My Updates 📬

Hi embedded finance friend!

if you are a regular reader, you will see that I changed the structure a bit: only one main story, a new section for banks in embedded finance, and no community section anymore. Additionally, I have increased my focus on Europe, and as mentioned before, I will continue to do so. Let me know, through the survey at the end of this newsletter, what you think about this edition.

I re-launched the website of Embedded Finance Review. Previously, I used the landing page from my newsletter tool Beehiiv, but now I embedded (see what I did there 🙃) Beehiiv into a new Webflow site. I am planning to create other types of content besides the newsletter, and the new website will help with that. It is still a work in progress, but please let me know if you see something that doesn’t look or feel right.

Lastly, as of writing, this newsletter has 988 subscribers. Do you want to do me a favour? Help me cross the 1,000 subscriber mark and get some rewards in return with the “share this newsletter" link at the very end. Maybe drop it into your company Slack/Teams? 🙏

And now let’s dive in 👇

It’s just a few days until our third Embedded Finance Review event in Berlin. A special thanks to our two sponsors:

Mastercard: For more than 60 years, Mastercard has been leveraging its technology, network, and global reach to help individuals and businesses achieve financial security and drive sustainable economic growth.

Swan: Companies of all kinds can unlock the full potential of their product by embedding Swan's banking features such as accounts, cards, and payments. Founded in 2019, Swan processes over 750 million euros of transactions per month, for 100+ companies, and operates across thirty European countries.

Don’t have a ticket yet? Sign up here!

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Top Story 📰

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How long until every vertical SaaS company offers embedded finance products?

This week’s top story is about one of my favourite topics: the opportunity for SaaS companies in embedded finance. Or, to be more specific, vertical SaaS companies. But one step at a time.

Let’s start with the story linked to the image above: Nory is a vertical SaaS provider from the UK, focusing on restaurant owners. The tool includes features such as inventory and workforce management. And last week, the company announced a lending product in partnership with Youlend. Nory claims that restaurant owners can apply for up to £2 million and receive an answer within 24 hours. It is a challenge for many small to medium-sized companies to get a loan, especially if they are from an industry such as hospitality.

Embedding lending into a vertical SaaS is often a win-win-win. The restaurant owner cannot only receive funding but can also use a channel they already use with no or limited data entry. Typically, such a solution generates far more loan applications due to its convenience (why fill out a lengthy loan application from your incumbent bank if you expect a ‘no’ as the answer vs. a few clicks). Additionally, the lender can leverage industry-specific data and make it part of the underwriting process. If it’s done well, it can be much better than the traditional underwriting process of an incumbent bank. Lastly, and obviously, the brand (=Nory in this case) can create a new revenue stream and tie their customers even stronger to their service.

But it’s not just lending, and not just the hospitality industry. We are seeing a clear trend of vertical SaaS companies launching financial service products. Vertical SaaS companies are in a good position because they focus on SME clients (that have clear needs and often a willingness to pay) and create data-rich services (which can be leveraged for financial services).

In addition to the Nory news, there were two other SaaS-focused content pieces that caught my eye. Firstly, the US embedded banking provider Unit published a guide for vertical SaaS companies to succeed in embedded finance. Obviously, the content is biassed and focused on Unit’s product offering and use-cases, but nevertheless, Unit’s content is usually more neutral and helpful for the buyer side than the average content piece of other infrastructure providers. Even though it is US-focused, I think most of it is still helpful for European companies as well.

Secondly, US venture capital investor Matt Brown published a blog post using the term vertical ERP when a vertical SaaS company is embedding financial services. Even more importantly, he looked at the numbers and found that in the US, 89% of the vertical SaaS companies offered embedded finance. The majority are offering embedded payments (83%), which he describes as the beachhead of a vertical SaaS fintech strategy.

The numbers in Europe are likely lower, but the trend is similar. Personally, I know a handful of SME-focused SaaS companies that are currently working on their very first embedded finance product (hopefully I can announce their launches here soon). Due to the nature of their business, they are all looking at either payment, banking, or lending capabilities; some of them consider a combination of the three. Most likely, they are also using payments as a beachhead. These companies are on the right track, but I would give three important tips: a) Don’t copy fintech strategies from other companies; find out from your customers what they need; b) Be smart about choosing the providers you use (do not rely only on desk research alone; use your extended network to get insights); and c) Don’t promote your embedded finance products as financial services; promote them as a packaged offering, including your non-financial offering.

By now, we have here in Europe plenty of infrastructure providers, proven strategies, and a lot of helpful content and people in the ecosystem. Therefore, I believe in a few years we might see that almost (!) every vertical SaaS company in Europe is offering an embedded finance product. What do you think?

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Non-Financial Brands 🏢

Europe

• IKEA is planning to fully acquire Ikano Bank, which follows their February 2021 investment for a 49% stake. IKEA offers embedded finance products (incl. insurance, lending and more) around the world, but Ikano Bank only operates in eight European countries.
• UK retailer Marks and Spencer has signed a new seven-year partnership with HSBC UK to enhance the credit and digital payment services it offers through its banking arm, M&S Bank.
• Amazon is working on a new credit card in Germany. Previously, Amazon collaborated with LBB on a co-branded credit card, but the German bank terminated the contract. Since Amazon did not find an immediate bank partner, they stopped their product offering, but a new website indicates a relaunch. Likely again, a co-branded credit card or is Amazon working on an ‘embedded‘ solution?

North America

• Uber halts fintech plans in Mexico while their competitors, DiDi and inDrive, are increasing their activities by providing payments, loans, and credit cards.

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Infrastructure Provider 🏗️

Europe

• Britain's ClearBank is planning international expansion after reporting its first annual pre-tax profit. ClearBank posted a full year pre-tax profit of £18.4 million for 2023, with income increase of 91% to £111.3 million. Launched in 2017 as the first clearing bank in the UK for 250 years, ClearBank is now used by more than 200 firms.
• A new partnership with Wise enables Swan’s clients to send and receive money from over 190 countries quickly, transparently and at a lower cost.
• Satago, a working capital solution provider, partnered with mmob, a universal API adaptor. This collaboration enables lenders and corporations to embed Satago’s invoice finance and cash flow solutions while using mmob’s integration capabilities.
• PayDo, a payment solution for individuals and companies, launches an API for SEPA, SEPA Instant, FPS and SWIFT transactions, which enables other business to integrate PayDo’s services.
• Swedish Scayl, a debt financing platform, has raised €100 million in debt and describes itself as a “fintech for fintech lenders”. The funding was raised from a network of banks.
• Ingenico and Cover Genius share more insights about their partnership, which aims to bring embedded insurance in-store.

North America

• Finzly announces the launch of Account Galaxy, a “sidecar core” solution for banks which enables them to offer virtual accounts to non-financial brands where transactions can be monitored in real-time, providing reduced compliance risk and enhanced speed.

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Banks & Financial Institutions 🏦

• Matt Harris from Bain Capital discusses the US BaaS pushback and asks if banks and regulators should readjust their priorities. He sees banks and regulators each with three choices, but which way to go?
• Also, McKinsey sees US banks at a crossroad and presents the choices and trade-offs for them.
• This Galileo report asks the question of whether banks and financial institutions can achieve a positive ROI with BaaS.
• Deutsche Bank Global Head of Embedded Finance Solutions Matthaeus Sielecki says Embedded Finance is changing business models.

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Insightful 🤓

• Simon Taylor writes (finally again!) about the BaaS landscape in the UK. He takes you through the historical development and discusses why embedded banking works differently in Europe vs. the US (spoiler: interchange).
• Our reader and friend Shaul David has been involved in various ambitious expansion projects at Railsr. So we should read closely when he writes, ‘Why we haven't seen a global Banking-as-a-Service provider. Yet.’
• Noam Inbar, partner at Viola Fintech, argues that there is a difference between embedded and contextual finance. While I see her point, I believe we don’t need this level of complexity. It’s hard enough to explain where the line between embedded finance and fintech is :)
• Unit CEO Itai Damti hates the term BaaS. Why is that and many other gems in this video interview with VC Rex Salisbury.
• Are you looking for a new role? Not pure embedded finance but likely still interesting: German Country Manager for an enterprise infrastructure provider focusing on banks (Interested? Ping me)

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