Embedded Finance Can Be A Game Changer For Nonfinancial Businesses

Phill Rosen, Founder and CEO of Even Financial.

Nonfinancial companies increasingly are embedding financial services into their digital customer experiences—including payment options, financing, insurance, banking and investing. They’re striving to deliver the right services at the right time to seamlessly move transactions forward, create relevant cross-sells and improve conversion rates. These companies aim to diversify and grow revenue streams while strengthening customer loyalty and lifetime value. Of course, at the end of the day, the objective is to make consumers’ lives easier by making it effortless for them to access the financial products and services they need.

It’s driving results—revenue, diversification and increased customer lifetime value (LTV)—for many businesses. Nearly half of nonfinancial companies are already investing in embedded finance offerings—in a survey of 1,000 leaders in these types of companies, nearly 88% report they have been “successful” or “very successful” at increasing customer engagement. By adding fintech solutions, SaaS businesses can potentially increase revenue-per-customer two to five times and create new markets “that previously may not have been accessible due to a smaller software market or inefficient customer acquisition,” analysts from Andreessen Horowitz report.

Embedded finance is the new normal for modern business, regardless of the sector. As founder and CEO of an embedded finance marketplace, I’m a strong advocate for the benefits of embedded finance in enabling a financial services ecosystem that streamlines the customer experience with flexibility and efficiency.

Covid-19 Was An Inflection Point For Embedded Finance

The pandemic accelerated the growth in embedded finance, forcing changes that were expected to take years to unfold to occur in just months. “From banks limiting their branch access and hours, to the fear of coronavirus contaminating paper bills and coins, the Covid-19 pandemic has fast-tracked the changing relationship between consumers and their banks or credit unions,” Forbes Advisor noted.

Adoption of fintech and digital banking services soared across demographic groups. New users flocked to smartphone apps to manage their personal finances, budgets and investments. Consumers gained confidence in the security of these solutions and appreciated the convenience. Companies responded with investment, innovation and a desire to embed financial services into their own offering. Demand will continue to intensify as millennials and Generation Z become a larger part of the consumer market, J.D. Power says.

The embedded finance market is forecast to grow 215% to more than $230 billion by 2026. More than 8 in 10 U.S. companies say financial services are essential to their future success or rank among their top strategic priorities.

The Next Phase

A growing variety of financial services are being embedded within the user experiences of an expanding number of industries—including healthcare, education, automotive, hospitality and real estate. This creates significant opportunities—and threats—for businesses worldwide. While many are familiar with embedded finance to make payments or utilize buy now, pay later (BNPL) offerings, the use cases for embedded finance go far beyond these initial applications, and businesses are seeing significant benefits including:

Revenue Growth: Carvana, the e-commerce platform for used cars, partnered with Root Insurance to offer auto insurance at the point of sale—and more than tripled the carrier’s new policy writings. “We do believe embedded [insurance] is a gigantic opportunity,” Root CEO Alex Timm said. “We think it builds better consumer experiences. And we think that we’re at the tip of that spear.”

Revenue Diversification: Toast, which provides point-of-sale hardware and marketing tools to restaurants, partnered with WebBank to offer loans of $5,000 to $250,000 to its clients, which can use them for any business purpose including expansion, covering short-term cash flow and refinancing debt. “The loans are underwritten using Toast’s transaction data, making the application process faster and simpler, and repayment is automatic and adjusts based on the restaurant’s incoming cash flow, taking into account seasonality, something a traditional bank would not be able to do,” according to Andreeson Horowitz.

Increased Customer Lifetime Value (LTV): MindBody is a SaaS company that helps fitness studios manage class schedules. Its original revenue model was based on subscription fees. Then it began enabling transactions on its platforms, earning 3% for every yoga mat and course sold. Today, more than half its revenues come from payments—and the added payments revenue increased the lifetime value of an average MindBody customer 25% while the cost of acquiring a customer stayed the same or declined.

Getting In The Game

For every early adopter successfully embedding financial services into their customers’ paths, there are companies at risk of being left behind. Here are several questions to ask when assessing whether your company should develop an embedded finance offering:

• Do you have a trusted brand and strong client relationships? That’s the foundation for a strategy to strengthen and expand customer engagement.

• What specific customer problem are you addressing?

• What’s your business objective? How will you measure success?

• What in-house capabilities can you bring to developing an embedded finance offering and what will you turn to vendors for?

• Is there an opportunity to leverage customer data?

• Can you allocate dedicated resources to the initiative?

Embedded finance is here, and it makes promises to help more nonfinancial companies tap new revenue streams and increase customer engagement and lifetime value in the next few years. It’s time to explore how your company can seize the opportunity.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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