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  • Writer's pictureVeronica Irwin

The rise of embedded finance

Good morning, and welcome to Protocol Fintech. This Friday: the rise of embedded finance, the return of Seth Green’s Bored Ape, and Janet Yellen vs. Cardi B.


It’s time to get embedded

The lower fintech multiples tumble, the harder VC funding is for founders to find. But savvy investors are betting on a less-flashy type of financial infrastructure provider. Funders have coalesced around a label for these companies, one that startups are only now starting to adopt: embedded finance. Part distribution strategy and part product design, it’s proving to be a downturn-resistant blueprint.

Think of embedded finance as the picks and shovels of cutting-edge fintech. That includes lending, payments, open banking, banking-as-a-service, data aggregation and data transfer services, typically API-driven and deeply integrated into other products.

  • Companies like Stripe and Plaid are considered early exemplars of embedded finance, joined by newer ventures like Apiture and Yapily. And embedded plays are emerging in both traditional fintech and crypto.

  • Bain Capital Ventures is one of the firms that set the trend. “It’s easier now, because of innovation in financial infrastructure, to get fintech products up and running faster and more easily,” said partner Christina Melas-Kyriazi.

  • Melas-Kyriazi said the best embedded finance companies either leverage data collection or network effects so that “once someone starts using your product they're going to use it again and again, and it's going to be harder for them to switch.”

Startups serving up software to financial services companies and other business customers are also earning more investor dollars than other fintech sectors. According to Dealroom, embedded finance investing nearly tripled between 2020 and 2021, and investment in payments startups — a key sector within embedded finance — appears to have held steady in the first three months of 2022.

  • Catherine Birkett, CFO at GoCardless, said integrating financial services, like putting payments and accounting together, simplifies business operations in obvious ways. The open-banking company secured $312 million in late-stage funding in February. “This is easy to explain to investors, and from there it’s logical that fintechs that offer convenience and ease of use to merchants are more likely to acquire customers than those that don’t,” she said.

  • That’s part of the embedded finance pitch: It’s a more efficient and consumer-friendly route to reach other companies’ loyal customers as opposed to branding and launching a new financial product into often-crowded markets. Like other business-to-business models, that makes it dependent on other companies as a channel for growth, but embedded finance’s supporters argue that’s a feature, not a bug.

It’s not enough to just declare yourself an embedded finance company and start pitching investors. Martin Tantow of Pegasus Tech Ventures says companies must have strong financials to back up their pitch — preferably enough revenue to survive a looming downturn.

  • “I want to see what their distribution model is [and] which channels and strategic partnerships they are pursuing,” he added.

  • For investors now, the most exciting fintechs are ones with low overhead, a clearly defined strategy of marketing to businesses and a promise of infrastructure that will accelerate the transition to a fully digital financial ecosystem.

PitchBook recently warned of a “bifurcation of the market” in fintech: Those serving consumers and small businesses, the firm’s analysts wrote, “will be negatively impacted while enterprise and infrastructure companies will remain at strength.” Or as “Saturday Night Live’s” trend forecasters might put it: Get embedded, or go to bed.

— Veronica Irwin (email | twitter)

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