By John Tucker
For this article, I will continue to explore embedded finance by examining some product categories that fall under the embedded finance umbrella. Embedded finance is basically banking-as-a-service (BaaS), a concept that's been in development since at least 2017—but the COVID 19 pandemic accelerated development of various BaaS products.
The BaaS movement involves technology companies, media platforms and other non-finance companies that, in a sense, become financial services companies because they embed financial services into the already existing daily experiences of their customers. These services are embedded at the point of need, and the companies derive a portion of their revenues or growth from having embedded said financial services.
By embedding at the point of need, the companies provide end users with a better user experience and more convenience, both of which lead to more loyalty and revenue growth.
Fintech researchers Simon Torrance, author and presenter at New Growth Playbook, and Matt Harris, a partner at Bain Capital Ventures, estimate that by 2030, BaaS-related products and services will be a $7.2 trillion global market opportunity, with $3.6 trillion of such coming from the United States alone.
So a significant amount of money is at stake, and if you follow fintech companies on Owler, Crunchbase, and other sources that are creating solutions in this area, you will see they are raising a lot of equity rounds for innovative technologies they're developing.
This article contains a high-level overview of some of the products that would fall under embedded finance/BaaS for the commercial side of things, along with some of the players within those sectors that are causing serious disruption. Note that there are many embedded finance products and players in the market, but I will focus now on products more in relation to the commercial sector.
In two prior Street SmartsSM articles, "The payfacs are coming – Parts 1 and 2, published May 10 and 24, 2021, in issues 21:05:01 and 21:05:02, respectively, I highlighted the rise of payment facilitators (payfacs) and how they could become a major challenge in the bankcard processing industry.
Today, for example, Infinicept estimates there are about 1,000 payfacs globally, managing around $1 trillion in processing volume. However, by 2025 we could see over 4,000 global payfacs managing over $4 trillion in processing volume.
Of the 1,000 payfacs today, three companies dominate the market: PayPal, Stripe and Square. These companies pioneered the payfac model and operation, helping lay the foundation for other prospective payfacs.
CBInsights projects that by 2025, buy now/pay later (BNPL) products could grow to $1 trillion in processing volumes in the United States alone. BNPL products allow buyers (consumers and businesses) to purchase items now and pay for them later, either through multiple fixed installments over two to 12 months, or through a lump sum payment that’s made within 30 to 60 days, using a net term structure.
The goals of BNPL solutions are to boost convenience and transparency, provide a better buying experience for the customer, and help the seller generate more revenues through converting new customers, boosting average ticket values, increasing annual buyer spend, and doing business more efficiently with higher risk clients/customers.
Some BNPL players focus mainly on business-to-consumer (B2C) transactions. These include PayPal, Affirm, Afterpay, Klarna, PerPay, Quadpay, Sezzle, and even Spence, which has a Cannabis BNPL product. Other BNPL players focus exclusively on business-to-business (B2B) transactions. Among them is TreviPay, which offers net 30-, 45-, and 60-day term programs for B2B companies.
While we are all mainly involved in the payments sector, we can’t ignore the emerging convergence of insurance and technology (insurtech), which can conveniently fit within a customized industry sector package of integrated solutions. Insurtech is about disrupting the traditional, slow insurance market. It is being driven by embedded insurance, which means incorporating insurance policies at the prospective policyholder's point of need and point of checkout using APIs and other forms of technological integration. What’s interesting here is on the B2B side, fintech researcher Simon Torrance (author of FightBack: How To Win In The Digital Economy With Platforms, Ventures and Entrepreneurs) projects that embedded insurance could account for over $700 billion in gross written premiums on property and casualty policies by 2030, which would be 25 percent of the global market.
Imagine if future integrated packages presented to various verticals included not just the payments piece, but also the insurance piece. It’ll be exciting to see how insurtech development plays out this decade, but one company in particular to watch is NEXT Insurance, which recently completed a partnership with Amazon Business Prime to allow business owners on the membership to quickly, easily and efficiently purchase business insurance policies online.
So again, we are in the payments sector, but I believe that, like insurtech, regulatory technology (regtech) could become part of a customized industry-sector package this decade.
Regtech is all about taking various complex regulations, screenings, fraud detection and prevention, identity management, transaction monitoring, and other aspects of compliance, and bundling them within an as-a-service offering.
This helps businesses become more efficient on the compliance end, saving them the time and resources typically required to complete compliance work internally in a segmented fashion.
As fintechs continue to play a greater part in the payments industry, we could see regtech solutions integrated into industry-vertical solutions. This is just another way to focus more on the value of your total solution offering, rather than getting into a price war based on selling the same commoditized solution that everyone else is offering. A company to follow in this area is Acuant, which provides a variety of regtech solutions for different industry verticals.
Angela Strange from Andreessen Horowitz (www.a16z.com) said that as we go forward, "every company will become a financial services company." And the team at 11:FS (www.11fs.com) stated that fintech is only 1 percent "finished." With the rapid rise of embedded finance, it's both a challenging and exciting time to be in payments.
The challenging part is trying to keep up with all of the changes, which means continued learning and making sure you are positioned properly going forward. What’s exciting here is that if you position yourself properly and continue to learn, there's a blue ocean out there in terms of high compensation potential and career stability if you bring the right integrated solutions to the right verticals.
John Tucker is U.S. enterprise sales director for TreviPay (www.trevipay.com) and has over 14 years of B2B sales experience in commercial finance. Tucker is an MBA graduate and holder of three bachelor's degrees in accounting, business management and journalism. To connect with him, feel free to send him a connection invite via LinkedIn at www.linkedin.com/in/johntucker99/.
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