Status update on embedded fintech
Embedded finance and embedded infrastructure has arguably been the hottest sector in fintech over the course of the past 5+ years. The tide feels like it's shifted recently though - have seen a number of articles come out titled something to the effect of "Is Embedded Finance Dead?". While it's inevitable that startups in any space will struggle at times, I think there are certain characteristics of what sorts of embedded plays have more staying power than others.
First of all, I fundamentally believe that embedded finance sells convenience at the end of the day. The inherent value prop comes down to converting a customer where they already are and minimizing friction associated with offering said financial product. Yes, sure, at times the embedded product can in fact be a superior one if there is significant strategic value that can be derived from the first party data that the embedded platform possesses (ie. embedded lending at times), but by and large, what's driving conversion is the concept of bundling and cutting out additional steps.
With that in mind, I want to delineate between two different types of embedded finance.
Embedded transactions - these are one off purchases / interactions with financial products that are discrete in nature. There is no software platform associated here that would drive reengagement from end customers. Think embedded travel insurance, embedded payments, bnpl on ecom sites, etc.
Embedded platforms - these are software products with user experiences that look to reengage customers on a more consistent basis. Ie. embedded accounting, AP, investing, etc.
Embedded transactions offer a more self evident value prop when viewing things through the lens of convenience. Buying travel insurance at the point of checking out for a flight is a way better customer experience than having to go to an insurance company's website and manually enter travel information. Because each customer interaction is discrete and independent, this idea of a convenient conversion experience can continue to drive the behavior behind each transaction, meaning that the embedded solution will continue to prove superior to something hosted by a third-party. Now that said, just because these products make a ton of sense to embed doesn't necessarily mean startups have a right to win here. Incumbents continue to improve at embedding their existing products, so we tend to see startups succeed here when they're able to offer new / unique products at the point of sale (ie. why bnpl startups transformed the way people finance purchases but travel insurance is still dominated by legacy carriers).
Embedded platforms, on the other hand, are slightly trickier. If we take embedded accounting for example, customers either 1) have an existing accounting system already or 2) are net new businesses looking to put together their tech stack for the first time. For the first group, the marginal convenience of bundling accounting + whatever the embedded platform offers must dramatically outweigh the hassle associated with churning off an existing platform. This is often a difficult sell, even if the embedded approach is a slightly better product at the end of the day, simply because it requires a churn decision to be made. The second group is a bit easier a sell - by bundling, this simply reduces the number of unique platforms a net new business would need to deal with, a convenience which can be reason enough to adopt. That said, net new businesses obviously are the most likely to shut down, creating an inherent retention problem as customers die. Players who win here are those who are able to provide a significantly better product as a result of being embedded and can successfully win larger customers from incumbents, or serve SMBs and establish partnerships with players who have incredible access to a wide breadth of SMBs (ie. why Gusto's partnership with JPM theoretically makes so much sense).