The Future Of Embedded Finance

As embedded finance (EmFi) enablers embrace new opportunities in the corporate and enterprise world, there is a temptation to pursue game-changing deals solely with large clients at the expense of servicing startups. According to conversations with European early-stage fintech startups, finding a Bank as a Service (BaaS) or EmFi partner is increasingly challenging. However, after years of fueling the fintech revolution and supporting European leaders such as PayHawk, Qonto, and TradeRepublic, should EmFi enablers look to win over corporate and enterprise clients at the expense of SMEs? Can a dual sales and product strategy serve startups and larger companies? These questions sit at the heart of every EmFi enabler’s sales and product strategy today. Alex Mifsud, Co-founder and CEO of Weavr.io, and Paul Staples, Group Head of Embedded Banking at ClearBank, shared their respective views and tips for success and each market segment’s unique opportunities.

Evaluating the Risk-Reward Tradeoff in EmFi

Both Mifsud and Staples believe that EmFi enablers can target both the startup and corporate spaces and a valid framework for assessing the tradeoff between onboarding a startup vs. onboarding a large corporation is critical. Mifsud highlights that while startups move quickly and often have embedded finance at the heart of their offering, they are yet to have an existing customer base. Corporates and enterprises, on the other hand, bring a substantial, established customer base. He explained, “an enterprise embedder can bring a substantial established customer base, the know-how to engage those customers, and the resources to scale delivery. When successful, enterprise deployments can deliver transformational volumes of embedded finance activity for an embedded finance provider.”

Pursuing a corporate or enterprise client is not without risk. In addition to challenges with adapting to the technical offering and corporate IT environments, Mifsud highlighted the long and complex sales cycle, “The success rate is not as high as one might expect from enterprise deals; embedded finance for these types of embedder is often an incremental enhancement to an established proposition and has to vie with many other priorities and are subject to getting dropped when they hit challenges or a greater awareness of the risks involved dawns on the organization’s senior leadership.“

Mifsud disclosed that Weaver uses the concept of Realisable Annualised Revenue (RAR) as the critical revenue metric for embedder opportunities. He noted that “RAR is not technically ‘recurring,’ but in practice, it is since it is driven by transaction activity, which tends to be repeat behavior). When comparing RAR for enterprise embedders vs. startups, there is frequently an order of magnitude difference, so it’s easy to ask: why bother with the startups?”

With this approach, he advises “not to exclude startups but to set a high bar to take them

on as customers. By qualifying tightly (considering the founders, their backing, the quality of their application, how compelling the market, etc.), you could be serving a fast-growing company that quickly evolves into a rocket ship.

Crafting Tailored Products for Diverse Client Needs

Once the risk framework is established, the next step is to ensure that the product offer can cater to the distinct needs of the startup or corporate client. Staples points out that while having both startup and enterprise strategies is feasible, the required products and services differ significantly. “The product is materially different due to the grades of services required. The procurement, infosec, compliance, and brand assurances that Enterprise strategies require and the underlying customer service/SLA/KPI standards are materially different from those that Startups look at. Thus, the maturity of the EmFi provider to appreciate these elements and provide for them is key. EmFi is still banking and built on trust. The corporation leveraging EmFi with its customers still needs to provide immutable trust, and this is where an enterprise-grade provider is required with demonstrable experience and financial depth to support them.”

To create a successful product and service offering, an enabler must deeply understand the benefits and motivations for making an embedded finance play. Staples categorizes enterprise opportunities into two opportunities. The first is launching new customer-centric products and services and creating operational efficiencies. He cites the example of Toast, a Vertical SaaS Enterprise, successfully using EmFi to streamline purchasing and inventory payment for restaurant owners, enhancing end-user efficiency. The second is part of a large corporation with limited direct-to-consumer propositions to adopt EmFi for internal operational efficiencies.

Staples suggests that multinational corporations like Sony have immense opportunities to own their banking solutions – they already have a bank in Japan that they own through which operations are centralized. “With Sony, this is where a full stack enterprise-grade embedded banking platform with direct connections to the UK payment schemes that leverage their lessons in Japan could be built quickly and safely on a platform that ClearBank has to offer. It puts a corporate in control to construct the banking model they need, not what’s imposed on them. We’re helping brands and businesses explore how using a banking platform operated by the corporation builds efficiency in their operations, de-risks cashflow, and drives new internal opportunities while also being used to build new externally facing propositions and experiences.

Mifsud believes the reasons for enterprise customers to adopt embedded finance are, in many cases, purer than those for startups. He cited several drivers that Weavr.io has seen in its relationships with large clients.

1. The wish to deliver more value to customers, often in response to customer requests.
2. For marketplaces and logistics platforms, the opportunity to increase gross merchandise value. Mifsud stated, “Some marketplaces and logistics platforms see a huge increase of 40%-50%, which is not unusual in the volume of trading when, say, working capital is provided to the buyers or factoring to the seller.”
3. Mifsud clarified the need to increase revenue per user (ARPU): ” This has been especially important in the past couple of years for SaaS businesses that have faced the double whammy of tight funding (for customer acquisition) and tightening customer demand (as business customers looked at reducing their SaaS spend).”
4. Embedded finance has been an opportunity to retain more customers and increase the revenue from every customer that adopts the financial service. Mifsud disclosed, “This increase in revenue can be as high as 4- 5x (see Shopify); at Weavr, we routinely see a doubling or more revenue per user that adopts the embedded finance offering.”
5. Catching up with the competition—seeing your competitor delight customers with an integrated experience is a wake-up call for enterprise product leaders and CEOs.

^{Specialization vs. One-Size-Fits-All in Embedded Finance}

Historically, the license held has dictated a BaaS or EmFi’s offering. Those with an EMI license were restricted to a primary offering of cards, payments, and accounts. Enablers with a full banking license can extend into investing, savings, and more. However, just because an enabler can offer a “bank in a box” across any industry, does that mean they should?

Mifsud believes a one-size-fits approach has proved limited in capability, explaining “the one-size-fits-all approaches to embedded finance, namely open banking and BaaS,

have either been too limited in capability (open banking) or too prone to missing the

standards required by regulators (BaaS).”

Specialization is critical in an enabler’s product and sales strategy. Mifsud highlights that offering a mono-line solution leads to a high potential for re-use. “For instance, each solution might be supported by a specialist risk model and custom-design compliance to reduce user friction in the context in which it is intended. However, the methodology for building risk models and understanding usability and risk exposure trade-offs are the same (even if the result isn’t). Therefore, it should be possible to build a ‘meta engine’ for embedded finance solutions.”

Mifsud likens this to an operating system and supports multiple applications while ensuring that specific standards) are upheld. He disclosed, “This is the approach that Weavr has taken to be able to offer a range of ‘embeddable financial products’ aimed at providing embedded finance into various use-cases typically served by SaaS and B2B digital platforms, such as expenses management, employee benefits, and accounts payable.”

The Secret Sauce

Staples’s advice demonstrates that no matter what area you operate in, understanding your customers’ nuances, problems and behavior is key. When asked what the secret sauce to a successful enterprise strategy could look like for EmFi enablers, Staples simply explained, “thinking like a corporate.” Staples highlighted, “I’ve been in startup land, and the delta is palpable. A tech startup is like a puppy in training with a wise old dog alongside. The puppy wants to play, has boundless energy, and sees everything as an opportunity, whereas, the wise old dog wants an easy life, cozy in front of the fire, and takes time to reflect on what it’s doing. As a result, the startup burns out, and the old dog snaps in frustration. As a startup working with Enterprise, you must demonstrate that despite your energy and opportunity, you can behave like a corporate and recognize the interplays, internal competing of strategic outcomes, and resource profiles. These take time and effort to understand, manage and navigate.”

For Mifsud, the secret sauce lies in the ability of an EmFi enabler to carry a compliance burden. He stated, “To do and survive (nay, thrive), embedded finance enablers must be astonishingly good at managing risk and compliance. Our house view at Weavr is that you cannot be good enough unless you focus on a narrow range of use cases where you can hope to understand and manage the risks effectively and cost-efficiently, and can design the embedded finance solution to be compliant yet usable (and deliverable via the third-party code and UX). Once you focus narrowly, you start to perfect that secret sauce, but only for those use cases that you are catering for.”

The future of embedded finance lies in effectively balancing the needs of startups and enterprises. While startups may be tempting to overlook, a partner never knows who the next Unicorn is. Enterprises provide stability and significant revenue potential but require longer sales cycles and stringent compliance standards. By balancing agility with robustness and specialization with scalability, EmFi enablers can continue supporting the fintech revolution while capitalizing on opportunities within corporate and enterprise sectors. Staples and Mifsud emphasize that understanding customer nuances and perfecting risk management are key to thriving.