The Rise of Embedded Finance

A Report on the Evolution and the Future of Embedded Finance

Foreword

Over the last decade we have shifted from disrupting financial institutions to In some ways it’s easier to run a small business today than it has been for a long
embedding the world of finance behind apps and websites to enable a better and time. The proliferation of software services designed to take the pain out of
smoother user experience and allow high digital traffic and user players to further undifferentiated operations means businesses can focus on what makes them
monetise and increase stickiness. special. This is best encapsulated in the rise of vertical specific software
platforms. If you want to run a local gym, there’s a software platform to help you
This trend is widely referred to as “embedded finance,” and it is fast becoming keep track of memberships, class bookings, and more. If you want to open a
one of the most disruptive trends across payments, banking, lending, insurance, restaurant, there’s a software platform to help manage table reservations,
and payroll. Embedded finance uses connective technologies to integrate ordering, and takeaway deliveries.
payments and other financial products directly into non-financial platforms, such
as company websites or mobile apps, enabling any merchant or brand to offer Financial services have been notably absent from this trend. If the gym or
innovative financial services to customers rapidly and at a relatively low cost. restaurant owner wants a loan, all of a sudden they have to close the laptop and
re-enter a world of pen-and-paper forms, faxes, and in-person appointments. By
The proliferation of cloud computing and the growing use of open application reengineering the distribution paths for financial services through these software
programming interfaces (APIs) has been a major catalyst, accelerating and platforms, we can make it far easier for businesses to access funding and manage
reducing the barriers to entry, to make embedded finance possible and their money, and so provide a vital boost to the small business economy.
accessible.
It’s clear this is already happening, but it’s equally clear there’s a long way to go.
We predict that the embedded finance industry will become one of the most At Stripe we’ve spent 10 years embedding payments services into software
value creative sectors in fintech, reaching a value of $7 trillion globally over the platforms, and we are now doing the same with lending, account provision, card
next ten years. While some of the early embedded finance models (e.g., issuing, and more. Embedded finance is a positive sum trend we’re excited to
payments and lending) are starting to mature, we still see significant growth catalyse; banks can serve small businesses at scale, software platforms can
potential across industries like health, real estate, and employment where plenty diversify their revenue, and small businesses can grow more easily.
of white space remains.

Radboud Vlaar Edward Moore

Managing Partner, Finch Capital Head of EMEA SaaS Platforms
Revenue & Growth, Stripe

1
Summary of content

1.
1 Introduction
○ The evolution of platform solutions from SaaS to BaaS—SaaS 3.0. .……………………………………………………………. 5
○ Embedded finance is surfing the wave of platformification and proliferation of APIs .………………………….……………… 6
○ The barriers to entry are coming down—card issuing example ………………………………………………….……………... 7
○ What problems is embedded finance solving? ………………………………………………………………………………….. 8

2.
2 Investor Perspective
○ The market is maturing with an increasing amount of growth rounds …………………………………………………………10
○ The majority of EF deals in 2022 are B2B software solutions raising $4-15m ………………………………………………….. 11
○ The biggest exits are happening in the US ……………………………………………………………………………………….12
○ Insights from experts on the market ……………………………………………………………………………………………..13
○ What industries are buying embedded finance products? ………………………………………………………………………14

3.
3 Industry Deep Dives
○ Shaping the bank of the future, part 1—financial services (BaaS) .……………………………………………………………...16
○ Shaping the bank of the future, part 2—financial services (BaaS)……………………………………………………………… 17
○ Stripe use case—financial services (BaaS)………………………………………………………………………………………. 18
○ Reducing the protection gap—financial services (embedded insurance)………………………………………………………. 19
○ Creating more value for customers—platforms and marketplaces……………………………………………….…………….. 20
○ Stripe use case—platforms and marketplaces…………………………………………………………………….…………….. 21
○ Improving CX to increase loyalty—travel and hospitality………………………………………………………….……………. 22
○ Stripe use case—travel and hospitality…………………………………………………………………………….……………. 23
○ Shaking up the traditional payment methods—healthcare……………………………………………………….…………….. 24
○ Transforming consumer behaviours—retail and ecommerce……………………………………………………….….……….. 25
○ Stripe use case—retail and ecommerce…………………………………………………………………………….….………... 26
○ Finch Capital featured portfolio companies…………………………………………………………………………..…………. 27

2
Summary of content

1.
4 Trends and the Future of Embedded Finance
○ Why is the opportunity now? ……………………………………………………………………………………………………29
○ Embedded finance VC hype cycle .………………………………………………………………………………………………30
○ Our predictions—part 1 .…….…………………………………………………………………………………………………..31
○ Our predictions—part 2 .…….…………………………………………………………………………………………………..32
5
2. Conclusion
○ Key takeaways …………………………………………………………………………………………………………………… 34
○ How Stripe can help ……………………………………………………………………………………………………………..35
○ About Finch Capital ………………………………………………………………………………………………………………36

3
Introduction
The evolution of platform solutions from SaaS to BaaS—SaaS 3.0

The Evolution of SaaS platforms

A decade ago, almost every platform could be
considered “SaaS 1.0,” where they simply offered
tailored software services (e.g., appointment
scheduling for salons) and generated monthly recurring
revenue from customer subscriptions. Today, most
platforms are considered part of the “SaaS 2.0”
generation, where they also facilitate payments on
behalf of customers.
How BaaS works
Now, with the rise of banking-as-a-service solutions,
platforms are beginning to evolve yet again to "SaaS
3.0"—offering additional embedded finance features
(such as loans, accounts, and cards) to customers
beyond payments.

SaaS platforms notably use BaaS providers to embed

financial services into their platforms through simple
APIs and open banking.

Other embedded financial services are also emerging

beyond banking such as insurance and payroll.

5
EF is surfing the wave of platformification and proliferation of APIs

Growth of Embedded
The evolution of the embedded finance ecosystem PSD2 RTS deadline
finance API layer

Open banking
The rise of new business models that enable a Core banking solution
company’s core service to be utilised as a providers start to emerge
component of another firm’s broader proposition.

2010s 2020s

PAYMENTS LENDING CARDS INSURANCE BANKING COMPLIANCE PAYROLL

Payments capabilities (wire Credit and lending Card programs (physical Personalised products Treasury, full-featured AML, KYC/KYB, document Full-service payroll,
transfer, direct deposit, ATM (cash advances, loans, and virtual; credit, charge, (e.g., house, auto, etc.) with deposit accounts (savings, fraud detection and employee benefits, time
deposit, bill pay, international revolving credit, BNPL, prepaid, and debit) simple buying process automation, identity, and Attendance, hiring and
checking, clearing, cash,
payments) revenue financing)
matched to time of need. FBO, etc.) privacy onboarding

Business Model Maturity

EF: Embedded Finance

Source: Financial Related API added to ProgrammableWeb 6
The barriers to entry are coming down—card issuing example
Open API card issuing and payment processing platforms have lowered the barriers to entry, and provide developers with the tools required to build, test, launch,
and iterate single integration card programmes across national boundaries. They also allow for programmable controls so businesses can set dynamic controls
down to the card level. They can set spending limits, block or approve certain merchant categories, or create an advanced combination of rules for their needs.

How it started How it’s going

Card
network
Plugins
(e.g., fraud, 3D Secure)

Issuer
Issuer processor
bin sponsor
Card
provider
Fintech

Market evolution Flexible card programmes with enhanced developer experience

Credit Corporate Purchasing Virtual prepaid Highly customised card

cards cards cards cards programmes with a few API calls:

● Custom brand
Lower risk to the issuer ● Spending limits
● Single load/reloadable
Growth in the B2B payments Global value of ● Multi/single currency
number of B2B will account for virtual card
● Merchant (MCC/MID)
217% virtual card 71% the majority of $6.8T transactions will
restricted
transactions virtual card reach $6.8 trillion
in 2020 transactions in 2026, from $1.9
in 2026 trillion in 2021

7
Source: Juniper Research, ‘Virtual Cards—The Future B2B Solution’
What problems is embedded finance solving?

Embedded Finance is …

1 SMEs are struggling to obtain financial services via traditional means.

Fixed costs of providing SMEs with financial services via traditional means are high. For Serving underserved markets
instance, it costs the same to credit review a £100k turnover business as it does a £1M
turnover business.

2 Old lending models don’t work for new digital companies.

As the economy moves online, old financial models and long-winded loan application Disrupting financial services
processes are inefficient and becoming less tolerated by users. For instance, the typical
digital platform or marketplace has all the financial data required to make instant lending
decisions which can be leveraged by new embedded financial solutions. Providing “one-stop” shop solutions

3 Data is siloed which leads to poor personalisation of products.

Traditional financial institutions are not leveraging data to personalise the user experience and Improving CX
recommend relevant financial products to users at the right time in their journey.

4 Financial services are limited for thin file workers.

Today more than ever, consumers with low or no credit scores are in need of financial
services such as lending, payments, and banking. The old financial system is typically not Increasing financial inclusion
inclusive to thin file workers who suffer from high APR.

8
Investor Perspective
The market is maturing with an increasing amount of growth rounds
VC investments in embedded finance companies (in USD) VC deals in embedded finance companies by growth stage

All Swedish investments across

2018, 2019, 2020, and 2021 were
for the BNPL company (total $3B)

Notable 2021 growth deals across North America and Europe

● VC investments in the embedded finance companies have more than doubled
from 2020 to 2021 in Europe and North America to reach a total of $6.7B. US UK Netherlands
● The continental European market is finally picking up the pace with $1B+ of VC
investments in 2021 (excluding investments in Klarna).
● The market is maturing with the increasing share of larger rounds (Series A+) $660m Series D+IPO $600m Series D+E $335m Series D+E
over the years while the amount pre-seed and seed rounds have remain
constant.

Source: Dealroom, Pitchbook (April 2022) 10

The majority of EF deals in 2022 are B2B software solutions raising $4-15m

VC investments in embedded finance in 2022

- US & Europe (in USD)
Warsaw-based raised Berlin-based raised $5M Berlin-based raised $10.5M
$18.5M series A in Q2 2022 seed in Q1 2022 seed in Q1 2022

Payroll Accounting and Admin Lending

Majority of deals
are B2B software
solutions raising
$4-15m
London-based raised $11M Barcelona-based raised San Francisco-based raised
series A in Q1 2022 $10M seed in Q1 2022 $7M seed in Q1 2022

Insurance Banking, Payroll BNPL

● The market is diversifying as more and more large seed and series A deals are being made
across European countries and verticals.
● The share of series B and C rounds is healthy and reflects the growing maturity of the
embedded finance industry.
Notable 2022 growth deals
US UK UK Italy US UK France

$620M Growth $400M Growth $229M Growth $213M Series B $180 Series C $131M Growth $115M Series C

EF: Embedded Finance

Source: Dealroom, Pitchbook (April 2022) 11
The biggest exits are happening in the US
VC exits by acquisitions VC exits by IPO

Date Location Acquirers Backers Valuation Date Location Backers Amount Valuation
(EV/Rev) (EV/Rev)

Atlanta, $2.2B $15B

Q3 2022 Q1 2021 SF, US $1.2B
US (4x) (32x)

Draper, $1.7B Oakland, $4B

Q4 2020 n/a Q2 2021 $360M
US (1.4x) US (19x)

Salt Lake $1.2B $15B

Q2 2020 Q2 2021 SF, US $1.2B
City, US (12x) (29x)

$450M Atlanta, $4.4B

Q4 2020 NYC, US Q2 2018 $874M
(1.9x) US (11x)

$440M
Q4 2021 NYC, US
(23.5x) ● We might wait a while before we see a European IPO,* as many fintech
players ruled out their plan to go public in 2022 amid the public market
Toronto, $262M slowdown (e.g., Revolut). This can be explained by the rising inflation, the
Q4 2020
Canada (6-9x) global instability stemming from the Ukraine/Russia conflict, and the
current pullback in valuations in the tech market.
Prague,
$140M ● Embedded financial services seem to increase valuation—according to
Q2 2021 Czech
(12x)
Republic Dealroom, marketplaces that embed financial services have a median
EV/Sales of 6.7x, compared to 5.3x for the ones that do not.

Source: Dealroom, Pitchbook (April 2022)

*Adyen announced the launch of embedded financial products in March 2022 post-IPO in 2018. 12
Insights from experts on the market

“The European tech ecosystem is younger than in the US, though it is

“The retail and ecommerce market has the advantage for embedded rapidly maturing across multiple centres of innovation—London, Paris,
finance due to its size, brand, and traffic power, making it easier to convert Stockholm, and Berlin to name a few.”
at moments that are relevant for people.”
“In fintech we’re seeing the strong, positive flywheel of repeat founders and
“The bigger opportunity is in B2B versus B2B2C, as this allows the client to experienced operators starting new companies. Much of this activity is
keep the relationship which is very important in general, but with more focussed on the embedded finance space, given the favourable European
challenging markets even more so.” regulatory landscape and scale and breadth of the opportunity set in
embedded finance.”

Radboud Vlaar Ellen Logan

Managing Partner, Finch Capital Investor, Augmentum Fintech

“Embedded finance is the infrastructure that is unlocking a new generation “Embedded finance is all about bringing two large industries—financial
of companies that are using financial services natively to create new services and digital applications—together to make the world work better.
solutions and better experiences for their users. It is fascinating to see what While delivering digital applications is permissionless, financial services is a
the next generation of founders is building leveraging embedded finance in highly regulated space, which makes this combination, despite its
markets as diverse as transportation, health tech, SaaS, climate tech, and value-creation potential, very hard in practice. This barrier is now being
many more.” removed.”

Yann Ranchere
Alex Mifsud
Partner, Anthemis
Co-founder and CEO, [Link]

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 What industries are buying embedded finance products?

Payroll

Lending

Banking

Investing &
wealth

Insurance

Payments &
cards
Maturity

B2B2B

B2B2B,
B2B2C

B2B2C

Financial services Healthcare Retail & ecommerce Travel & hospitality Platforms & marketplaces
$13.4B $1.1B $6.7B $5.2B $5.9B

Sectors, amount raised*

Disclaimer: This graphic provides a high-level view of companies which have made strong inroads into certain industries. It's not an exhaustive representation, and many of the companies represented work across multiple industries.
*Estimated total amount raised per sector from the above logos and more 14
Industry Deep Dives
Shaping the bank of the future, part 1—financial services (BaaS)

Traditional banks are competing with challenger banks for market shares

Primary bank account used by UK Challenge BaaS solution

employees to receive salary
Rise of digital-only
and mobile-first Cloud-native BaaS solutions enable
approach to traditional banks to bring digital
consumer banking products to market quickly

Restrictive legacy Cloud-based BaaS platforms power

systems for SME loans and enable traditional banks to
lending become pure capital providers

Source: CFTE, 2021 Adopting BaaS is a way for traditional banks to stay relevant and increase market share
notably in the consumer account and the business lending space.

BaaS = Banking as a Service

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Shaping the bank of the future, part 2—financial services (BaaS)

How we see banking evolving in the future

Banks BaaS Distribution/Origination/ Consumers

Capital Products Servicing

Underwriting Technology

Banks will remain guardians of capital

Third-party distribution and onboarding
BaaS enables traditional banks to and deploy their balance sheet and data
will become the dominant acquisition
outsource tech and product capabilities. advantage by leveraging historical data
channel for banks.
to underwrite.

17
Stripe use case—financial services (BaaS)

Shopify is a leading global commerce company, providing trusted tools to start, grow, market, and
manage a retail business of any size. With Shopify Balance, merchants can manage their funds, pay bills,
and track expenses. This gives them easier access to financial products and greater control over their “By building across Stripe’s payments and
business.
banking-as-a-service infrastructure, we’ve
Problem Impact been able to give Shopify merchants
Financial services are an essential part of running a Shopify Balance offers Shopify merchants a fast, access to critical financial products that
business, but most banking services aren’t designed simple, and integrated way to manage their
for the needs of independent business owners. funds. Built on Stripe Issuing and Treasury, meet their needs, such as faster access to
Shopify Balance gives users access to critical funds and rewards, helping them further
products—all within Shopify.
grow their businesses.”
Stripe Products

Payments Connect Issuing Tui Allen

Senior Product Lead for Banking at Shopify
Terminal Treasury

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Reducing the protection gap—financial services (embedded insurance)

Embedded insurance is the future growth channel

Challenge Solution

Lack of efficient Embed insurance product into fintech

distribution (neobank) at the point of sale via PSP
channels or directly via merchant or through
platforms.

Operational Claims handling software and

bottleneck technologies like AI can decrease
impacting margins operational pressure and improve CX.
and CX

The gig worker insurance example

A simple typology of gig worker protection gap Problem: Insurers’ appetite for individual gig worker risks tends to be
limited. Carriers prefer to provide group coverage to platforms and
workers’ associations.

Solution: Embed insurance product directly via platform. Through APIs,

insurance products can be integrated at point of demand.

19
Creating more value for customers—platforms and marketplaces

Financial services as a bundle Stride Bank <> Lyft example

From platform to ecosystem Fintech-enabled marketplaces

The wave of fintech across Europe over the past decade has seen the unbundling of
Lyft offers debit cards to its drivers powered by Stride Bank to give drivers
financial services. A new ecosystem opportunity for platforms is emerging, Financial
instant access to their earnings. Stride Bank handles the regulatory compliance
Services as a Bundle, with neobanks in pole position to capitalise on this trend.
requirements for providing the product.

E.g., Revolut is creating an ecosystem for its consumers

where they can trade stocks, book a holiday, earn
rewards/cashback, purchase insurance, and send gifts.

From marketplace to fintech

Embedding financial services into marketplaces makes financial services accessible at the
point of need in an innovative way for both buyers and sellers. This is creating significantly
more value for the marketplace by making the user journey smoother and unlocking new
revenue streams.

Motor Real Estate Education Health Freelancing

Source: Lyft

Insurance Escrow Financing Loans Payments Payroll Product features:

Compelling Regulatory
Branded debit card Faster payments
rewards program compliance
Benefits of fintech-enabled marketplaces
Customer experience improvements like seamless account opening and integration into
✔ New recurring and ancillary revenue streams ✔ Expanded market opportunity Lyft’s driver app provide a compelling product offering to Lyft’s drivers.
✔ Improved unit economics and lower CAC ✔ Enhanced CX with seamless user
journeys
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Stripe use case—platforms and marketplaces

Wayflyer is a great example of a platform using embedded finance. Wayflyer partners with ecommerce brands
around the world to give them the funding they need to grow. As its client base grew, Wayflyer was looking for a
way to lower the cost of providing funding to its customers so it could continue helping thousands of
ecommerce startups scale.

Solution Impact
Wayflyer chose to implement Stripe Issuing, which Today, Wayflyer has been able to provide $700
enables Wayflyer to issue virtual cards and gives its million in total lending through over 2,100 merchant
customers a convenient way to access their new cash advances. Using Stripe Issuing’s virtual cards,
funding. This enables them to share in interchange Wayflyer’s customers are now able to get immediate
revenue from card spend, which it gives back to its access to the funding they need. Wayflyer wanted a
customers as a discount on their loan terms. In turn, partner that served multiple international regions in
customers can leverage the additional capital they order to have the ability to scale in the future.
saved from reduced loan fees to reinvest in and grow Wayflyer is confident that Stripe's extensive
their businesses. Wayflyer also utilises Stripe Identity to international presence will help it expand quickly and
verify user identities and prevent fraud before offering easily as the company scales to new markets.
and dispersing funds via their virtual cards.

Stripe Products

Identity Issuing Payments

21
Improving CX to increase loyalty—travel and hospitality

The travel and hospitality sectors are recovering The travel and hospitality sector has already started to see some disruption with
BNPL, embedded insurance, payments, and card services tailored for the industry to
Customers are twice as likely to try new brands and experiences as a result of improve customer experience through affordability, rewards, and flexibility.
COVID-19, and 75% of US consumers tried a different store, website, or brand during
the pandemic. This is particularly important in the travel sector with its strong
reliance on loyalty programs. Banking
Payment & cards
As travel volumes are starting to return in many parts of the world, now is the time
for companies to re-prioritize customer experience and personalisation to gain a
strong competitive advantage. There is a huge potential for a wave of dissatisfied
customers at a time when loyalty is up for grabs.
BNPL

Insurance

Inc. car finance

Source: McKinsey, 2021

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Stripe use case—travel and hospitality

TripActions is a platform that helps businesses build, manage, and scale their corporate travel and expense
programmes. The company partnered with Stripe to launch TripActions Liquid, its virtual and physical card programme
that helps manage travel payments and expenses.

Solution Impact
After launching a successful corporate travel By partnering with Stripe, TripActions was able to
management platform in 2015, TripActions looked to move quickly: The company turned their idea into
expand offerings for its existing customers and new an entirely new product line in just six months.
users. The company decided to create a modern Another benefit of using Stripe Issuing is having
alternative to manage employee spend across travel access to dynamic spending control and being able
and non-travel categories and eliminate the concept of to have real-time authorisation over every charge, “Employees are no longer filing expense
traditional expense reports. TripActions Liquid is a which has saved the company valuable time and
travel payments and spend management solution with resources. Through Stripe Issuing, TripActions’
reports, managers aren’t looking at every
real-time visibility; automated expense reconciliation customers are able to experience the same transaction, and finance doesn't have to
and reporting; and smart physical and virtual cards with functionality and user experience in 20 countries
built-in controls. To power TripActions Liquid, they across Europe, including France, Germany, Spain, figure out the context of every transaction
chose Stripe Issuing, which allows companies to create, and the UK. They saw a 50% MoM adoption rate
manage, and distribute virtual and physical cards. growth in the first three months and 599X growth and whether it's in policy.”
in monthly expense volume in the first year.
Stripe Products
Robin Gandhi
Issuing Connect
SVP for Product and Payments at TripActions

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Shaking up the traditional payment methods—healthcare

Payment infrastructures are broken Market challengers examples

Product Market

All-in-one platform Dental

from processing
payments, UK, Netherlands,
subscriptions to France, Italy, Spain,
improved CX Germany

Source: OECD, 2016

Today, it takes more than 30 days on average for a provider to receive payment for their Practice General Practice,
services due to complexities inherent in today’s reimbursement models. management Clinic
platform, including
payments and US
insurance for
patients

Embedded Employers
payment, banking,
and ecommerce US
services for better
virtual care

Source: Waystar, survey US 2021

24
Transforming consumer behaviours—retail and ecommerce

Retail and ecommerce payment services timeline

Embedded
Brick & Mortar Lending
Insurance
POS Terminal Hire Purchase Online Payments B2B payments BNPL B2B BNPL Checkout BNPL 3.0

‘70s ‘80s ‘90s ‘00s ‘10s ‘20s

COVID-19 marked a lasting change in consumer behavior What’s next for embedded finance solutions?
Strong growth in ecommerce led to the rise of BNPL and other payment methods With the rise of inflation, default rates and bad debt are expected to increase
further for BNPL providers globally. This new challenge for loan providers could
1) Ecommerce market size (in $T) 2) Global Ecommerce payment methods
prove to be an opportunity for embedded solutions focussed on debt
management, collection, and recovery (see logos below).

A third of 18–24 year olds who have used BNPL have been charged late
payment fees (% of people surveyed)

Source: FT, 2022

Sources: 1) eMarketer, 2020; 2) Worldpay (FIS) Global Payment Report, 2021 25

Stripe use case—retail and ecommerce

WooCommerce is one of the most popular ecommerce platforms in the world, enabling WordPress businesses
to sell and manage orders directly from their websites. In 2021, WooCommerce expanded its partnership with
Stripe to give businesses more features—like subscriptions, in-person payments, and local payment
methods—to help them grow.

Solution Impact
WooCommerce set out to expand its platform In just three months and with a team of fewer
offering to match the rapidly evolving needs of its than 20 people, the company partnered with
merchants. To do this, it decided to launch a Stripe to launch WooCommerce Payments in 17
brand-new platform, WooCommerce Payments, by countries—from Canada to New Zealand and
integrating several different Stripe across Europe. Using a wide range of Stripe
products—including Connect, Instant Payouts, products, WooCommerce was able to quickly
Terminal, and Billing. build and launch an integrated payments solution.
This expanded financial platform helps
WooCommerce capture a greater share of wallet
Products for increased customer retention and allows its
merchants to adapt to evolving customer
Payments Billing expectations and habits.

Terminal Connect

26
Finch Capital featured portfolio companies

Payroll Lending Collections

Symmetrical is building global payroll API rails, In3-embedded interest-free loans, powered by Webio powering embedded conversational
allowing companies to scale payroll internally payment service providers (PSPs) self-service in credit and collections

Symmetrical helps companies onboard and pay In3 has developed a product that seamlessly Webio has developed embedded conversational
workers at scale. The solution is used by mid- to integrates with the tech stack of payment service self-service for debt management and collections,
large-sized flexible workforce companies with high providers (PSPs). Through these integrations, In3 helping to manage debt, payments, and repayment
levels of complexity in the way they handle payroll. allows PSPs to push a buy now, pay later module to schedules right through the debt cycle from early-
their merchant base. Merchants can in their turn add to late-stage debt.
Facilitating payroll processes is a key goal for In3 to their checkout page in a matter of seconds.
companies that hire internationally, grow Through omnichannel conversational AI a customer
internationally, and encounter the problem of paying This close collaboration with In3 allows PSPs to in arrears is directed to a branded digital debtor
employees abroad. [Link] solves this issue, expand their product portfolio and increase their portal to set up payment schedules, make payments
supporting a fast and uninterrupted pace of growth. revenues per transaction significantly. The merchants and notify the company (e.g., lender, utility, telco,
The company’s vision is to make payroll invisible and see a steep increase in conversion rates and basket etc.) of their personal circumstances and promise to
enable everyone to hire and pay anyone in the world sizes, while returns are reduced. pay.
through just a few API calls.

27
Trends and the Future of
Embedded Finance
Why is the opportunity now?

B2B2C B2B2B

Changing consumer behaviours Verticalization of financial services

As consumer habits are shifting from traditional purchasing methods at Software providers are consolidating their product offering to one-stop shops that
brick-and-mortar stores to shopping through social media and online platforms, are tailored by vertical industries. In doing so, software platforms add financial
the finance product becomes ancillary to the underlying sale and no longer the services to their solutions so they can accompany their clients during more and
main thing that buyers were looking for in the first place. more steps while they run their businesses and get to maintain a close
relationship with them.

For example, a consumer visits the British Airways website to buy a flight ticket
and they end up buying travel insurance alongside the flight ticket. Banks and For example, Stripe serves clients across use cases from platform
insurance companies traditionally have distribution networks that push products, and marketplaces, ecommerce, travel and hospitality, and crypto
while embedded finance relies on a pull logic where the consumer purchases the industries and helps them better serve their customers with
financial product at the point of need. tailored embedded financial services.

Quest toward full financial inclusion Virtuous product development cycle

Deeply embedded banking and other financial products usher in new levels of Software companies also use their clients’ data to build better products overall
democratised access to financial services, help close the protection gap, and and anticipate what the businesses need.
further the quest toward full financial inclusion.

For example, if clients have a card through the platform, the platform knows their
For example, Grab widens access to financial services such as business expenses and can tie that back to reporting. The software provider can also
wealth management, digital payments, and lending know the seasonality of a business and proactively offer lending when it's needed.
throughout Southeast Asia for the most underserved.

29
 Embedded finance VC hype cycle

Credit & Payroll

debt collection
Lending
Robo advisors
Banking
Payroll advance
Fraud detection
& automation Investing &
Claims management Wealth
Payments
Core banking infrastructure Insurance
Payroll APl software
Payment Payments &
orchestration Cards
Commercial Insurance
Hype

Investment API BaaS Consumer Modern card comparison &

Fund as a service BaaS issuing distribution
Brokerage
AP/AR infrastructure API
Bank connector API
automation Expense
management Compliance API (e.g., KYC)
Sustainability as
a service Lending as a service
BNPL
Financial
identity as a
service

Angel & seed stage Early stage growth Later stage growth Pre-exit stage M&A and IPO stage

Venture capital life cycle

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Our predictions—part 1

The current macroeconomic climate will shape the future of embedded finance …

1 Payroll API is the next big thing 4 Fast invoice platforms could save businesses from insolvency
Payroll APIs will allow financial product providers almost guaranteed payments at Rising costs put businesses under pressure which increases the risk of payment
lower interest rates on the basis of “writing” their deduction into the payroll. With delays and defaults. Invoice finance and funding APIs could solve this problem and
the recent surge of the consumer price index, the need from employees for payday improve the resilience of businesses struggling to get paid and pay suppliers and
loans could also increase. workers in time.

2 The days of the credit card are numbered 5 Neobanks are entering uncharted territory
BNPL could become even more appealing to customers with their low- to no-interest The neobanking industry was born in a low-interest-rate environment where
offering as credit cards increase their interest rates. This will be compounded by lowered challengers could compete on customer-journey automation, personalisation, and
barriers to running card issuance programmes as alternative lenders like BNPLs find predictive analytics. With rising interest rates, high-interest savings accounts offered
other ways to extend their reach outside of merchant checkout page integrations. by traditional banks coupled with BaaS features could look more attractive than ever
to customers, and only the most feature-rich neobanks will win.

3 Embedded finance as a way to fight valuation pressure 6 Embedded insurance is gaining momentum
Recent times have increased the pressure on tech companies’ valuations. Platforms P&C insurers are suffering from margin squeeze from inflation, increasing claims
and marketplaces will accelerate the adoption of embedded finance features as a way costs ahead of premium growth, and this is exacerbated by the loss of revenue from
to monetise and generate more revenue; e.g., Shopify makes significantly more revenue a low-interest-rate environment. The knock-on effect is that this further increases the
from its fintech services to merchants than from SaaS subscriptions (SaaStr, 2021). imperative of growing distribution scale and reducing marginal costs of distribution
through less price-sensitive embedded channels (lowering acquisition costs).

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Our predictions—part 2

Product development will unearth new opportunities…

7 Wealth tech’s resilience will be challenged by the bearish market 8 Differentiation strategy will rely heavily on market segmentation
With the stock market going down along with the digital asset market, retail investors We expect fintechs and neobanks to double down on specific target verticals and
and high-net-worths might increasingly turn to wealth-technology solutions to user cohorts, since different markets have different financial needs. Embedded finance
customise their investing strategy and help recover their recent losses. Now is the time solutions will be the backbone to serve customers’ needs across segments.
for investment algorithms APIs and embedded robo advisors to prove their value.

9 Open banking APIs will gain in quality and consistency

Long-term interest rates are increasing, total % per annum
Today, open banking APIs vary considerably in quality and consistency. For now, there
are discrepancies from bank to bank in the consumer experience of using payment
initiation services (PIS) and account initiation services (AIS) which create friction.
A world in which they were improved could increase adoption and create new product
opportunities.

10 Vertical software platforms could become the OS for SMEs

We’re already seeing platforms emerge that are targeting specific verticals (e.g.,
gyms, beauty salons, takeaways, etc.); these cross-functional systems are providing
management tools and capability across: sales, marketing customer experience, and
loyalty/retention. Once these platforms firmly become the OS for these businesses,
it makes sense for these platforms to also be the place where finances are managed.

Source: OECD, 2022

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Conclusion
Key takeaways

The proliferation of APIs and platformification of businesses is at the heart of the evolution of the financial services
industry. Banks are becoming more reliant on technology to stay competitive, and their intrinsic role is refocusing to
being underwriters and liquidity providers.

While Europe is still early in the exit game compared to the US, the market for embedded financial services is maturing,
and we expect growth to accelerate given the progression of the startup ecosystem and investment activity.

The ecommerce and retail industry were early adopters of embedding financial services at the POS including lending,
insurance, and payment services. Other uses cases are now emerging across sectors including travel & hospitality and
healthcare. Marketplaces and platforms are ‘rebundling’ financial services to create frictionless and integrated ecosystems.

The B2B2C and B2B2B business models both present significant opportunities across industries. Some of the most
promising verticals include credit collection, embedded investing solutions, and Payroll API services.

The current macroeconomic situation including increasing interest rates is going to accelerate the use of embedded
financial services, and we will see an explosion of use cases across industries.

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How Stripe can help
Stripe’s banking-as-a-service APIs, along with our robust payments solution, let
businesses—from fintech startups to established platforms—embed financial services directly
into their existing software.

Connect Issuing
Stripe Connect is a payments solution that allows Stripe Issuing allows businesses to instantly build a
businesses to embed multiparty payments and offer card program to issue branded virtual and physical
a variety of financial services to their customers, like cards. Customers use the cards to make purchases
collecting payments and paying third parties. while getting faster access to their sales earnings.
Businesses earn revenue by collecting fees for the Businesses get insight into how their customers
payment services they provide. Stripe Connect is spend their funds, while Stripe handles card
available in Europe, North America, and Asia. production, fulfillment, and shipping. Businesses
earn a share of interchange that’s collected every
time a card is used. Stripe Issuing is available in the
Treasury UK, euro area, and the US.
Stripe Treasury’s APIs allow businesses to create FDIC
insurance–eligible accounts for customers that can
earn yield, send ACH or domestic wire transfers, and Capital
support check deposits (available soon). Stripe handles Stripe Capital is a financing solution that enables
upfront negotiations with a network of banks, embeds businesses to offer fast and flexible financing to
KYC so businesses don't need to build a costly KYC help their customers grow their business. Many
program, and advises on remaining compliance small businesses struggle to get competitive loans,
requirements. Most businesses build Stripe Treasury especially if it’s difficult to underwrite their
and Stripe Issuing together to offer their customers a Scan the QR code to talk to a member
business. Stripe removes that barrier by allowing
way to store, spend, and manage money. Stripe businesses to offer a complete lending program
of Stripe’s team to learn more about our
Treasury is available in the US. through a single integration. Stripe Capital is banking-as-a-service products.
available in the US.

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About Finch Capital

Finch Capital is a Thematic Growth Investor in technology companies in

finance, real estate, and health run by exceptional entrepreneurs. Our
mission is to fund and support the best entrepreneurs creating
products that will shape the future of these themes. We leverage our Radboud Vlaar Mike Brennan
international network and industry expertise to enable our portfolio Managing Partner Principal
companies to grow into leaders in their field. radboud@[Link] mike@[Link]

We have a strong preference for teams that have worked together in

some form in the past and complement each other on skills and ways
of working.

We back companies that are solving a real problem. We want to

understand what problem you are fixing, why this is a problem, and
why your solution is better, more sustainable, and scalable.

We are actively looking for investment opportunities and welcome Lourens Ruigrok Eugénie Colonna d’Istria
suggestions and introductions that fit our strategy and criteria. Please Investment Manager Business Analyst
don’t hesitate to reach out! lourens@[Link] eugenie@[Link]

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