How Embedded Finance Can Benefit VC Portfolio Companies

For investors, applying embedded finance can create new monetization opportunities for portfolio companies
Angela Bao
Angela Bao
June 1, 2023
venture capital embedded finance

While fintech funding has slowed in the last two years, one financial services sector has shown surprising resilience in tough economic times. Investors seem to be more willing to bet on embedded finance as an area with promise, according to Insider Intelligence. Some recent examples of successful fundraises include digital banking platform Credable, small business lender Liberis, and B2B payments platform Monite. The reason: venture capitalists are prioritizing efficiency, prudent growth, and monetization — areas where embedded finance can play a key role. 

Embedded finance is poised for growth in the foreseeable future. Research from Bain & Company found that financial services embedded into e-commerce and other software platforms accounted for nearly 5% of total US financial transactions in 2021, or $2.6 trillion, and by 2026 will more than triple, exceeding $7 trillion. 

“The most powerful solutions combine the power of software and the power of financial services to create new features and experiences that can surprise and delight customers,” says Dan Kimerling, founder and managing partner of Deciens Capital. “That combination can actually accelerate sales, pull forward revenue, and create new monetization pathways and opportunities.” — Dan Kimerling, Deciens Capital

What kinds of venture backed companies would benefit most from embedded finance?

That’s a bit of a trick question. According to Kimerling, a lot of companies have the ability to become very powerful financial services businesses but aren’t yet aware of that potential.

Any company where adding payments, banking, and even credit services can accelerate the business model is a good prospect for embedded finance. 

Marketplace businesses are a great example, says Kimerling. 

“I was talking to a venture capitalist who had recently invested in a marketplace focused on at-home childcare workers,” he says. “It’s not always super obvious that a marketplace is a financial services business. But in this example, you can load money into a childcare account, like the Starbucks app, so you don’t have to constantly be repaying the childcare provider.”

It boils down to customer-centricity. If a fintech understands why a customer uses their product or service, they can figure out how to implement financial services to improve that experience.

Other examples of successful embedded finance companies include: commercial and consumer neobanks ( Zeta, Guava, Parker), investment platforms (AngelList, Alto), B2B Payments (Viably, SumUp), and verticalized software in industries as diverse as real estate (Azibo), construction (Buildertrend), and healthcare (First Dollar, Ametros).

"Adding embedded finance to other business models is a very concrete, measurable, actionable set of steps that VCs can do to improve the business models of their underlying portfolio companies," says Kimerling.

For more comprehensive insights into embedded finance for SaaS companies, download our full Embedded Banking for SaaS guidebook.

Improve workflow efficiency with embedded banking tools

The looming economic slowdown has led companies to cut costs. For many, that means streamlining business operations while looking at other potential avenues for revenue.

According to Kimerling, one of the main benefits of embedded banking tools is efficiency. Currently, a lot of software is still segregated from financial services, which adds time, complexity, and more potential for error. A company CFO, for example, will have to look at their accounting software and then separately log into their bank accounts to move money. With embedded banking, that accounting software provider can embed financial capabilities directly into their product. Now, that CFO can manage their bank finances directly through the accounting application with just a few clicks.

“That's a much more powerful solution than a disaggregated solution, and that's why embedded finance can add tremendous efficiency,” says Kimerling.

Create new revenue streams with embedded finance

Finding new ways to monetize and generate revenue is another top priority for fintechs looking to position themselves well for the future. According to Deloitte’s 2023 tech industry outlook, tech companies want to transform themselves via “digital advancements.” For certain tech companies, embedded finance can help drive revenue.

Adopting embedded banking software to provide embedded finance services can help companies drill deeper into their verticals. Venture capital firm Andreessen Horowitz found that embedded finance can increase revenue by 2-to-5-times per user, lower the cost of customer acquisition, and increase customer lifetime value for vertical SaaS companies. 

With embedded banking, that hypothetical accounting software provider can expand their products and services offerings to include accounts, ACH transfers, and more. They can create an ecosystem that not only streamlines their customers’ business operations, but makes them more likely to stick around for the long term.

How to choose an embedded finance partner for your portfolio companies

Kimerling believes that there are two questions to ask when selecting the right embedded finance partner:

  1. Does the company want to work directly with a bank?
  2. Does the fintech want one bank partner or multiple partners?

A fintech should choose a partner that will be with them for the long-term, believes Kimerling. There are certain situations where working directly with a bank is the better solution, but for companies new to financial services, working with an embedded banking software provider is the optimal way to go. Instead of starting from scratch, an embedded banking provider typically has an existing network of banks and can match the fintech to the right partner, based on their needs.

Fintechs should also take redundancy and compliance into consideration. In the wake of the Silicon Valley Bank failure, more and more people are realizing that it’s critical to have multiple bank partners, believes Kimerling. An embedded banking software company with a large bank network like Treasury Prime can provide interconnected bank network tools like OneKey Banking to help you create stability and ensure business continuity.

The U.S. financial system has always been heavily regulated for the safety of consumers and the larger economy. After SVB, the Fed is increasing its financial oversight. If a fintech wants to introduce financial products, they need to understand there are real compliance obligations.

Kimerling says, “Ask yourself, do you want to roll your own compliance stack? Or do you want to partner with an embedded banking software provider to get a best-of-breed compliance stack on day zero?” 

The future of financial services is embedded

Ultimately, consumers, businesses, and enterprises want financial services to work for them. Although the legacy banking industry doesn’t have the best reputation, embedded finance solutions turn the microscope onto the customers’ needs.

“In being embedded, you make financial services work for the customer, not the other way around,” says Kimerling. “Whether the economy is great or terrible, consumers will still be looking for great value — and when you can surprise and delight a customer, you're going to win them for the long term.”

Wondering how embedded banking could help your business? Contact Treasury Prime — we have a true multi-bank network, the deepest bank core integrations, and extensive compliance experience. Read more about our $40 million Series C Funding and why Tearsheet named us the Best Banking as a Service company for the second year in a row. Talk to the best embedded finance team in the industry.

Related embedded finance content:

Harnessing the Power of Embedded Banking to Build New Revenue Streams

How Embedded Finance Can Help Vertical SaaS Companies During a Recession

Case Study: Growing Tuvoli's Embedded Banking Platform

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