Complimentary fintech product offerings, like lending, are a continuation of the evolution and growth of embedded financial services and an opportunity for additional revenue and value-added solutions to elevate your platform.
Host, Bob Butler discusses this and more with Lendflow Founder and CEO, Jon Fry on this episode of PayFAQ: The Embedded Payments Podcast brought to you by Payrix.
Jon has been in the SMB lending and fintech space since 2013. He recognized that the most exciting and impactful opportunity was to build a platform that would allow their customers to innovate on top of quickly bringing new products to life. Lendflow launched in 2019 and got their first customer in Q1 2020 in the middle of the pandemic.
Some of the qualities or characteristics of industries that are a good fit for embedded fintech include those with underserved businesses, those that have gaps in cash flow and those where there are large growth opportunities, according to Jon. A few examples include service-based business such as construction, transportation and personal services like barber shops, salons, restaurants and more.
Jon suggests that SaaS based software companies have an embedded finance strategic plan. This often means starting with embedded payments but planning for other products like lending, insurance, consumer-side lending, deposit accounts and credit cards.
According to Jon, one of the keys is to build off the synergies of each of the embedded products. He suggests thinking about the “second order effect” or how a second or third product works together to create additional value in the customer relationship.
Jon believes there’s going to be an explosion of innovation in this space over the coming decade. He is looking forward to a huge year in 2022 and the continued growth of Payrix and Lendflow.
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Full transcript
Bob Butler
Hi, everyone. Welcome to the PayFAQ embedded payments podcast brought to you by Payrix. I’m your host, Bob Butler. And today I’m going to be talking with Jon Fry, the founder and CEO for Lendflow, all about embedded FinTech, other market segments like embedded lending, and how these offerings can be applied to payments. So hey, John, welcome to the show.
Jon Fry
Bob, thank you. Appreciate it. Glad to be on here today.
Bob Butler
Really happy to have you on. You know, first before we get started, can you tell us a little bit about Lendflow, sort of your role and professional background in general? How did this all get started?
Jon Fry
Yeah, sure, happy to run through it. I’ve been in the SMB lending space most of the last decade. Started in about 2013, right out of college, decided to pursue a more entrepreneurial career and launched my first company right after post-graduation and happened to be in the FinTech space doing a lot of customer acquisition for SMB lenders, for payments companies, merchant processing. And I guess it’d be lending really the one that took off for us and found that myself and our team was really passionate about. We grew out that team did a few 100 million dollars in SMB loan originations. And from that point really, just identified other areas of opportunity in the space. And I think one thing that we pretty quickly noticed, back then there wasn’t actually all that much tech in a lot of the FinTech companies. There’s mainly just big rooms of people doing manual processes. And we identified pretty early on, okay, well, if we come in here and provide a more tech-enabled solution, then that’s a great opportunity, a great thing of great value-add we provide to our clients. And so we really started to dig into that, especially around late 2014, 2015. And helped them with a lot of their tech challenges and ultimately ended up building a tech-enabled micro-financing platform. We started issuing our own credit and learned a lot through that process as well. Really plugged into a lot of the earlier FinTech API’s. And then from that point, from all that, we learned is that the most exciting, impactful opportunity was, instead of trying to be that lender, that embedded lending service, we really wanted to allow our customers to execute on all the amazing embedded lending opportunities out there and just make a platform that makes it easy for them to innovate on top of, and bring those products to life and iterate and bring them to market quickly. So that’s what we did. We launched it in 2019, had our first customers in Q1 2020, which is a pretty amazing time to launch a new project in the business. And we got through it, scrapped and got away through the lock downs and the pandemic. And you know, 2021 has been a great year for us. We’re excited about the team that’s coming together. They’re super excited about many of the new customers and innovation we’ve seen being built on the platform and looking forward to a huge year and 2022.
Bob Butler
I mean, that’s really cool. And really interesting. Love the background. Can you talk a little bit about the use cases that you’ve seen, as you’ve built out the product at Lendflow?
Jon Fry
Yeah, there’s all kinds of things being built, there’s so many areas of opportunity in the space, everything from building buy now pay later, that’s a pretty hot one, launching revenue based financing products, we’ve seen a lot of that, both lenders who are trying to get into that as well as platforms and want to offer a similar offering to Square or Shopify Capital. We see Instant Pay features to help customers, to help their customers get paid immediately. There’s a time lag between when they render services and when they’re paid, for them to add in financing products and to checkout processes, issuing credit on credit cards, SMB credit cards, we’ve seen, that’s pretty cool, just to name a few. So all kinds of products being built right now.
Bob Butler
As you think about embedded lending, embedded payments, which is what we do over here at Payrix, can you give me an example of how you see that sort of multi-embedded solution coming together?
Jon Fry
Yeah, I mean, I think they build on each other quite well. You can see that with the success of some of the earlier successes I mentioned, to Square and Shopify Capital a moment ago, but you really just have all of that data to understand before they even know that they want or need financing with you, you know whether or not they’re going to be qualified and you have that very valuable data that you can analyze and determine if they’re going to be a good fit from financing. You also can use that data to determine when’s the right time to present the opportunity. It’s very much a timing product, especially in a lot of the industries that need it most. You have higher cycles, you have times a strong cash flow and times where it gets more tight before the revenue comes in. And so if you’re able to hone-in on when those times are, you can provide in context, timely financing to your customers. And that’s a big value-add. No one likes, the age-old way of trying to originate loans with the banks and others have used in the past was basically just slammed people with ads and marketing until, you get lucky one day and you hit them on the right day. So you can just deliver it to them right when they need it. The other way it’s valuable is on the back-end, the servicing. And so rather than like debiting from the bank account, you can just split the payments or split the loan repayment off of the payments. And so that means it never needs to hit their bank account, you can also adjust the payments up and down based on the volume of payments that are flowing into them. So on days where they make less revenue, then there’s less of a loan repayment when they have more revenue, and they’re more able to make a payment, then you can scale that payment up and make it a percentage of that revenue rather than just a flat amount, which can be tough during the lean times. And so I think that’s a benefit to both parties. So yeah, just a few of the ways where it’s a pretty strong combo product. And there’s others that come in there and can make it even more powerful. But I think as far as a one-two punch, that’s certainly the one that’s been most successful. And you could see that from some of the earlier innovation this decade.
Bob Butler
I mean, do you see other efficiencies and benefits besides those, because I think those are huge, by the way, any others that you can think of?
Jon Fry
Yeah, I mean, look, it makes the platforms much more sticky. You know, when these SMBs are using you to collect their payments, and then they’re using you to solve their cashflow problems and to take advantage of opportunities for growth. Those are pretty big pain points. And there’s pretty big areas where you can provide more value. And that means the platforms that are providing these services, you know, they’re tougher to lead, there’s more switching costs, there’s more reasons to stay. And these are also revenue drivers for them as well. And so they’re earning revenue, they’re able to earn from that from providing this valuable service to this and, it makes their platforms more sticky. It increases retention, we’ve seen a lot of companies also acquire quite a few customers through these products using that as a hook, the financing to get them in the door. And then they can cross-sell/upsell, let them know, inform them about all of their other services. It also can help if there’s some kind of action or feature on the platform, help drive engagement for it. So if you have a payroll product, and you’re trying to drive payroll, well, you know, the last thing you ever want to do is not be able to pay your people, pay your employees. And so that’s a pretty big pain point. If you need to pay payroll, and you can’t make it that’s a very bad thing for the business. And so if you’re offering payroll, and all of a sudden you offer payroll financing on top of that, they can know in the back of their head, anytime they use that feature, or they need it, they can also finance that payroll. It makes them more likely to start to use that product, it gives them a reason to use it for the first time. It drives engagement of it. And you also see that in like the checkout process, if you look at what Affirm’s done, you know, as you’re going through that consumer e-commerce checkout process now you can pay later. So it increases the cart size, in b2b payments as well, where you increase the transaction volume, increase the cart size by offering financing at the point of sale. And so, you know, we see that with like equipment purchases, we have some equipment loans being built on our platform, which is pretty cool to see just a few more examples where you can really drive improvements and create more value on your platform through these services.
Bob Butler
I definitely have a couple of opportunities we need to connect upon. While we’re talking about platforms. Are there certain software verticals that you think are a better fit for embedded FinTech in general. And can you give me a few examples of why you think they’re better suited than maybe some others?
Jon Fry
Yeah, I mean, you look for a few things when you’re looking for industries that are a good fit. What those are, is underserviced communities like under serviced-businesses, which most SMBs actually are under-serviced, but some much more so than others. In other things you look for are, do they have cashflow gaps in their business? Like how often do those occur? What kind of growth is going on in the industry? What kind of growth opportunities are there out there? Which industries are receding and which ones are really booming? Which one do they have opportunities to go out there and really grab market share and grow? So a few of the things that you look for, and what we found is you see a lot of growth, especially over the past couple years with what’s happened in e-commerce, you see a lot of innovation, a lot of new balance sheets being created in that space, which is very exciting, and a lot of these e-commerce companies growing, but you also see that on the other side was there’s been a little bit less of that and a lot of these blue collar, very critical service-based businesses, they’re doing a lot of the important things in our communities. Everything from home services is a very key one. We’ve seen a lot there and construction space as well, which I think that’s going to be heating up even more with this infrastructure bill they’re putting out there. So there’s going to be a lot of activity on that side repairing all this key infrastructure for the country. You’re going to see that in the transportation space, you know, well, you can’t have e-commerce without moving freight across the country to where you need it to go. And so that’s another key one that seen a lot of growth. And there’s a lot of cash flow gaps, you know, that takes time for them to get paid after they pay all those upfront costs and deliver the freight and they don’t get paid until a good time after that. So just to name a few examples, on top of like business and personal services, everything from barbershops, salons, a lot of these community, you can throw restaurants in there as well. I think these are the big ones that we’ve seen.
Bob Butler
Yeah, I agree. I think that’s really, really insightful. So what can these SaaS companies do as they prepare themselves? And I talk embedded payments all the time. But as we start to introduce a lot more sort of a broader scope of embedded FinTech, what can they do to prepare themselves for this overall embedded FinTech journey? And what can they expect? Or do you have any idea on any best practices or advice on how to select a partner, you know, implementation process, go-to-market operations, all that kind of stuff? Any thoughts on that for the software companies?
Jon Fry
Well, there’s a lot to unpack there, we could probably have about seven podcasts, each of those so, where to start? I mean, I think everyone needs a plan. No more broadly, you got to have a strategy with this. If you’re just sitting back thinking it doesn’t apply to you, then well, you’re quickly going to be left in the dust. Because your competitors are absolutely thinking about it. And it’s going to be so important. Over the next decade, I think going into 2030, you’re just going to see an absolute explosion of financial innovation. And much of this is going to be from all of the advantages that come with embedded finance. Now, what does that mean preparing? Well, many cases, you kind of need that first one, right, and you need to decide what that one is for you and your company. And in many cases, I’d probably say in most cases, to date, that first one has been payments, you know, providing a service that Payrix actually does offer, that’s what we’ve seen. And you can build a lot of that. But when you do that, you also need to plan like how can you not just do that one, but plan for the next one is as well and you have lending and financial services, like the ones that Lendflow provides. You have insurance as well, you have consumer side lending, not just commercial, you have deposit accounts and credit cards. And so you really need to map out the full strategy. And I think one of the things that we’ve seen on our side, that you can build a lot of advantages from leveraging the data that you’re able to collect from one and being able to use that across the board for all so that if they come in, and they start with you, whether it’s on loans, or insurance or payments, or whatever it may be, that you can use that same data in that same underwriting to make the onboarding process for all of those other financial services immediate and seamless, and in one click. And on the back end, they’re not going to know the difference. All they’re going to know is, wow, I can get all these financial services without any work. Because when they were onboarded for that first product, you know, you prepared to store that data and run all that data in a way that you could pull it out at any time for all those other services. So now you have it. And you can really grow on that very quickly, and makes onboarding for any of those other financial services very, very quick and easy and very, very easy to execute on and very powerful. So on a broadly, that’s what I think, as an approach, I think companies should be thinking about as they evaluate going to market with their first, second, whatever it may be, service. How can they make sure they have a strategy holistically? Yeah, one of the other points is like, what do you look for in one of these providers? And I think just the optionality to both be very custom, but also to get to market efficiently. If you’re sitting there building for 6,12, 18 months until you get to market, well guess what, you just missed out on a big opportunity, because probably a competitor was able to do it more efficiently and faster. And they were able to gain the distribution from it, which is one of the most valuable things. They were able to learn customers away from you. They were able to acquire new customers faster, because they executed more quickly. And I think, you know, getting the market efficiently and quickly and gaining that advantage, that first mover advantage, that can be hugely valuable. And so if you’re sitting back, just trying to build everything super, super custom from day one could benefit you with a better release. But also, you’re not learning as much from your customer. Now you’re not getting data and feedback, you’re just making an assumption and guessing on many things they may want, you may or may not know that. And so if you’re able to get to market quick, if you have a mechanism for getting data and feedback, you have a strategy around how you’re going to leverage this data across many different financial services in the future. And you do all of these things and you get to market quickly then you reap the rewards of all those benefits. So you know, that’s what things I would look for in providers, do they have the ability to do all those things. Can they help you get there? Can they help you execute? Are they a real partner with you in doing this? Do they understand all of these things? And can they help you not only in the initial implementation with their service, but do they have an understanding of what else is out there and how you can execute on those as a second, third, fourth, fifth step over the next decade?
Bob Butler
Yeah, I couldn’t agree with you more because sometimes just getting up and running and getting into market, because I think with a lot of what’s going on in the space, it is a land grab right now. And sitting back and trying to build perfect, while letting perfect be the enemy of the good is a bad strategy, as we’re out here trying to build this thing and push forward. So I couldn’t agree with you more, because I’ve seen a lot of success even on the stuff that we’ve worked on together, just seeing the pickup in a very short period of time. So, you know, you mentioned in your last answer, like other complementary offerings that SaaS businesses can provide for their customers to monetize payments, I’d like to sort of pick that apart a little bit. What are some other thoughts? You mentioned insurance, and consumer side lending? What are some other things that you think might be helpful as these software companies look to add other embedded financial services and products?
Jon Fry
I think like how they build off of each other, you know, you want to try to capture those synergies as much as possible. And what I mean by that is, when you look at what Shopify is doing, where they have, you know, they did payments, and they’ve executed on that very, very well, then they did Shopify Capital, so they’re providing the growth. Then they have the Buy Now Pay Later in the checkout process. So it’s kind of like they got a full loop, a full circle, where now their businesses are getting from the Buy Now Pay Later, they’re be able to purchase more, they’re able to get figure cart sizes, they’re able to do more volume of transactions that they’re getting, then they’re able to go out and scaling by purchasing more inventory at wholesale rates, they can make investments in their business, they can do all these other things, and then powering all that is the payment. So every bit of flow, you know, it’s very easy for the payments to flow through. And then Shopify is able to monetize all of that flow. So you want to look for those virtuous circles in other areas and see what’s going to drive the most impact for your company. But also what’s going to get the flywheel turn in on kind of the second order effects. What other impacts is it going to have, if you’re selling ads on your platform, for example, you have an ad financing product that’s going to initiate the more purchase of ads, or if you have equipment, loans, and you have equipment financing product in the checkout process, you know, how’s that going to impact? What’s the second order effect of people being able to have that option when they’re going through that process? So I think that’s one thing to look at is it’s about the top line revenue, but it’s how about how these products synergize and work together, and then about the second order effects that they call. So that’s one thing I would dig into and look at.
Bob Butler
I really appreciate it. You have any closing thoughts before we wrap up for today?
Jon Fry
Well, I mean, it’s an exciting time. Like I said, I think there’s going to be an absolute explosion of innovation over the coming decade. It’s cool to kind of be at the ground floor with companies paving the way or on the shoulders of those who paved the way with all the awesome innovation that’s happened over the last decade. And the great companies that were built, much of this would not be possible without all that they paved the path for us. And now there’s companies out here like Payrix and Lendflow that can help push things forward. So if you’re not innovating, you’re not in there yet. And I think we’re still early days, and I think you should hop in. So I’d certainly love to hear from you. If you’re thinking about building in this space, or you’re thinking about executing on these opportunities. I’d always love to chat, so feel free to reach out to me over email on LinkedIn. And yeah, I’d like to continue the conversation as well with you, Bob, anytime you’d like to have me back on here, dig into any of these topics. Happy to do it.
Bob Butler
Really appreciate it Jon, you got it. You’ve been great partners, and have really enjoyed the relationship with Lendflow. Again, want to thank you for being on the show. I know we’re both big believers in sharing knowledge and experience on embedded solutions. So we really appreciate you joining us today.
Jon Fry
Appreciate it, Bob. Thanks a lot. It’s awesome to be here.
Bob Butler
We will continue to invite industry experts like you on the show because we want to be a trusted resource for software providers who are out there trying to make sense of embedded solutions and PayFac® and to help them get the education they need to make the business decisions their customers and investors will thank them for.
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/podcast.
