Most founders think embedded payments is either incredibly easy or way too complex. Both are wrong. And both leave millions on the table.
This episode dives deep into what it actually takes to embed payments successfully. I sat down with Alex Schoonkind, Cofounder and CEO of Embed, an embedded payments provider specializing in vertical SaaS companies.
Alex has seen it all, from founders who rush in without understanding the operational complexity, to those who avoid payments thinking it's too far from their core business. He breaks down exactly when to make the move, what to expect, and the one question every founder needs to answer before starting.
In this episode:
- The two misconceptions that kill embedded payment projects before they start
- The critical question: "Do you see a future of yourself as a financial services company?"
- When timing is right: why you need 20 to 50M EUR in yearly transaction volume
- The support overhead reality (spoiler: it's only 1 to 2% of customers)
- Why flexible pricing models matter more than you think for vertical SaaS
- How KYC can kill your user experience and what to do about it
- Why industries like healthtech and proptech are leaving money on the table
- Alex's prediction: generic payment providers will disappear in the next decade
Have questions about embedded payments that we didn't cover in this episode? Reach out to me (e.g., LinkedIn), and I will make sure to answer them at a later time.
Transcript
(Only accessible for subscribers)
Intro: Embedded payments sound simple on paper. Integrate a provider, start monetizing transaction volumes and watch revenue grow. But the reality, it's an operational product with a revenue hat. And if you underestimate what it takes to build, optimize, and support, or if you overestimate the complexity, never start, you'll miss one of the biggest opportunities in vertical software as a service today.
Today we're diving deep into the world of embedded payments with Alex Schoonkind, co-founder and CEO of MB embed, an embedded payments provider specializing in vertical software as a service companies. In this conversation, we will explore the biggest misconception companies have when approaching embedded payments. When the right timing actually is to make the move and why flexible pricing models matter more than you think. We'll discuss why some industries are leaving money on the table. What support overhead to expect and Alex's prediction for the future of payment providers? My name is Lars Markull, and this is the Embedded Finance Review Podcast.
Every two weeks, I'm interviewing the builders and shapers of embedded finance. And a quick reminder from my side at Embedded Finance Review, I publish weekly newsletters, biweekly podcast, and host in-person and virtual industry events. You can find all of these infos on our website, embedded finance review.com.
In addition, I also work with non-financial brands, infrastructure providers and banks in understanding, designing and launching their embedded finance products. If you are interested in working with me, visit my website and reach out, and now let's dive in.
Introduction and Greetings
Lars Markull: Hi Alex. Welcome to the podcast. How are you doing today? And in what part of the world are you located right now?
Alexander Schoonkind: Hi Lars. I'm doing great. Thanks for having me. I'm located in the center of Amsterdam, actually.
Lars Markull: Lovely.
Diving into Embedded Payments
Lars Markull: And Alex, today we are going to dive very, very deep into the topic of embedded payments. Obviously a topic that's very close to your heart also quite a bit for myself. Today I want to talk about the typical question that non-financial brands have when they come closer to the topic of embedded payments and potentially even integrate that. I guess it's a lot of the questions that you face on a daily basis with some of your leads and companies. Let's maybe go through them and maybe let's kick things off with, is there some kind of typical misconception that companies have when they get closer to this topic. I mean, we all know that the most common companies for better payments maybe are verticals, marketplaces and so on. So is there a typical kind of misconception that you see quite often in your work with them?
Alexander Schoonkind: So I think we primarily focus on vertical SaaS because in marketplaces it's more of a generic monetization, right? Often in a percentage model that includes all services. But in vertical SaaS, I think there's two common misconceptions on both sides of the coin almost, is that there's the ones where they think it's easy and they actually think just launching a generic payments offering will lead to great adoption from all of their customers. And it will be easy to manage operationally.
And then there's the other customers who are actually quite either scared or against monetization payments because they don't want to appear like a bank. And they want to be as transparent as possible towards their customers, and they would prefer to aggregate others.
And I think there's nuances to both sides. Sometimes either one of those sides might be true, right? If you run restaurant software, obviously it's part of your core business to accept payments.
Challenges and Opportunities in Vertical SaaS
Alexander Schoonkind: But there's also platforms who actually potentially can monetize fairly large volumes like in health tech or property tech that currently still failed to do so because they think it's too far away from their core company where I'm thinking they're leaving an opportunity on the table.
Lars Markull: But you think that's often driven by the leader, the management, the founder of the company, who has a certain kind of misconception, or how is that?
Alexander Schoonkind: I think often when there is a platform that doesn't really embed payments, and I jump on a call with them and it's a founder, whenever we kind of lose the deal, it's not because we lose into a competitor, it's because they're not ready to embed payments. They think it's a potential threat potentially. They're doing already really well in just growing the company from a SaaS perspective, and they don't feel it would add anything, which, I mean, I'm not in their shoes. It's all a decision.
That's why my key question actually to everybody is, do you see a future of yourself as a financial services company? Because I think that is kind of the mindset you need to have when you start embedding financial products. Now we're talking about payments, but it can be anything. If you don't really have that mindset, and some founders have it from the get go because their whole model is kind of based on monetizing the payment volumes. But if you still see it as an add-on or a nice feature, I would often almost advise not to do it. Because payments is like an operational product with a revenue hat, right?
You can immensely underestimate it. You can also overestimate the effort done, right? So I also often get the return of the customer saying but I'm going to get all these incoming questions. And then I said, okay. But percentage wise, if you get a ton of questions, it also means you're monetizing a ton of volume. And then ideally you will be able to pay support staff to answer those questions. So it's a bit of a mixed bag, but I think it's either the complexity, overestimated complexity or underestimating what it takes to embed payments and optimize for that.
Lars Markull: And do you think this has changed in the last, like 12 to 24 months, like substantially, or is it still the same the last years?
Alexander Schoonkind: I think embedded banking has kind of slowed down. So I think initially in Europe at least, the approach was very much done from the accounts and issuing side. I think the realization is that Europeans are not really likely to switch banks. I think also some of the domestic incumbent banks have done a great job developing some kind of SMB offering.
It's the same with issuing. I think the general thing which I see is that companies overestimate the uptake, right? So they just calculate the spend. Let's say you're an accounting tool, of course the balance sheet of this company and you think like, oh, they're going to use this corporate card everywhere, right? They're going to do the groceries, the travel with the card, and then you're calculating the commercial interest that you're going to be getting. And then you find out actually the uptake of it, or they forget using it, or they just don't like grabbing another card and adding it to their wallet is quite disappointing.
However, I do see a large uptake from a payments perspective is what we focus on, right? So my theory is that you focus on laying the foundational pipes of funding money in and out of your platform, and then adding accounts and potentially cards at a later stage because I think they're more follow on products. So I do see a greater appetite there. Sometimes also because the platform's growth is kind of slowing down from a SaaS perspective because it seems to be more linear and they want to kind of get that hockey stick motion going by monetizing volumes, and they have accumulated sizable volumes within their platform.
Timing and Monetization Strategies
Alexander Schoonkind: Because that leads me to another question that I think lingers in our minds. When is the right timing? I usually tell our prospects, our customers that you need to be able to monetize, I would say between 20 and 50 million on a yearly basis. And I always take a generic revenue line of 1% of that because then it starts to add material revenue to your bottom line. And it also makes the product valuable enough and interesting enough for you to spend time on it, right, as a company, because as you know, we're all busy running our companies and everything takes time and effort. And so it needs to be able to generate meaningful revenue for you to absolutely focus on it.
And I think sometimes the initial use case is more focused around developing a better product experience. But like I said before, it can be quite operationally intense and just doing it for a product experience might not be standalone the best reason to start doing it.
Lars Markull: And that's quite interesting, right? I mean, we mentioned a couple of type of companies who are very likely or often prone to build embedded payments at one point or another. You of course obviously mentioned already with a strong focus on vertical SaaS. And as we all know, like specifically vertical SaaS embedded finance, there's a strong overlap and probably there's not many, maybe not one at all vertical SaaS that exists for longer than five years that hasn't done anything in embedded finance. But obviously what you mentioned is like when is the right time, right? You said like 20 to 50 million is the volume. This is a space where it gets really interesting, right? Which I guess kind of means as well, you first have to figure out your product market fit, right?
Because at the end of it, I always remember this, the quote of the CEO of Toast, who says like, nobody comes to us for the financial services. Everybody comes for the actual product. But then we monetize them through the financial services, but they don't come for that. So that's of course something you need to figure out. And I think you did mention as well, sometimes you say companies as well, maybe not right now yet, is that correct? Have you encountered speaking to potential companies who want to embed payments where you said, maybe not right now, maybe wait a little bit longer for the right moment?
Alexander Schoonkind: Yes, I mean, I'm actually quite transparent and open because I think it creates a better relationship down the line. Sometimes I feel that they don't have product market fit, like you said. And I think they underestimate, right, the effort to take to not only land payments, but convince your customers to take you for their payments.
I think it's different in some sectors like food and beverage or something where it's more logical, but in some other industries, there might not be the uptake. And certainly your customers that are already using the platform and have found another solution to handle their payments, they're not going to switch overnight. I think, at one of the previous, I think, investor relationship meetings from Adyen, they also showed that it generally takes three years to get a sizable attach rate, right? Meaning all your companies, like 30 to 40, 50% of your companies start using you for payments. So it's a slow, I mean, they also don't leave, right? Which is one of the benefits that creates more stickiness. But they...
I often say this, I think you're either not big enough, it will not get the right effort, or it's not adding enough to you because there's another factor that I would include in vertical SaaS. You need to be the, as we call the platform of record. So a customer should use you as their main accounting money going in and out tool to run their business, right? So meaning if you are down, they cannot run their business, right? That's kind of an, and there are a lot of vertical SaaS tools that can be focused on a vertical. Let's say you're building an AI communication tool for GPs or something, right? There's many of those out there. You're not the platform of record, right? You sit on top of their main employer of record, kind of the, of their main GP medical software, usually some legacy piece. They are more likely to implement payments than you are. And sometimes you see a strategy of these companies starting out with a niche, with a wedge, and then slowly building down to become the platform of record. That can be a strategy. But so often I encounter companies which think it would make sense. I think Brian Chesky actually at Airbnb because you have Airbnb payments, right? It's kind of their embedded payments thing. They launched it too soon. He also said, because back then just private people like us were using it to rent out the room because you were going on holiday, you might as well make money on two weeks. You're not going to be onboarding because it requires KYC, an effort to start using Airbnb payments because it's just two weeks per year. Now, as we all know, Airbnb is full of professional companies, and now you can see they relaunched the product and now it gets a lot of uptake because these companies use Airbnb as their main renting platform, essentially to capture all rent flows.
Lars Markull: Interesting. I think the other terms that we quite often hear about these type of software that you're referring to is like critical business software, like the software that's like really critical for to run the business very often around like ERP features. And I guess the point here is also that obviously if you, in your example, if it's just an AI feature for a specific kind of audience and then you add financial services on top it doesn't create so much magic value for the customer of combining these two things, right? It still feels like I'm using a fintech and I'm using an AI software. It just happens to come from the same service. But if I do everything around there the typical verticals SaaS play, we do a lot of these things. Then of course, adding financial services adds value in a lot of the different aspects.
Alexander Schoonkind: It adds automation or it enables even cool features, right? Automatically sending a payment link or automatically, I don't know, holding funds in escrow or something like, which is more invisible, I would say, like you said, to the customer. So they don't even know they're using financial services to an extent because it just comes, it's so logical, and otherwise you're just playing PSP, I would say. You're maybe providing a benefit by having one contract or something like this. This is a limited benefit, but you're not really offering benefit from a product experience.
Customer Journey and Integration Timelines
Lars Markull: The companies you're talking to, I mean, in your case specifically the vertical software as a service companies, what do you see typically as a journey? Like a timeline, how long it takes them from like kind of getting an interest on the topic, then being sold on the topic of embedded payments, and then from the decision we want to do it, actually they're going live. Is there like a typical kind of timeline that applies to many of them?
Alexander Schoonkind: I would say there's two flavors. Some companies prefer to still start on a referral type model. So they want to test out the product right in extent and see what happens when you offer payments. So they would use, for instance, a lot of our kind of pre-built components to quickly launch an MVP. And they're more on the referral model, meaning they're not fully integrating other APIs, right? They're not fully integrating transactional reporting within their own dashboard. They're not fully integrating yet settlement reports within their own settlement reports.
Lars Markull: And for me to understand, this sounds like if I take in my own words, this sounds like a group of people or like a group of companies, the people who are building it, who don't have maybe a hundred percent conviction that this is something where they want to maybe place their internal, I don't know, career or brand of their own company. Because I mean, not, maybe not career is a strong word, right? But obviously when you have these builders at companies, they also want to be convinced personally. This is my project. I'm pushing this forward. This needs to succeed. So obviously they want to be convinced of this as well. And obviously doing this kind of step that you described right now can give the personal conviction for the individual, but maybe also for the company behind there that this is valuable.
Alexander Schoonkind: They either don't have that much expertise in payments or they come from a gateway type product. So where they're kind of agnostic and they provided API integrations with several providers. But they're kind of annoyed by keeping up 15 different providers and just listening to every merchant asking for their own provider. And they think like, okay, let's take a first step and start having more of like a preferred supplier, right? And integrating them in the backend, providing some optimization, one contract, one touch point but not going fully all the way also because it takes up engineering resources.
And I would say you can launch that within four to eight weeks. Also it depends on the size of the company and how likely you have resources available immediately. But I think the more integrated approach would likely take you around three months or something like this. Because you need to test out, you're going to do some internal production tests. I usually ask customers to provide me with like one or two MVP customers. Customers that they know really well that are also willing to test out the product with them. So we can kind of have like three party meetings almost. So then we assess is this product going to be used by you? Is this product according to what you would like to use? So to kind of do a bit of product management together with them. But that can take three to four months right? Before you have a decent, before you can publicly launch it.
Lars Markull: And this is of course, like partially technical integration, but of course, maybe also on your customer side, getting all the different teams aligned around activating the customers and learning from that.
Alexander Schoonkind: There's a legal part, right? Because suddenly they add a legal clause with payments, right? Which a lot of people feel also hesitant, right? Because of course we do the technical and we do the underwriting, right? So the financial compliance all lies with us. However, you're still offering a payments product. And you do know you have some responsibility and you control the funds. So there's the legal department, which needs to be fine with the wording that they're putting into the contract, similar to like the customer accepting it as well as indeed, like you said, the technical and then the marketing around it. How are you positioning the product? Are you positioning the product as a separate payments feature, or is it more embedded, like we say in the background and it's not that obvious that people are signing up for something like this?
Lars Markull: And do you advise your customers for this specific question?
Alexander Schoonkind: A lot, a lot, I think a lot of embedded payments revolves around us sitting around the table and really becoming the payments partner. Because there's a lot of questions unanswered depends. It ranges from pricing, like you said to the type of payment products you offer. A lot of companies are not used to offering payments so they have no idea about fraud or what products to offer. They might offer a separate direct debit out of the gate, and then they get a lot of reversals. As we know from German, Netherlands, they get a lot of reversals. So I say like, ah, first maybe let people try out cards and immediately try to capture the payment. And then when they behave like a normal person, right after three months enable SEPA. So there's all of these things that you need to speak about. We often also map out the whole flow initially because some companies have fairly complex flows into kind of money orchestration. They hold things in escrow or they have certain projects. So we really need to deep dive on this because I think one of the things that is often underestimated is the product experience from the end user. It needs to be super good, right? Because otherwise people are already used to great experiences, right? Because they're using apps like Uber and Airbnb where it's already seamless. And so you need to offer such a seamless experience. Otherwise people will not accept it and they will likely break off in the process. So you're enabling somebody to become a PSP, but you kind of need to train them on what it means.
Lars Markull: Makes sense. Makes sense. And then now about the journey of getting interested in embedded payments, launching or deciding to launch embedded finance and integrate it and then launch it. Let's say the first year, the first couple of years after launching it, and when a customer comes to you and says like, okay, is this so far a success or not? How am I doing in comparison to, let's say a peer group or something like this? Do you have like a specific view on that? Is there something like, how do you define success in the first couple of years after launching such a product?
Alexander Schoonkind: It's very case by case because there are big bang kind of migrations. There are people who force people to use it. There's different approaches, right? You can start out by offering the payments product, but then for your enterprise customers, you're kind of still willing to entertain another provider, for instance. And there are companies who decide, this is what everybody's going to use, and we're migrating all of our customers, whether they want it or not. I would say the main KPI you should be looking for is an attach rate. How many of your customers are actually using it? Because that's a good indication on how important the product will become for you. And it also touches upon a very sensitive thing with every company who starts embedding payments is that they are hooked on SaaS. The whole company is often, if they don't start from payments from day one, they're hooked on SaaS revenue. Meaning also your commercial team is hooked on SaaS revenue. Your commissions are based on SaaS revenue, right? And if you really want to embrace payments, it should kind of become more of a replacement for that SaaS, or it may become a major chunk of it. I think you've seen it in companies like Shopify, right? First it was a pure SaaS product and then it started to kind of lower the SaaS barrier in exchange for getting shop pay revenue. But it's a very sensitive time, right? When you decide to do that. That's why I say if the commitment is fully there from leadership and from founders to be doing this, they're often more bullish in selling it and training their salespeople to start upselling it and treating it as a core product, than treating it as a side product. And then it's obviously in the KPIs when there's no uptake, something is probably wrong with either the service is not embedded enough or you're not forcing your customers to use it enough. And that's an indication I would say.
Lars Markull: Interesting. And obviously with your company focusing obviously, you personally focusing on vertical SaaS, you see a lot of different professions. The companies using these B2B SaaS software, do you see big difference in that as well? Let's say there are specific areas, professions? I mean, a lot of it's driven by how they do payments before and what kind of payment methods are accepted. Here in Germany, just thinking about the examples in the craft industry where it's a lot more bank account transfer based and maybe less of cards. Does it feel for you different as well when you talk to different industries?
Alexander Schoonkind: It's very different. It's very different. That's why I think it's always bespoke to that specific industry. So there's a difference, first of all, between are your customers SMBs or are your customers fairly large customers? Because if you're in the very low SMB ranges, so let's say hair and nail studios or like self-employed, sole traders, I think they'll be more likely to use your payments product because there's less involvement from them, right? They don't really care often about the rates because you're likely going to be offering them better rates than they would independently be getting and they use the product as their main platform. They're not going to review the terms and conditions extensively and they're also okay going with this kind of automated checkout, right? Where you kind of pull them through an online checkout. You do selfie scan, it's okay.
But if you build software, let's say for car dealerships also in a more traditional space where these founders of these companies have been 80-year-old dealerships, right? Or Volkswagen or Audi. They're not going to go through an online screening, likely the founder of that company is not even with the company, like physically. So you're not going to get a utility bill or like a passport selfie scan from those guys. So it's a very different approach to offering financial services. And then indeed you have the more card based economy where there's a lot of card traffic, and then there's the bank base where it's a lot more about being able to reconcile properly, bank transfers, splitting payments into different bank transfers, having flexible ledgers. It's a lot about reconciliation, sending money out through optimal routes. How often do you send it out? If there's fairly large payments, it can be very sensitive to be able to do the right thing and then apply. And the rates are more sensitive, right? So the larger the customers get, the more critical they will be of the rates you're charging them, right? It's logical, right? If you start charging 2% on 50 million, people are going to question like, okay, and what service are you actually adding for that? So there's a lot of differences.
Exploring Preferred Industries for Embedded Payments
Lars Markull: Do you personally have a preferred industry or area for embedded payments?
The Appeal of Legacy Industries
Alexander Schoonkind: I like legacy industries, so I really like automotive. That's why I took it as an example. But I also like construction. I like industries where you don't expect embedded payments because it's not been there day one. So, and I think that hospitality, food and beverage, that's been done forever because you cannot start the business without accepting payments.
Challenges and Opportunities in Legacy Companies
Alexander Schoonkind: But I like the legacy industries where these companies are actually very interesting because often they're very profitable companies. They have product market fit, and they're only just dipping their toes into embedded finance, payments being one of them. And there it pays off to do a lot of consultative work with them, listening to their customers and starting to build a product because when they roll out the product, it's a serious product for them. They really commit. I think often in flashy startups, so I would say I'm also a startup, but I know the deal. People are very opportunistic. They always think revenue's going to 10x every month. And then often a lot of them die or they lose focus because they have to pivot or anything like this. Whereas the legacy companies, they have a really good balance sheet already. They know their customers in and out, long-term relationships. So whenever they roll out the product, it'll get serious adoption and serious traction. It also means their customers will be more critical but they usually also have a better relationship. So it's easier for them to offer a better product experience. And then once you get in and you get through these hurdles of building a specific KYC pipeline to accommodate a specific user group, you have this specific, I don't know, money orchestration, specific payment product. It's a much bigger success than it is with the flashy startup, I would say.
Lars Markull: Of course. I totally get that. I guess, of course, also for you personally and also your company kind of breaking into some of these legacy industry can be extremely valuable and extremely interesting, and obviously going after a company with a massive volume, but a harder chance to crack is obviously sometimes, in most cases more interesting than maybe the easy cases that maybe don't have so much volume.
Pricing Strategies for Embedded Payments
Lars Markull: And Alex, we touched a couple of points already on the topic of pricing and that's also something that on my end I've seen quite a bit with companies. I think a little bit of content out there when it comes to pricing is like what's the right pricing strategy for an embedded payment company? And let's take again, the vertical SaaS company that's now maybe already catering to, is already live, has product market fit, has customers obviously. The customers have already done payments one way or another, so that means they probably have a payment provider already directly integrated or using it one way. And now you as a vertical SaaS are offering them embedded payments. How should you price it? I mean, the, I don't know, easiest solution would be look at the existing pricing and maybe make it a bit cheaper, a bit more expensive, and then go with that. Is that a common approach you see and what's typically the one you suggest companies to go down?
Alexander Schoonkind: Again, it's very case by case, like in industry that are very commoditized. If I look at the restaurant industry, I mean, you've seen a couple of companies now growing into that because like, I think Lightspeed, whatever, they're becoming almost a legacy player. You have Tebi here in Amsterdam. You have Flatpay killing it right throughout Europe. Their pricing is actually very low, right? You could see that it's not important. It's just an enabler. And the main value lies in the tooling.
The Complexity of Payment Pricing
Alexander Schoonkind: It's very different from an industry where it's more obscure actually on around how you compare the pricing towards somebody else. I think it's very easy for these small businesses. Obviously it's very dependent on the industry and the type of customers, the size of the payment that you're processing, the tool that you're, the payment product you're using to monetize. But I would say always try to steer away from offering it as just a payments product because then you get to compare apples to apples, start comparing it to public pricing. Large enterprise companies will start comparing it to their direct offerings, right, of the other competing kind of PSPs. And that will lead to nowhere. I think that the interesting thing that you see, for instance, Shopify taking as an example, Shop Pay is actually the most expensive option. It's more expensive than a direct integration with other PSP, although they add a markup if you prefer to use another PSP, but it wraps all the services, right? It offers you the best product experience. So that's why I say if you're not fully convinced on offering payments and you take more of a referral approach, then you're also going to have to offer it at a cheaper rate. Because you aren't even optimizing, you are not optimizing the product experience that much yet for your customer, so why would they pay, right?
Ideally, it's so obscure on what, you cannot compare apples to apples because sure that the other party is processing the payment, but you are adding all these automations throughout the platform, making lives 10x easier, saving them 10 hours on accounting, on closing the books at the end of the year. You're adding so much extra value by processing payments that you can also allow yourself to charge more. And I think that's what you should aim for, because if it becomes kind of a loss leader almost for your company, right? It's just an enabler and you need to offer it as low as possible, it gets very tricky because you need to make money on it, right? Because it is an operational effort, so it needs to make sense. I would say you try to aim for at least making 50 basis points to 1% of margin off of the product.
And what I see is there are a lot of vertical SaaS companies that start off offering payments from the get go because it's core part of their industry. And they started out using some of our competitors who were actually quite expensive. And then when I approach them and they're kind of fed up with this, they say like, actually, we have not been able to monetize it. We are just offering payments at the same rates as the rates we are paying. Because otherwise they would not take it. Our businesses wouldn't even accept the payment. They've technically then been subsidizing it, right? Because you also have to pay employees that answer questions and then your engineers who have to maintain connections. So that's why it's very difficult when you start out a vertical SaaS platform to start adding payments with the typical SMB focused payment providers, because they're not going to give you the room to really monetize it.
Lars Markull: And that's an interesting point, right? I mean, that's also what I was thinking about that obviously companies also in some cases, like underestimate the effort it requires. So when you get price X mentioned by a provider and then you mark it up maybe a little bit and you feel like this is enough. Like how do you know this is enough, right? Like how much cost, how much employee power will really be consumed by offering these features. And this is of course sometimes the unknown, right? And obviously, I guess another point here as well that, not sure what's your view on that is, but if you also start the payment product on a certain price range, then of course like increasing it from there is a lot more complicated than potentially going the other way around as well. So, this is a learning I've seen also quite a bit.
Alexander Schoonkind: I would also say for cards, it's becoming increasingly hard to offer a blended rate. So a blended rate meaning like a fixed 1.5% or something. Because I've seen now in some regions, so within Europe, so you're processing an issued card from another country in another country, intra-regional within Eastern Europe, the scheme fees have increased quite a lot. So even though everybody always says, oh, interchange it's capped at 20, 30 basis points. For some, for some cards. But then if you see what MasterCard and Visa are putting on top in some regions it's quite high. And if you go low and you start beating others on price, right? Just pure on blends, it can be tricky for your company. I think if you underestimate the type of volume you're going to be getting you can run a loss on it, even.
Lars Markull: And of course it depends also highly on what kind of industry you're in and what kind of cards are being used at your merchant, right? There might be some industry where maybe foreign cards are very uncommon, or maybe even business cards are rather uncommon. It's a big percentage of normal European consumer cards, which have capped interchange, but obviously in other industries might be completely different.
The Evolution of SaaS Companies with Embedded Payments
Lars Markull: And Alex, when you look at the companies you worked with in the past, obviously embedded payments is now a hot topic for quite a bit of time already. The companies who have successfully done it, is there something you have seen how they changed? I mean, obviously they're now offering payments and the features have changed in that regard and the functionality, but have you also seen, like, let's say under the hood at the company that they, we spoke about earlier about the SaaS mindset and then transferring maybe to more payment type of businesses. Do you see these companies making this transformation, or how do they evolve after they turn the product successful?
Alexander Schoonkind: I can see it from their sales perspective. So where before it was more of an add-on feature, it starts to become the main feature on which they're starting to sell. So marketing wise, they're kind of marketing out payments products as the main feature of the product as opposed to what you sometimes see when SaaS companies are transitioning. Often they have like three tiers, right? And so maybe it's not even there in tier one, right? So it's like an add-on feature, which means it's like, ah, I'm also okay with you not using it, or something like this. And then the real payments, the companies who really benefit from it and they see the strength and it depends also on your model and your type of industry, then it starts moving to being de facto there. Like this is all we do.
And you also see it if a company is coming from where they're just agnostic and they have all these APIs that they're maintaining. You see them kind of steering away from that. So they're deprecating and they're forcing their customers. They're giving them like a year to either switch to their, I don't know, their in-house payment product or that's it, right? They have to find a different solution because they're deprecating the solutions they have out there, because that's also reducing their opex, right? They're thinking like, why? I have now a good payment product. It has matured, right? We've learned from initial feedback and so now we're ready to roll it out to everybody, and there's no reason for you not to take this payment product.
It also matters, and that's also what I've seen, it's another learning, how confident the company is about their own brand, basically. Because you have to trust somebody to handle money. And in essence it's us handling the money, like really from like a regulatory perspective, but from a customer point of view is that company. And what I see often is that these early companies, they're quite afraid, right? They're still marketing out a partnership with Stripe as though they're not paying Stripe's bill every month, right? Like, hey, we partner with Stripe as a legitimacy. Like, hey, we're legit because we signed up with Stripe. And I think companies who've matured out of it, they obscure away the payment provider completely and it's all about them, right? And you have enough trust in them. They have enough track record for you to kind of blindly accept the product.
Lars Markull: Which again comes back to the point which we discussed earlier, having the conviction that we are the best party for our customers to offer these features and they should come to us. And probably also the internal trust that the company, the product, what they have built is something the customers should rely on, even for the most critical aspect of what they have, which is their money.
Alexander Schoonkind: Yep. Radiating that confidence.
Transitioning to Embedded Payments
Lars Markull: And Alex, you obviously have been quite a bit in the payment industry, started as an employee and now have your own company. I would love to understand like what made you trigger, like going all in on this founder journey and starting actually a company that's specifically focused on the embedded payments aspect.
Alexander Schoonkind: I think you have to be a bit crazy to start a company, because obviously you're going up against giants, right? It's in any industry, right? It is like on paper, you will always lose because you're going up against other companies that are bigger, have bigger marketing budgets, can theoretically do anything they want.
The European Market for Embedded Payments
Alexander Schoonkind: But what surprised me is that there are still so much legacy software out there. And what also surprised me is that there've been many reports written about it. There's a Credit Suisse UBS report about it as well, is that the uptake of payments in Europe has been quite lagging behind US. I think in US, I think the estimation is, I think the last Flagship Advisory report, I think 60, 70% of companies have a form of embedded payments in vertical SaaS, whereas I think it's like around 20% or less in Europe. Which I think is also due to the market obviously being more complex. You cannot just launch a very simplistic product in US, like you have ACH and cards, let's go, and US dollar, and it's all in English. So that's easier. So it also depends on the size of the platform. So obviously we're 10 years behind in growth of vertical SaaS companies because you, like I said before in the beginning, you need to have a certain size to be able to think about embedding payments.
And I also think what was missing is that when I spoke to a lot of these vertical SaaS companies that have not yet embedded payments is that they were kind of afraid. They did not understand payments. They thought it was a huge effort. A lot of companies still don't understand we do the financial and underwriting that it doesn't depend on them. For them it's more black and white. It's either they don't do payments or they get regulated is also what you sometimes see. It's often because companies become too frustrated with their provider that they think like, why don't I just get regulated and do it myself? I do everything. And then they get regulatory oversight and they think, well, maybe I should go back to...
Building a Company Focused on Vertical SaaS
Alexander Schoonkind: So that led me to, because I believe that, and also the providers that are out there, don't forget, they've been built for direct payments, for direct merchants. They've been built to power Netflix, Uber directly, web shops directly, and suddenly giving a lot of that infrastructure to another software company and enabling them to monetize on it is very difficult for a company that's already processing billions. Changing your ledgers, enabling another company, for instance, to monetize on FX. A lot of companies, their FX treasury system is very much an in-house built system. You cannot expose being able to monetize and capture FX to an external party, and we've built that from the ground up from day one, and that enables us to expose features that others have a lot of difficulty exposing.
Another simple feature, which I was surprised nobody does, is that a SaaS company who has SaaS also still, like they have SaaS and payments revenue, and then with some providers, that's still a separate billing cycle, right? So you take out, it's net settlements, so you take out your fees from the settlement, but then still at the end of the month there's also a bill for the subscription fee. Whereas the company would say like, well, why don't you also take that out of my flow? You already have my money. And so that doesn't work. So, and that sounds a simple feature we enable, or it's where we offer this kind of variable pricing where companies have a lot of different products, price points, right? So they have price points in five euro range and in 50 euro range. And so the pricing they actually want from us needs to be able to adjust to that, right? Otherwise it doesn't make sense. And those are all the features and frictions we got to build from day one. And I have to say, it's easier, right? Because if you have very little volume processing, you can iterate much quicker on your platform and think about it much more thoroughly. And that's why we started the business.
Lars Markull: Interesting. Interesting. But that also means like your bet was probably also a bit that the whole, I mean, you focus specifically on vertical SaaS. Is that something you did after you started the company and realized this might be the biggest focus or was it already something you saw before where you're thinking vertical SaaS will become a bigger topic in Europe and specialized payment providers might be an interesting opportunity?
Alexander Schoonkind: I was just reading up a lot of material on where the payments industry was headed. Obviously, embedded finance has been a trend for longer. But I was always skeptical, I would say, about the embedded banking and I would say why aren't more people doing embedded payments? I also think even the incumbent providers have been fairly slow actually ramping it up. I mean, they're all ramping it up now, but the opportunity was there a long time ago already. And I just felt there was a gap in the market not being addressed solely on vertical SaaS. I think a lot of other companies started with a marketplace offering, which is also very popular, and you do see a lot of volume coming together in either marketplace and vertical SaaS. My strong belief is that in 10 years time, I think there will be very few SMB businesses left that do not run on some SaaS software company, providing them financial services, whether that be capital, issuing or payments. And so you need a dedicated provider because those generic providers that just cater to SMBs, giving them payments one-on-one on the website, I think that will disappear. I think that model will start to disappear. And so that's why we headed in that direction essentially.
Lars Markull: Interesting.
Competing with Industry Giants
Lars Markull: And with your company, you mentioned already you're obviously competing against, mentioned a couple of names already of payment providers, some giants there. And obviously you are, as you said, like money is a very important piece, right. So how do you pitch to your companies when you know exactly your leads are also talking to some of the big names in the industry. What is your argument why your solution is still the more interesting one, even though you're a smaller company?
Alexander Schoonkind: It helps if somebody has tried out one of the competitors because then they actually know what's wrong with them or how they're not offering the right type of product for their industry. So I would not say we're the best for everybody yet, right? Because we're still building, obviously we still lack certain, I don't know, domestic payment products or local settlement rails, right? So in some cases I would say we're not ready for you yet, or we can only power part of your business, which might not make sense. But I think it helps if you've been burned by the incumbent.
Tailoring Payment Solutions for Specific Needs
Alexander Schoonkind: And it revolves a lot around the flexibility of the platform, right? I think there are platforms, for instance, that have both a platform model where they onboard their customers and part of their system is still merchant of record, right? Where they are the merchant and they want to combine both models. There are models where they have more complex settlement streams that offer, like with sub entities, they have multi entity structures that they power when they want to kind of orchestrate money over. And that becomes very difficult to do with the legacy incumbent providers because some of them offer a great solution out the box as long as you stay within the guard rails. But once you start to move out of it, it's the same with KYC, right? KYC being always the initial hurdle, right? If you're selling SaaS, it's easy. Sign up online and you get to use the product. But if you want to enable payment products, right, you need to do a level of KYC and the KYC is often very vanilla. Like it can be a great flow, but maybe not for your specific user group, like what I mentioned before. And then how are you going to onboard them, right? And a lot of these larger companies, they usually don't care as much for those outlier use cases. And they're not willing to put in any resources. And I think that's where we excel, because we do provide the level of consultancy and we try to build a solution because we have such flexible building blocks that's really suited for you to build the optimal experience towards your customers, which leads to a higher attachment rate. That's why I always say like, otherwise, you're not going to get people using your product. And sometimes they've experienced it where they say the product is not being successful. I said like, oh, because you were limited, right?
Lars Markull: That's a good point.
Final Thoughts and Advice for CEOs
Lars Markull: Thanks Alex. Is there a lot of, I think interesting aspects for the builders out there who want to go on the journey of embedded payments, do you think we have missed anything? Is there any final advice you have for maybe a potential CEO of a vertical SaaS company listening that is kind of about to go on the journey of embedded payments?
Alexander Schoonkind: No, I would say always reach out to me. I'll be honest, if it's not a good fit right, or we cannot accommodate, I'm always happy to provide advice. I'm a payments nerd. I try to finish reading the internet on payments before I go to bed, then I start in the morning again, just before the shower. So I follow a lot in the industry. So always happy to chat to people about embedding payments and payments in general.
Lars Markull: Okay, perfect. I'll make sure to include your LinkedIn profile in the show notes. I guess that's a good way to reach out to you and Alex, I knew already before this episode, before I hit the record, this has probably gone a little bit of a longer one, so we definitely went longer than the usual interview, but I think there was a lot of interesting insights. I think embedded payments is, or I don't think, I know embedded payments is a, it's a growing, keeps on growing trend. A lot of companies still have a lot of questions, so thank you for sharing your insights. Maybe if there's interest in the audience, maybe we can pick you up also for a virtual event or some kind of other deep dive to go a little more into other questions that we didn't really talk about this time.
Alexander Schoonkind: Happy to. Thanks for having me on the podcast.
Lars Markull: Thank you, Alex. And until next time.
Outro Lars Markull: I hope you found this conversation as insightful as I did. Embedded payments is one of these topics where the devil really is in the details, and Alex shared some fantastic perspectives from the trenches. If you have questions about embedded payments that we didn't cover, feel free to reach out to me on LinkedIn. I would love to hear what you're curious about. And here's my biggest ask. If you enjoyed this episode, please follow the Embedded Finance Review Podcast in your favorite podcasting app. It really helps me to reach more builders and founders who are navigating the space. Thank you, and until next time.