How Can You Make Money With Embedded Finance?

Nobody pursues embedded finance for fun. Benefits do exist, and we will describe how they function in this article. For everyone involved in the startup environment, this can be a challenging period. Massive layoffs, declining values, and an unclear forecast for the upcoming weeks and months. We wish to emphasise why it is incredibly wise to start your Embedded Finance (EF) journey today even if this may sound frightening.

To refresh your memory, when we refer to Embedded Finance, we are referring to non-financial providers that are offering financial services that are seamlessly integrated into their core product.

Why should you pursue Embedded Finance?

So, before we jump in on how you make money with EF, then let's first understand why you should look for an EF solution for your company. There are already hundreds of EF solutions available around the world from companies such as Railsr, Solaris, and ClearBank. As an outsider, you might wonder what motivates these companies to provide financial services and what are the advantages, and if they can also apply to your company.

Let's go over them one by one.

“As SaaS companies add financial services, they not only increase revenue per customer (often by 2-5x), but they open opportunities in markets previously deemed too small, or not cost efficient to acquire customers, to be viable.”

1. New Customers

Founders, CEOs, and Entrepreneurs are constantly looking for fresh approaches to grow their customer base. One way to do this might be to embed financial services. To better understand this, let's examine a theoretical example.

Lets picture a modern crypto exchange that is offering a cryptocurrency trading platform with high-end analysis tools. Let's call that business "Crystal". Traders around the world can use Crystal platform for participating in the cryptocurrency market and earning money. However, if these customers want to spend their profits, they would need to look for another financial services provider. Despite Crystal offering a great product for their customers, most of their customers wish to enrol in a platform that allows them to spend their profits using, for example, a virtual card that is directly connected to their trading account. New or existing customers might not want to use Crystal anymore because that would mean that they would need to find another solution for withdrawing their funds and putting them on a bank account card, which of course takes time and commision (every trader hates commission). Plus, traders might be paying for two things instead of one - withdraw commission and bank virtual card monthly fee.

If Crystal decided to integrate virtual cards into their product ecosystem, the total product offering would be more compelling for new and existing customers. Furthermore, Crystal would be able to enter the market from a new angle, which would help to reduce the Customer Acquisition Costs (CAC).

2. Stickiness

We all know that financial solutions lead to stickiness. Although switching financial products is not impossible, it is also not always the most enjoyable task. It goes without saying that a service provider must overcome this obstacle if they hope to convince their own customers to switch to their financial services. However, once the customer starts using your financial product, stickiness works in your favour because it will be more challenging for them to switch to someone else. You will probably agree with the inconvenience of changing your personal bank account. And, definitely, a significant factor in the stickiness is the time and effort needed to change card information or account numbers with your customers and providers.

There is one more additional aspect to consider when talking about the EF ecosystem: It's possible that your closest competitors do not currently provide EF solutions. As a result, when your customer is targeted by your competition to switch, they will realise that they must transfer from you to your competitor for whose products don't have financial services integrated. Thus, they must also find another service provider (perhaps a bank) for their needs related to financial products. Therefore, switching might demand the purchase of two different kinds of solutions for the customer. Even if the incentives are appealing, this certainly decreases the likelihood that a customer will migrate to a competition. This decreased stickiness will result in an increase in Customer Lifetime Value (CLV), which may increase revenue or allow the service provider to spend more on Customer Acquisition Cost (CAC).

3. New Revenue

 We have finally reached the topic you have been waiting for. In our opinion, this is the most important benefit of embedding financial services. Everything revolves around increasing revenue with each client. Although it is always good to increase revenue without recruiting new clients, we think this is incredibly helpful in the modern world. Yes, you will pay money for embedded financial products, but considerably less than you think. More importantly, you don't need to hire a group of experts to complete this. You can do it with your current staff. To give you a ballpark idea how using embedded finance might boost your revenue, the investor a16z estimates that revenue could increase by up to 5 times.

Cornerstone Advisors report some interesting figures about Embedded Finance and how businesses perceive it:

• 46% might consider Embedded Finance in the future
• 11% are currently pursuing Embedded Finance solutions
• 8% are currently developing an Embedded Finance solution
• 20% consider pursuing Embedded Finance
• 12% have never discussed or considered Embedded Finance for their business.

So, let's now dive into the different types of revenues you might benefit from.

Increased Usage = Higher Revenues

Earlier we already established that stickiness is one of the benefits of financial services. Financial products can create new touch points for customers to re-engage with the core product. The increased usage of the core product and financial product result in higher revenues. In some ways, embedded financial services can work like loyalty and customer retention enablers.

A popular practical example comes from Starbucks. They offer their customers cards which they can top-up and spend for buying coffee and collecting loyalty points. Not only is this a new touch point to re-engage with the core product - coffee - but also acts as a new revenue stream for Starbucks as they receive a usage fee each time a customer uses their card for a payment.

Usually, the fee that Starbucks receives is “interchange fee”. When a customer uses a Starbucks card, the card issuing bank receives a kickback called interchange. As a result, a company that incorporates cards into their offering could generate a substantial new revenue stream if their customers begin to use the cards on a regular basis. The interchange fee varies around from 0.2-1%.

Charging for financial products

As you are integrating EF solutions into your product ecosystem, commonly account and payment capabilities, then you are in a great position to set your own terms. Meaning, that you can pass different costs to your customers and even put a mark-up on different services.

• Payment Revenues - Charge transaction fees that go through your platform. For example, $0.25 markup on every SEPA payment. 
• Card Revenues - Card issuance fee, chargeback fee. For example, charge $5 for every virtual card issued to your end-users.
• Account Revenues - Charge for IBAN account maintenance. Charge your business customers $50/month for IBAN account maintenance.

Let's set the scene.

You operate an online platform where users deposit money to compete in games for the chance to win the prize pool. You have users coming from different parts of Europe, all wanting to compete across different online games. As already mentioned, users need to deposit funds on your platform in order for them to pay the participation fee to enter these competitions. Accordingly, if the user wins the competition, the prize pool money is sent to their profile on your platform. EF can triple or even quadruple your revenue in one simple process. You can integrate payment capabilities such as SEPA payments into your ecosystem in order to allow your users to deposit and withdraw funds. By choosing an EF provider you gain access to such functionality cost effectively and fast.

You might be asking where the extra revenue comes from?

It's simple. You can put a markup on all incoming or/and outgoing payments that your users make. For example, if the cost of the outgoing payment that your business occurs is 0.3%, then you can forward this fee, plus put a markup of 0.7%, to your platform users (1% to withdraw funds). This is where you earn your money. For example, if your business monthly outgoing amount is around $1,000,000, then you can earn as much as $7,000 from outgoing payments.

There are different products that you can put a markup on, like:

• International payment fees
• Foreign exchange fee
• Card transactions
• IBAN account usage/monthly fee
• Subscription fee
• Account/card issuing fee
• Many more

Closing thoughts

Embedded finance solutions aren't a sub-product that you add to your product ecosystem and leave it to exist. Embedded financial services can provide you with completely new insights about your users as you see them interact with products that are completely different from your core product. The insights allow you to optimise and grow your business. These fresh insights can be used to modify or develop new products that will appeal to your users.

For instance, your business might learn that a portion of your clients are paying for an offering of another SaaS provider, which might prompt a deeper investigation of the providers services, which can lead to integration of their services or even development of similar services on your own.