It is not just our payments consultants who like to come up with these great new terms meant to describe how our industry is evolving. These terms often sound great, but they are not always fully understood by the public or, worst case, by industry experts themselves. Open Banking is a good example, and as someone on a recent webinar kindly pointed out, it does not mean that bank branches are now open 24/7 and on weekends. Another term that has been doing the rounds for the last few months is the concept of Embedded Finance. In short, embedded finance is when financial services are integrated into websites or mobile apps by non-financial institutions. Financial services (incl. payments) are integrated, or embedded, in a wider product proposition by non-banks. Think Uber and how you pay for your ride. It’s all part of the experience and not a stand-alone process.
Increasingly, embedded finance plays a considerable role in the B2B space, especially for small-medium sized businesses (SMBs) served by Software-as-a-Service (SaaS) platforms. These SaaS platforms enable SMBs to participate in the digitisation of the economy. That is quite a grand statement, but when you think of a small business, for example, a small yoga studio, and the challenges and overheads to run such a business by dealing with customer enquiries, taking bookings, managing capacities for lessons, taking payments and managing accounts etc., then the merits of a platform proposition that deals with all these processes in an online environment become obvious. There are different SaaS platforms for different industry verticals as specific needs tend to differ depending on the industry the SMB is operating in. Embedded payments are arguably the first step of embedding financial services. SMBs sign up to a platform that supports all of the SMBs core functions, but then the SaaS platform provides payment acceptance capabilities on top of it. The payment functionality could be integrated with the accounting software, and it would certainly negate the need for an SMB to contract with a payment provider separately. Fortune Business Insights recently estimated that the global SaaS industry will grow from $114bn in 2020 to $717bn by 2028 (a CAGR of 27%).
Last month, FIS, one of the largest global providers of financial technology, announced the planned acquisition of Payrix, a US-based fintech company that specializes in enabling SaaS-based platforms to embed payments and financial technology into their offerings to enhance the payments experience for SMBs. The terms and Conditions of the deal were not published. In its press release, FIS was very clear about its intentions: “Since acquiring Worldpay in 2019, FIS continues to expand its strategic payments capabilities and offerings in global e-commerce. Bringing the Payrix capabilities inside FIS enables us to continue our journey of serving e-commerce as well as platform companies.” Payrix offers an API-based technology platform that makes payment facilitation quick and manageable. It is these technical capabilities that FIS, or its Worldpay division, wants to get its hands on. It is not a revenue play (remember FIS has annual revenues of approx. $14bn so any Payrix revenues would not substantially change that). Today, Plarix offers payment facilitation or payment enablement to SaaS platforms across different industry verticals. SMBs sign up to SaaS platforms such as fitDEGREE (health & beauty segment) or ResMan (property management services) who support core processes of the SMB business such as scheduling, taking bookings etc. and Payrix enables SaaS platforms to incorporate payment acceptance so these platforms can drive further revenue or make the SMB customer relationship better and stickier.
However, the future of Embedded Finance will be beyond payments. It will be about issuing virtual cards (either to employees or loyal customers), insurance offerings or lending/working capital propositions to help SMBs when cash-flows suffer. Especially the latter is of massive importance to SMBs. FIS has gained lots of experience in providing financial technology apart from payment acceptance and has customers and technical interfaces to banks and other stakeholders in the financial services industry. Therefore, it could be well-positioned to build an ecosystem of financial services that support SaaS platforms and how they serve the large number of SMBs that increasingly transact through digital channels.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).