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.
