As traditional embedded payments become table stakes, savvy independent software vendors (ISVs) are expanding by introducing broader financial solutions to their platforms. These solutions include payment acceptance, lending, insurance and other offerings traditionally provided by banks.
By embedding financial services into digital solutions, software providers can tap into lucrative new revenue streams and provide more value to customers.
James Armijo, CEO of Inktavo, joins NMI’s Payment Playbook host Greg Myers to discuss the embedded finance trend in more detail. In this episode, James shares his take on the stepping stones and stumbling blocks ISVs face in a prolific embedded finance ecosystem. James also discusses where he sees this trend going in the next two to five years and the benefit of focusing on customer pain points over monetization.
We’ve highlighted a portion of their conversation below. Listen to their full discussion here.
Greg Myers: Embedded finance is broader than just embedded payments; it’s a huge part of what software companies have been doing for several years. But let’s first talk about embedded payments, and then we’ll jump to the bigger picture with embedded finance. Tell me a little bit about Inktavo’s embedded solutions.
James Armijo: At Inktavo, we offer embedded payments in various touch points. Our customers can use our platform to create a variety of ecommerce solutions for their customers. Embedded in all of those workflows are transactions that we capture and monetize.
For instance, we also do a lot of business-to-business transactions. Say a local restaurant needs to buy uniforms for all their employees and goes to one of our customers. That transaction typically happens via an electronic invoice; different payment workflows are built around that. So, we’re supporting the embedded payments component as those transactions happen over time.
Myers: In your opinion, what are the differences between embedded payments and embedded finance?
Armijo: Embedded finance has morphed over time. From my perspective, embedded payments are a subset of embedded finance.
For instance, when I think of embedded payments, I picture a utility company coming into a house. If I think about my house, I just want to turn on the light switch and have the lights come on. I don’t want to know what turbine is being used, what gauge wire is on the transmission or all these other things, right? I need somebody else to handle that for me.
Customers think about payments in very much the same way. What’s key is that it should be cost-effective and easy to use. So, we’re really focusing on our customers' experience related to payments.
Can they get a merchant account up and running quickly without having to leave the platform to fill out unnecessary paperwork? Once they get that merchant account provisioned, can their customer use all the different payment methods they might want to use? Once they receive a payment, is the reconciliation and remittance process straightforward and easy? That’s the focus that we’ve taken.
Myers: For many software companies, payments are a primary focus because, like in your example with utility companies, they’re necessary. But beyond that, software companies have so much data on their customers (and their customers’ customers) that creating other financial products like checking accounts, insurance and lending is starting to make more sense. What are your thoughts on that?
Armijo: Great question. It’s interesting - a couple of weeks ago, I had the opportunity to attend a conference for our investor group, and about 70 other businesses were there. We’re all software companies and do payments, but we serve a variety of different needs. While talking to some of those peers, we made the observation that there’s a buffet of options you can have around embedded finance.
Ultimately, the most successful companies are the ones that figure out what is relevant to the customers in their industry.
For example, when I think about our customers, their biggest one-time expense is usually around equipment. It’s tough for small businesses to get capital these days. So, for us, lending is incredibly important. Because we have data and know they have a reliable source of income, we’ve been able to provide embedded lending as part of our platform. As a result, we’ve seen a very strong uptake among our customers who need access to capital.
I’ve also talked to CEOs in other industries where insurance is a big issue - industries like construction. So, having the ability to offer an embedded insurance product is important to them. There’s not a lot of risk in our industry, so insurance isn’t nearly as important as it could be in other places. But all of these options are interesting.
Solving the needs of your customers is what’s most important.
Myers: How is your lending product doing?
Armijo: Lending is doing really well at about 30% to 40% adoption, but we’ve only offered it since the start of this year. And we’re seeing that the adoption is reasonably consistent every month because customers need access to credit to make investments.
Myers: We’ve talked about all the positive things you’ve seen in embracing embedded finance, but what are some roadblocks?
Armijo: There are a couple of things that I would point out, and I’ll admit I’m also not an expert in solving them. The process around applying for a merchant account and the KYC (know your customer) requirements that come along with that are significant barriers to both implementation and adoption. I would love to see the industry develop ways to make that process more seamless and real-time, especially for smaller customers that aren’t Fortune 500 companies with a lot of data.
The second big issue that I’ve seen is around funding timelines. It’s a painful day when you have to tell your customer how a NACHA file works, how ACH files get settled every night, what the return period looks like and why that impacts when they can get their money. Most of our customers today say, “It’s 2023; isn’t there a way where I could just say, ‘Does this person have the money?’” And the answer is, yes, there should be. But we don’t live in that world, and there are a lot of issues around that.
Customers say, “Well, if it’s going to take me eight days to get my money, I’m hosed. We’ll just take a paper check or cash and (better yet) be able to spend that cash tomorrow.” So, I see that being a continued issue that, hopefully, the industry will solve.
Lastly, I would point out the overall issue around fraud management. Clearly, there’s a big issue. It’s really hard. Having a better standard and a better way to resolve transaction disputes is undoubtedly an ongoing barrier to increased adoption across the industry.
Myers: When you step back and think about the next two to five years, what do you think the future of embedded finance looks like?
Armijo: I see payroll as one big component and AP (accounts payable)/AR (accounts receivable) as the other. I think those are both exciting solutions that many, especially vertical software solutions, will eventually figure out how to integrate.
Another big challenge I’ve seen (which can also be a solution) is the behavior tied up in payment rewards. I have a credit card, and it gives me rewards. However, that can be a barrier to change. For instance, one of the biggest challenges is that customers lose all of their reward points if they switch providers. To solve that, some companies have done a really interesting job at coming up with their own reward and corporate credit card solutions.
Wherever there are barriers, there is generally innovation to reduce those barriers. I wish I knew what the answer was; I would probably go start a company to do it if I knew the answer. But I’m sure some smart people out there who are way smarter than me are coming up with a solution right now or will in the near future.
I’m really excited to see what those options are. I think that’ll open up a lot of different doors to how transactions happen and the types of accounts that people use for those transactions.
Myers: We’ve covered a lot of ground. Is there anything else you’d like to add before we wrap up the show?
Armijo: Yes, one repeat point, and it’s an obvious one, which is just focusing on the customer's need. The money will follow if you start with the customer's needs and pains and build your solutions from there. I’m sure of it.