New Revenue: Are There Opportunities for Making Money with Embedded Finance?

Small and medium-sized businesses are always after new revenue. But they want to focus on their core business and not have to spend time and energy worrying about payment processing. Offering SMBs low fees, fast settlement, and a global network, while allowing them the generate revenue off those transactions, embedded payments players are coming to the rescue! Or are they? While embedded finance has certainly taken the industry by storm and allows consumers a plethora of payment options, not everyone is so sure the money flows back to the small business. Join this panel as they debate whether embedded finance is a cash cow or a money pit.

Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Faheem Savja (00:08):
Joining me today on stage, we have Peter Wannemacher, principal analyst at Forrester Research. Thank you for being here, Peter. And we have Matthew Watts, CEO of Metrexia and the co-founder and former CTO of Lendflow. We just learned last night at dinner that Matthew is also a search and rescue volunteer for the National Park Service. Hopefully none of you have to meet him when you need search and rescue, but if you do, he's there to support you. Thank you, Matthew. That deserves a round of applause. The topic today is embedded finance—a very, very hot topic. Embedded finance has certainly taken the industry by storm, especially in the realm of small business banking, which is why we are all here today. Think about POS systems. Think about embedded finance solutions when it comes to lending offers. Yesterday, we heard from Fiserv about options given to small business owners directly from their accounting software.

(01:06):
Those are tools and services that are readily available to small business owners. That could be an opportunity to build a partnership with financial institutions or act as a competitive offering. Let's get into it. Peter, I would love to hear your take. I know Forrester's done some new research on the field of embedded finance. What does that research tell us?

Peter Wannemacher (01:27):
Thank you, everyone. I'll try to do a relatively quick rundown of the current state of the market from an outside-in perspective. I'm going to start with the end user, or what we sometimes call at Forrester the "ultimate customer." I'll start with the end user, the customers of small businesses, then get into small businesses themselves. Then I'm going to touch on the vertical SaaS players because they have a growing role here, at least in the small business space overall. And finally, the banks themselves—last, but not least. Regarding end users, more than one in five US consumers used some type of embedded finance in the past year.

(02:14):
We use a pretty broad definition here because we're including things like offering financing at a car dealership, which is embedded finance. It's old school, but it can be digitized. We include anything where financial services are integrated into non-financial journeys, experiences, or platforms. So, more than one in five—that's pretty substantial. I actually think that might be a conservative estimate because, when done right, embedded finance should be invisible to that end user. I would argue "should be" is probably where we're heading. This is a real thing playing a role in people's lives and having an effect on how businesses interact with their end users.

(03:05):
Regarding businesses, we know that a majority of small and mid-sized businesses want some type of embedded finance that's relevant to them. I want to stress the word "want." When you look deeper at whether they're actively searching for it, no, they're not necessarily doing that. But a substantial share say, "Hey, if my vertical SaaS player or my bank can help me give more options to the people who want to buy my coffee or use my services, yes, I'm interested." Vertical SaaS players are playing a big role here and they're probably the hungriest of all the partners in this ecosystem.

(04:06):
We see their role rising. Lastly, the banks: we surveyed over 400 business and tech leaders at banks and found that 30% of them said that embedded finance in some form—not exclusively for small business—was one of the top areas they will invest in most in the near term. This was a forced choice, so they weren't allowed to choose 25 different areas.

(04:40):
This is top of mind. If I were to distill all this down, I would argue that embedded finance in small business banking is a strategic question for banks. I think it's an inevitable destination. I don't feel that about every buzzy word, but I think this is inevitable as a distribution model. It won't be the only distribution model, but it will be a major one. Banks need to make real strategic choices about their focus. Right now, banks are thinking about it as an enrichment opportunity, a new revenue opportunity, and "all of the above." While it is all of those potentially, they aren't making the strategic call on what is most important to their business.

Faheem Savja (05:27):
It's tough. We've heard a lot of discussion around potentially going down the route of partnerships using embedded finance as a solution. Matthew, I want to kick it over to you because you put together an embedded finance solution. Tell me a bit about Lendflow, your experience there, and the specific impact on the small business owner.

Matthew Watts (05:45):
At Lendflow, we built an assembly lender marketplace that ended up processing $1.5 billion every year through 75 different lenders. That gave us a unique perspective. To Peter's point, the more we could become invisible to the workflow, the more value we provided to the merchants. The message we received from SMBs was that they were just trying to get back to work. They're not looking for your payment button; they just want to get back to what they do as a business. When they can manage money, move money, access capital, and reconcile in the same tools, that finance becomes oxygen for them to scale their business. Take a look at it from a different perspective: vertical software companies are driving a third of SME acquiring revenue, and that is predicted to be just shy of 50% by 2028. That tells a profound story around modeling in credit ops. Traditionally, the winning models were based on price, but now they're actually based on "time to capital," which really changes the story. Banks can get behind that story easily through partnerships with those vertical software companies. At Lendflow, we observed that models, despite being specific, were only telling part of the story. The most value we got was from learning context—such as offering a loan triggered by an inventory restock or a payroll run. The lady earlier from US Bank mentioned they are integrating with Gusto.

Faheem Savja (07:49):
Yes.

Matthew Watts (07:50):
Parafin does the same. There are a lot of companies going down this path that find exponentially more value than a generic campaign in the same process.

Faheem Savja (07:59):
It's interesting we talk about this because I wanted to be clear about the impact on small business owners and the banks that service them. If I'm a small business owner looking to get a loan as quickly as possible, and an accounting software or an embedded solution offers me a package faster than my bank, I may choose them over writing a longer application with my house bank. How does that affect the small business owner from what you've seen at Lendflow? Peter, I'll pass the same question to you.

Matthew Watts (08:36):
I think it actually affects both parts of the system equally.

Faheem Savja (08:40):
Okay.

Matthew Watts (08:40):
For the SMB, they can get to work faster. They don't have to waste time going to different vendors. It's never just one bank; it's always 10 banks. The value we found at Lendflow is that if we can connect 75 of these institutions to the SMB, there is a much higher chance of obtaining capital, and they can get back to what they're doing. It saves a lot of time.

Faheem Savja (09:04):
I just want to double take on that. They have multiple options. Are those options as favorable as what they might receive if they go through a loan application with their home bank?

Matthew Watts (09:17):
Ultimately, yes, you could say they're the same. Sometimes they could be worse or better, depending on the context and how it is being underwritten. Are we looking at revenue streams from the last 30 days or last quarter's performance?

Faheem Savja (09:33):
So the real key here is speed and convenience that the SMB is paying for.

Peter Wannemacher (09:38):
Right.

Faheem Savja (09:38):
Peter, what's your take on this and what you've seen?

Peter Wannemacher (09:41):
I agree. I might disagree with you on the second part, so I'm interested.

Matthew Watts (09:46):
The second part is these vertical software companies solving distribution problems for the banks. The banks then become the oxygen tank to an oxygen mask, making a much wider surface area spread. That's how I say it benefits both. Let Stripe and those companies deal with what they do best—interaction and servicing the user on the front side—while you provide the resources they aren't equipped for, which is regulated finance, trust, and a century of risk diligence.

Peter Wannemacher (10:19):
I agree with everything you just laid out, and I think more banks should take that point of view and pursue that strategy. However, there is a potential trade-off. There were multiple banks here—one was the banking arm of Bryn Mawr and the other was Citizens earlier today—who talked about using their relationships with small business owners to offer other services. I don't just mean treasury or cash management, but things like wealth management. Someone mentioned that 30% of their SMB customers utilized wealth management or estate planning capabilities from them.

(11:11):
If you say, "We are going to let vertical SaaS have more of the SMB's attention," there is a potential threat. I want more banks to be willing to say, "We've looked at this and we're making a strategic choice to use this as a distribution model for this book of business." Then they can focus on something else to get the attention of those customers. Someone else mentioned "ring-fencing" their most valuable customers. There is a genuine threat of disintermediation, and it comes with a potential loss of enrichment services.

Faheem Savja (11:49):
Should community banks, credit unions, and regional banks be worried about encroachment into their loan book, customer book, or deposit book?

Peter Wannemacher (12:02):
Yes, but some of them should move on from just worrying. As I said, embedded finance is an inevitable, major part of small business banking. Therefore, they need to make a choice. For some, the main goal is to prevent that encroachment. But I think more should be willing to say, "Okay, we're going to let this be our distribution model. We'll see some encroachment, but our focus is over here on these particular business customers or a particular sector."

Matthew Watts (12:42):
It's an interesting conversation. I think the story should change from competition to collaboration. The banks have what the software companies don't: access to capital and the ability to scale. These vertical SaaS companies know the texture of the business in a way banks never will. They are able to influence when and where capital gets injected to help a business thrive. Banks bringing the components I talked about is a massive value-add. Sure, merchants could go to different banks, but I don't think the banks will ever disappear.

Faheem Savja (13:24):
There's a place for it. Certain FIs have already done this the right way, while others still need a lot of work. What does collaboration with vertical SaaS companies and embedded finance solutions actually look like?

Peter Wannemacher (13:45):
An increase in vertical SaaS companies serving SMBs isn't necessarily a zero-sum game. If their revenue increases by 60%, the overall pie grows. Regarding what it looks like: traditionally, banks have been the only supplier and the primary distributor. If you choose to continue being both, you're making a big bet that costs a lot of money. I think, more often than not, banks will play the supplier role and let vertical SaaS players be the distributor, especially for market expansion into new territories or sectors.

Faheem Savja (14:49):
Interesting. Matthew, what do you think?

Matthew Watts (14:52):
I agree. Peter answered that perfectly.

Faheem Savja (15:01):
I hope you're not holding back on something spicy here because we want to hear it! I think you're right, Peter, you have to pick and choose your spots. I'd love to hear interesting use cases you've seen in the market. There may be bankers in the room considering partnerships with vertical SaaS or collaborating with embedded finance solutions. What has worked well?

Matthew Watts (15:41):
The best use cases meet them where they live and breathe. The clear winners are payments companies like Stripe. Companies like Rippling and Gusto are already working with FIs to streamline the process because they know you physically have to hit "run payroll." If they can offer capital for the next three months to cover payroll, that helps a business, especially during things like a government shutdown. We're also seeing it in the construction space with Procore. Experian recently started leveraging Lendflow to scale their operations in that area. As a bank, I would think about what my users are doing and meet them where they are using those tools.

Faheem Savja (16:37):
In your research, Peter, have one or two key use cases for embedded finance popped to the top of the list?

Peter Wannemacher (16:44):
It is embedded payments and embedded loans—actually, more often, lines of credit. There is also room for embedded insurance; banks are often players in that ecosystem as well. To steal your line from earlier, your answer was perfect for the near term, which could last for a few years. Going further out, there is potential for banks as stewards of identity. Imagine a world where banks are on the backend as validators of business owner identity beyond just simple KYB. We also see embedded investing in the longer term. But for the foreseeable future, your answer was exactly right.

Faheem Savja (18:08):
That makes sense. Some institutions are considering "build versus buy." Do either of you have a preference?

Matthew Watts (18:32):
As a technologist, my preference would be to always leverage the experience of a subject matter expert versus wasting time educating myself in an area where I can't compete. These vertical software companies can't compete with the banks on their own; they have to work together to solve the problem collectively.

Peter Wannemacher (19:02):
The answer is far more often "buy" or "partner." Whether it's a one-time conversation or a giant project, the answer is buy far more often than build. I would say the ratio is about four to one. Someone earlier said, "I like a blank piece of paper as much as the next person, but I don't usually get one." I love the submission to reality in that worldview.

Faheem Savja (19:48):
That makes a lot of sense. I wanted to pass it off to the audience. In the context of your credit union or community bank, have you partnered with an embedded financing software solution that you are proud of? No examples?

Audience One (20:18):
Who's a bank?

Faheem Savja (20:19):
Who's a bank? I'll open it up to questions too.

Audience Two (20:34):
I'm not a bank, but I can ask a question. One of you mentioned KYC and "owning" the customer. As more banks and credit unions go for digital account opening and reduce branch presence, the previous panel mentioned having relationship managers, but one manager per how many customers? If you go down-market to micro-businesses, there's no way a relationship manager can sit in front of them all and know exactly who they are and what they're doing. In this digital age, how will banks leverage embedded finance to help with KYC, KYB, and de-risking when there are fewer humans involved?

Peter Wannemacher (21:56):
I don't think the banks know, and I think they're right to not know. We did a study finding that the relationship manager was the number one driver of increased customer lifetime value (CLV) for business customers. We repeated that research 12 years later; the effect had shrunk but hadn't gone away. Every traditional bank I talk to still says this. They aren't quite sure what to do because the rigorous data still shows that the human model drives business results.

(23:04):
But it doesn't scale. I think what they'll be doing in the near term is thinking about partnerships with vertical SaaS for digital distribution in secondary markets. They might say, "We are really good at our home geographic market, but for national expansion or a specific sector like construction, we'll let the vertical SaaS players be the distributor." Regarding the de-risking aspect you asked about, I just don't know the answer yet. It's a complicated question.

Matthew Watts (24:08):
The more distribution I have in an area, the better those insights will be. Teaming up with vertical companies is the best way to go unless a bank has billions of dollars to assign to the problem.

Faheem Savja (24:30):
I'll open it up for other questions.

Audience Three (24:44):
Great discussion. When do you think embedded finance becomes ubiquitous—no longer a special feature, but just part of what everyone offers?

Peter Wannemacher (25:05):
I called it "inevitable" earlier, meaning it will be a mainstay of the world in which business owners operate. They're going to want it and use it. Ubiquity is a strong word; it's too far afield for me to see a world where there is no direct relationship between a business owner and a bank for lending or payments. I'm not trying to be nice; I just don't see that. My answer is that it will be a mainstay within five years, but ubiquitous? Never.

Matthew Watts (26:11):
I agree. Eventually, it will get so well integrated into systems that people won't even be aware of its existence.

Faheem Savja (26:22):
Collaboration is required. Whether it becomes ubiquitous or not, you still need that "home base" FI, in my personal opinion.

Audience One (26:56):
There's a lot of conversation that feels like, "If you don't get the right answer from mom, go ask dad." For Fintechs offering more leniency, at some point, you're always going to want to go directly to "dad." I think the disintermediation of banks is possible. Big banks will be fine, but what about the smaller ones?

Peter Wannemacher (27:31):
It's a very real threat if a bank's business model is predicated on deep enrichment, multi-product ownership, and long tenure across generations. If that's how you make money, you need to either rethink that model—which is hard—or make choices to protect areas of your distribution. It is a real potential reality.

Matthew Watts (28:19):
I agree, especially for smaller players. It's about accepting how the industry and its shape are changing.

Faheem Savja (28:36):
One last question?

Audience Four (28:47):
This is about relationships and who owns them. There's a version where an SMB logs into QuickBooks, clicks to get financing, it goes through a marketplace like Lendflow, which points them to a non-bank lender backed by a bank. In that chain, the bank has the least direct relationship. Is there a version where the bank maintains a primary relationship with the SMB?

Matthew Watts (29:42):
Yes. We partner with banks that choose to emphasize that relationship. Sometimes it's easier for the bank to be invisible, typically for things like lines of credit. But there are also entities that want it to be known because of the trust they've built over 60 or 70 years. They want that trust to be part of the experience.

Peter Wannemacher (30:15):
It's a spectrum from "completely invisible"—which can still be a viable business model—to "product prominence" or "high brand visibility." All three are viable but require very different choices for your partnership ecosystem and product development.

Faheem Savja (30:55):
I was excited to hear that, Matthew. If a financial institution is interested in being grained in the fabric of a business, they have that option through a platform like Lendflow.

Matthew Watts (31:10):
But they won't have that option everywhere. Some vertical software companies don't want the brand in front.