Growth at Worldpay for Platforms. I’m Leah Asdell and I’ll be your guest host today as we dive into the world of Embedded Finance and what it means for vertical software. So hey, Ian, welcome to the show on this side.
Ian Hillis
This is fun to be on the other side. Leah, thank you for having me as your guest while you are guest hosting. This will be fun.
Leah Asdell
This is super fun. All right, so let’s dive in with your favorite topic. What is Embedded Finance, and how is it different from traditional finance?
Ian Hillis
Great question to get started here, and I think it’s really important to level set on a definition. Embedded Finance means a number of different things to folks. So, I’ll start with how I think about it. For the most part, I think Embedded Finance hasn’t necessarily created a plethora of new financial tools per se. Instead, it’s how these tools are being presented and engaged with that really makes it, quote, unquote, embedded. So, I’m going to create a definition here, leveraging a few components and how it might separate it from standard financial tools or products. So first and foremost, it needs to be embedded. It’s in the definition, and that means that the engagement with this financial product needs to happen within a workflow familiar to the customer, and that’s typically going to happen within a trusted relationship. So, if we’re talking about B2B Embedded Finance, that could be an SMB using their vertical-specific software that runs their business. For a consumer, that could be a product that shows up during a checkout experience, or while navigating within their bank’s ecosystem. Secondly, that trusted entity embedding a product should have control over that experience. Where is the product showing up? How is it showing up? When is it showing up? That’s really the magic of the embedded nature of that. And then three, if done correctly, that embedded product is typically leveraging existing customer data that the product provider would have access to that can allow them to better tailor the experience or the offer. So, for example, if you’re talking about a retail point of sale system presenting an embedded capital offer to an SMB that could be happening at the right time of the year, given inventory needs that the vertical software platform would have line of sight to given that underlying data. So really, for the most part, the product themselves aren’t necessarily revolutionary new financial products, lending, payroll, insurance, payments, etc. It’s really how they’re presented and engaged with that’s creating a lot of the hype that we’re hearing about, and I do think there is the potential to create some new and interesting use cases, but we’re still in the earlier stages of that, in my point of view.
Leah Asdell
Very cool. So being in the content world, I definitely see the topic of Embedded Finance everywhere. What’s with all the hype, like, why is it kind of coming up now? Why is everyone talking about it?
Ian Hillis
Yeah, so I’m going to start actually, with some of the underlying dynamics of what’s happening in the SMB market today, and I think that’s going to help set the stage for why Embedded Finance has risen to such prominence and created a lot of the hype you’re seeing in the market. So, over the past several years, SMBs have been increasingly adopting vertical-specific software to run their businesses. In 2018 that figure was approximately one out of every three in the US. If you fast forward to 2022 that number surpassed one out of every two, and we continue to see that grow. Why is that happening? Well, business management software in particular that targets SMBs has become increasingly verticalized. a16z coined this term, the vertical operating systems, or the vertical OS. And this concept’s been around for a while, but whenever Andreessen Horowitz coins something, it creates a catchy name. So, let’s go with it. So, vertical operating systems within sub verticals, the operators are often using unique language. They have unique employee and customer journey flows and unique needs, wants, desires related to running that business. The vertical operating systems have developed an offering for that sub-vertical can hyper tailor it to those unique needs. So, let’s use an example here, Leah, if you and I woke up tomorrow and wanted to start a storage unit business, we quit our jobs and said, “this is where we’re going to go make our bank.” We’d go find land. We’d go have construction to build the units themselves. But at some point, we have to figure out how we’re going to keep track of everything we need to run this business. And we would probably go out and we’d find the software from Storable, and Storable has created software that is hyper tailored to the storage unit market. Allows us to take reservations, keeps track of all of the various silos where people hold their items for storage, but then think about everything that can attach to that. You can run payments for those reservations and everything through that so as an operator of a storage unit business, because they’re starting to speak my language around monthly payments and the flows that target that I’m much more likely to use that software to run that business. As a result of this trend of the verticalization, that relationship between an SMB and the vertical operating system is extremely close and trusted, and that vertical operating system is also sitting on more and more data related to the business customer than anyone else in the value chain, including its bank in most cases. That coupled with the fact that employees and these operators typically spend 80 to 95% of their time within that particular system, means that they’re bestowing a lot of trust to that particular vertical operating system. So, you’ve got trust, you’ve got significant time spent in the system, and a robust set of data in there. SMBs are more likely to engage with products presented within that workflow, and we’ve watched these vertical operating systems start to offer many more products beyond just core workflow management. So, let’s take another example here: Toast. So, if you’ve been in a restaurant or bar recently, you’ve likely seen the Toast software hardware in action. You may see it behind the bar, or when your waiter or waitress comes up to allow you to pay at the table, restaurants are using Toast to run their business by managing table layouts and assigning waiters to tables, track orders, store menu items, etc. And those are just the basics of running a restaurant. But Toast has started to expand that offering to be more comprehensive, so they started to include things like allowing the customers to pay for their meals via credit card. They’re managing employee time shifts. They’re reconciling the finances from the day orders, even that still is just kind of the basics. From there Toast has expanded other tools that historically have been more horizontal in nature, marketing engines, social media management, all the things relevant to running a restaurant but may previously been provided by a more horizontal solution are taking place within that vertical operating system and that Leah is really the root of Embedded Finance. SMBs are looking to their vertical operating systems for an increasing array of products that they can use in that same ecosystem, the same trusted source that they’re using to run the rest of the business. When these tools are financial in nature, they’re quote, unquote, Embedded Finance. So, your question around why the hype? Here’s two stats that I find compelling. One 84% of businesses would explore financial products from their business software tool if they were offered. And two 76% are willing to pay a premium for such a one stop shop solution across financial products. So Embedded Finance is really creating new revenue streams. It’s increasing customer satisfaction, and it provides convenient access to financial products that are often more burdensome for SMBs to engage with, and more traditional finance motion. So, I really do believe the hype around these pieces, and that’s some of the reasoning behind them.
Leah Asdell
Such great examples. I love that. Tell us a little bit about your view and outlook on this market, and then maybe kind of highlight some of the financial products that you’re seeing out there within these vertical operating systems.
Ian Hillis
Yeah, it’s an exciting market, and I love in particular that this is really being driven by the software players out there, typically providing extremely value additive products for SMBs that need them and in ways that make it more efficient for an SMB. At the end of the day, time is the most precious resource for anyone running a small or medium sized business. And Embedded Finance tooling has done a wonderful job of helping to save time and make things easier overall. Now that said, I still think we’re in the early innings, particularly for B2B Embedded Finance. And what do I mean by that? Go out there and Google Embedded Finance products, and you’re going to find pie charts with dozens of possible products, and many of these sound interesting, but the demand just fully hasn’t manifested yet for engagement within the embedded motion across that so from the ones I’ve seen, where there’s data showcasing reasonable adoption rates in the market, payments certainly comes to mind and lending. And look, lending is a big category. There are lots of different types of lending, so take that with a grain of salt. For a second: card issuance. So, think expense cards, charge cards, and then embedded accounts. And accounts are a really fascinating one, because once you create an embedded account within that trusted ecosystem, it can serve as a foundational unit for a whole host of interesting products. So, think Treasury Management Solutions, more creative money movement, closed loop, digital wallets, merchant accounts, consumer accounts for employees to hold cash. We’ve seen demand for these vary by sub-vertical, but all made possible via that embedded account. And then from there, I think there are more emerging use cases that show promise so payroll, insurance, accounting, or other financial business management tools. And there are successful examples in the market, but I think we still have a little bit more to learn there in terms of the breadth of adoption potential on those.
Leah Asdell
Great, as we kind of close this out, start to wrap it up. Tell us how our software companies should be thinking about Embedded Finance. Where should they start? What kind of advice do you have for them?
Ian Hillis
So, I think software companies should be genuinely excited about Embedded Finance, the area where it has demonstrated success really validate that they are often truly the most trusted relationship in the world of an SMB. SaaS businesses that embed financial products, from what we’ve seen 2 to 5x revenue increase per user. That’s coming from Andreessen Horowitz study, that’s a pretty compelling value prop there. Embedded Finance allows software companies to continue to expand their relationship with their customers by providing valuable products and tools that SMBs need to run their businesses successfully, and it allows them to do so in a consistent environment, to create a more frictionless experience. So as software companies contemplate their engagement with Embedded Finance, I’d really encourage them to find a partner that can grow with them on this journey, and Embedded Finance is a journey right now there are very real and meaningful embedded products showcasing great adoption. Today we talked about that being payments, lending, card issuance, or accounts come to mind that play well across the bulk of verticals. We here at Worldpay for Platforms are live with our Worldpay Capital embedded lending offering and seeing a lot of excitement and strong results from that product. SMB adoption rates have been in the high teens, and more than 70% of a software partner’s customers that take a capital offer are likely to take another one. That’s providing instantaneous growth capital at market rates to businesses that need it, and who typically face a more burdensome loan process and other channels where applications can take six weeks or longer, require personal credit scores, charge predatory rates. But as I mentioned earlier, I still think we’re in the early innings for Embedded Finance. Companies are still dreaming up exciting new use cases. Most of my conversations with software partners showcase a desire to see reasonable proof of adoption before allocating time and resources to a new product line, and that’s why I think software companies should be really strategic about who they engage with on Embedded Finance. A burdensome way to do this would be to go and integrate with a whole bunch of different providers for each type of product, figure out how to reconcile all those integrations internally, assign increasing numbers of resources to maintain those integrations, and then go have to find a new partner each time a new compelling Embedded Finance product proves relevance. A better approach here is to go find a trusted partner that can provide access to an increasing suite of Embedded Finance products, leverage existing integrations, data sets, funding flows, and that’s just going to create a more efficient use of resources and a more consistent ecosystem to maintain as this exciting new area of finance grows.
Leah Asdell
Really great advice. I love that. I think you’ve given everyone a lot to think about, and this has been a lot of fun. So, thanks for having this conversation with me today.
Ian Hillis
Thanks, Leah, fun to be on the other side of the table here.
Leah Asdell
Absolutely. We want to be a trusted resource for software providers who are out there trying to make sense of Embedded Payments and finance to help them get the education they need to make the business decisions their customers and investors will thank them for. Thank you for tuning into this conversation today and stay tuned for the next episode.
Thank you for joining us today on the PayFAQ: Embedded Payments Podcast, brought to you by Payrix. For more information about Embedded Payments, subscribe to our show at payrix.com/podcasts
