An introduction to Embedded Finance

If you want to start a financial company, instead of spending two years and millions of dollars in forming tons of partnerships, you can get all of that as a service and get going. — Andreessen Horowitz


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Embedded Finance refers to non-financial companies that have value propositions that are significantly enhanced or even transformed through the associated financial products and services embedded within.

Essentially, these are companies that are embracing the trend that non-fintech companies are venturing into being involved with financial services, and the first, second, and third-order implications of such a macro-trend.

We want to answer three main questions:

  • How and why does this trend play out in the tech and financial ecosystem?
  • What and who has been investing within the macro-trend of embedded finance?
  • What are the different buckets of opportunities that exist in the market today?

We believe that startups of almost every vertical can and may move into financial services. It is not just about being better/tech-driven/more risk-taking. It is about finding opportunities to combine data, process and capital in ways that accomplish the same ‘jobs to be done’.

We believe that Embedded Finance companies have an edge to distribute financial services because of distribution, data and resources, and we see examples of these across multiple verticals, from search engines (Google with Google Bank), to ride-hailing (Grab with Grab-pay), to marketplaces (Amazon Pay).

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At a high level, we see a three-step evolution in financial services.

Firstly, financial services originated from banks and other financial institutions that were generalist financial institutions. For example, bank transfers as a means of transferring money from one entity to another.

Secondly, the Great Unbundling of Banks resulted in a slew of first-wave fintech companies that were focused on using technology to enable financial services outside of/on top of a traditional banking process. For example, Paypal to allow for payments online.

Thirdly, the Great Democratization of Financial Services has resulted in specific financial transactions (potentially segmented by customer or industry type) that are better served or distributed by specific non-fintech platforms. For example, Wechat Pay for p2p payment transfers.

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We see this trend happening across multiple core functions and ‘jobs’ of fintech. Abstracting the role of capital and value, we see 3 core functions of capital [as illustrated by Anthemis]:

  1. Transfering/storing value in space
  2. Transfering/storing value in time
  3. Managing the entropy in value (inflation, etc.)
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Examples of companies tackling the different sub-verticals include Wechat Pay, Udaan Credit, Shopify Capital, Grab Financial, Uber Insurance.

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We also see a range of corporate venture arms as well as generalist venture capitalist firms investing into embedded finance companies across all stages of a company’s growth, and across all types of verticals, from healthcare companies to ride-hailing.

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Importantly as we do a global scan of embedded finance companies, we see startups taking advantage of even more unbundling of the different stages of the financial value-chain. As a generalization, there are three main stages we see in the ecosystem that correlates with the sophistication of the financial ecosystem in that region.

The first stage focuses on the distribution of financial services through an existing platform. We observe this is more commonly present in Asia, where the central problem remains distribution and education. As such, these companies tend to focus on building an ecosystem of services that aim to incorporate deeply across the value chain within their specific vertical. Companies in this space are the aforementioned Shopify, Udaan, Grab, etc.

The second stage focuses on connectivity between fintechs and non-fintech companies. It is a recognition of the reality that financial services are incredibly difficult to manage well (especially by companies without institutional knowledge and moats of capital).The catalysts for this are twofold: Regulators insisting products and services remain under the purview of banks, and banks looking to participate in the forefront of financial technology. By focusing on connectivity, these companies streamline the proliferation of financial services. Companies in this space include Flexmoney, Plaid, etc.

The third stage focuses on the native integration of financial processes through an existing platform. As platform ecosystems become larger with increasing payment/transaction flows on the platform, dependency on external financial processes (payment processing, facilitation, etc) becomes more noticeable. While building and maintaining such platforms in-house may not make economic sense, startups are empowering B2B companies to natively adopt white-labeled financial processes into their digital ecosystems. Companies in this space include Finix, Matchmove, DriveWealth which are focused on allowing existing ecosystem players (for e.g. Shopify) to offer their own white-labeled financial stack. For example, Finix allows platforms to have their own payment facilitation network, allowing such e-commerce enablers (say Udaan) to have their own in-house payments stack that they can then begin to charge a variable rate for, negotiate with relevant partners, etc. By focusing on infrastructure-as-a-service, they are enabling stronger proprietary financial ecosystems.

Realistically, although the transformative effects of such integration into non-fintech companies are clear, fintechs and traditional financial institutions looking to revamp their internal processes have also been large clients of such infrastructure as a service offering.

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Vast Opportunities in Embedded Finance

We did a high-level mapping of what potential opportunities could look like across different parts of the financial value-chain across different industry verticals and present a selection of them below:

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The opportunities for Embedded Finance, particularly in Asia, are extremely exciting as foundational levels of digitalization takes place across traditional industries, allowing layers of tech-driven financial services to be built on top of traditionally non-fintech companies. As Embedded Finance companies continue to unbundle financial processes, the hierarchy of unbundling that we observe will be replicated in ecosystems around the world.

As we take these lessons from what is happening around the world in the US, India, China and other ecosystems, we see the future of platforms around embedded finance.

With previous experience investing in and building embedded finance companies like Grab Financial, we are aiming to invest heavily in embedded finance companies globally, and especially in Southeast Asia + India:

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If this is an area you or your company has been interested in looking at, hit me up at jengyang.chia@creditsaison-ap.com for a conversation.

First published on TechInAsia by the same author

Chia Jeng Yang

Principal @ Saison Capital | Cambridge | Harvard MBA