Are payments the right starting point for software companies interested in Embedded Finance?

Updated on August 9, 2023

Remember the transition from license-driven business models to subscription-based recurring revenue? It felt like seismic change at the time.

Now the sands are shifting once more, as ambitious software companies look beyond their subscriber bases toward a wider mix of revenue sources.

Many software leaders are getting proactive in driving their companies toward revenue diversification through value-adding services like embedded financial services. Our 2023 Embedded Finance Survey Report revealed 98% of software businesses plan to launch (or improve) an embedded finance product in the next year.

Which SaaS customers want financial services?

First, it comes with an understanding that no two SaaS businesses are the same. Your vertical has its own attributes and nuances. And that raises a question: Which SaaS verticals can embed finance offerings? To answer this, seek to understand the needs of the people who hold the future of your business in their hands —your customers. Consider those who shows signs of:

  • high inventory costs
  • seasonal cash flow gaps
  • rising employee headcount
  • exponential product demand
  • or growth opportunities they can’t seize alone

For example, home services, construction, transportation, and personal and business services may benefit from split payments, payroll and embedded accounting solutions. These industries often face cash flow challenges and are poised for growth, making them potential candidates for your software platform’s diversified offerings.

Other industries may just be looking for better ways to run their business and want to streamline services such as payments.

Are payments the only pathway?

Some SaaS companies take the first steps into financial services by monetizing their payments. Different verticals take different routes into the Embedded Finance arena. For example, some SaaS executives prefer to stick with a integrated payments referral approach. Others choose payment facilitation. And others still pick our PayFac-as-a-Service model.

Ultimately, by enabling seamless and secure transactions, you gain the trust of merchant subscribers. Handling payments efficiently can also give you valuable data to identify if and where there is a potentially lucrative demand for additional financial services.

Other revenue routes

Can other financial services broaden your revenue sources too? In short, yes. The survey report we mentioned earlier revealed software companies that embed financial services can drive an average revenue increase of more than 40% per product built.

Payments are one potential pathway to such results. There are other sweet spots too. You don’t need to have begun with payments to embed growth capital, inventory financing, or insurance into your platform. You may even decide that lending, deposit accounts, or payroll services appeal to your subscribers far more.

Small businesses are the classic example. By providing contextually relevant financing options, your software business could help SMBs to address cash flow gaps and support their employees, customers, and vendors though both lean and lucrative times.

Picking the right partner

As Lendflow CEO Jon Fry suggested in an interview on our podcast, you should create a dedicated strategic plan if you’re getting serious about embedded finance. For some, that may mean starting with embedded payments and planning for other products like lending, insurance, consumer-side lending, deposit accounts, and credit cards.

For others, it may mean knowing you only want to provide financial services in a limited and targeted way.  As you embark on this journey, carefully analyze verticals, prioritize services, and collaborate with trusted partners to accelerate your market entry. Consider:

  • Using your existing subscriber or transaction data to inform your potential financial service offerings and build a realistic roadmap to make your chosen product a reality
  • Shortlist technology and banking partners that understand your vertical and embedded fintech, its licensing needs, and your regulatory duties as a financial services provider
  • Choose a trusted financial institution and white-label embedded finance provider who can expedite your time-to-market, limit development costs, and enable compliance

Embedding value

By embedding financial services to increase revenue streams beyond subscriber revenues, companies can actually shore up those very same touchstone revenues. When you solve critical pain points — think cash flow management and growth capital — you make your platform stickier and improve customer retention. This in turn creates a flywheel effect, giving you the ability to cross-sell and upsell further financial services that diversify your revenue.

It’s up to you whether you choose Embedded Payments, Embedded Lending, working capital, consumer-side lending, or deposit accounts, but one thing’s clear: SaaS businesses have a growing range of options to build a comprehensive financial ecosystem for their merchant clients. And there’s more than one path to success — and it’s yours to forge.

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