The embedded finance market is undergoing rapid growth. New use cases extend beyond payments and encompass a range of services, including lending, banking, insurance and investments - all with the potential to change how financial services, businesses and consumers interact.
As a private investment firm with a focus on Fintech, Bain Capital Ventures has poured considerable resources into its embedded finance strategy. The firm describes embedded finance as non-financial platforms offering financial services to customers through partnerships with financial services companies. This unique collaborative approach opens new avenues for revenue generation, customer acquisition and enhanced user experiences.
In the second episode of NMI’s Payment Playbook podcast, our host Greg Myers joins Bain Capital Ventures Partner Sarah Hinkfuss and Investor Tina Dimitrova to explore the significance of embedded finance and its growing importance to both platforms and financial services institutions.
In this blog, we highlight a portion of their conversation. Listen to the full podcast here.
Greg Myers: Can you tell us about Bain Capital Ventures and give us a high-level overview of the company?
Sarah Hinkfuss: Bain Capital is one of the world’s leading private investment firms. Across the firm, we have over $165 billion in assets under our management. As an umbrella organization, there are 12 strategies underneath Bain Capital, including private equity, credit, real estate and, of course, ventures.
We think about Bain Capital Ventures as a partnership of business builders and domain experts. We are in search of passionate visionaries who see the world differently than everyone else. We’re multistage, so we have partners on the early-stage team that focus on seed and series A opportunities. Then, Tina and I are on the growth team focusing on Series B and beyond. Across Bain Capital Ventures, we have over $10 billion in assets under management.
We focus on Fintech as well as infrastructure software, application software and commercial tech. Our investments look at everything from $1 million to $100 billion in growth equity. So we have a pretty wide mandate. Within each partner and vertical, there are specific themes we’re focused on.
Myers: How does Bain Capital define embedded finance? Can you give us a couple of examples?
Tina Dimitrova: There are a few ways to think about the category of embedded finance. I’ll start with the definition we used for a report we published last year. In the report, we defined embedded finance as whenever a non-financial institution, which we call a “platform,” offers financial services made possible by financial services companies, which we call “enablers.”
Some examples are companies such as Toast, which has embedded payments and lending, and Shopify, which has embedded payments, lending and banking. Bill.com is another good example. All three of these companies started as pure-play software but now have more revenue flowing from the financial services they’ve embedded, which speaks to how significant the opportunity is.
When people think about embedded finance, I think they define it as all the ways that a distribution platform can offer non-core financial services products. That could be a wallet that embeds an investment product, for example.
Myers: There was a time when everything was about embedded payments. My goal is to broaden that mentality. What are the major segments you see in the embedded finance space?
Finkhuss: Great question. As you said, we’ve seen payments be the first and furthest along in the adoption cycle when it comes to embedded finance. But why? Why have payments come first? There are a few different reasons. First, payments are higher velocity. Embedded financial products involve businesses that are not financial services companies offering financial products. Because payments are high velocity, they’re top of mind. They create more value for the customer and add more value to the platform. As a result, platforms care about actually embedding payments.
The second reason is that more entities in the value chain can enable these Fintech or non-financial services. There are more opportunities for people to get involved with embedded payments. Third, payments represented one of the areas that scaled non-bank innovators earlier than the other spaces. Predating to 1998, you had players like Fiserv, FIS, Global Payments and others who were a part of the first wave of [embedded finance] innovation, and that happened to be in payments rather than other categories.
Finally, ecommerce pulled innovation forward in the payments market. As digital commerce took off and people had the desire to transact online, the only way to accomplish that was through digital payments. Businesses had to embed payments natively into the checkout flow, which translated into other opportunities for embedded payments.
Taking a step back, what other relevant trends do we see in embedded financial services? Those trends include other bank activities in addition to payments. For instance, a bank or regulated financial services institution services payments, but they also lend, issue cards and have deposit accounts. They might also offer investment opportunities in brokerage accounts. Those are all additional opportunities for embedding financial services, and we’re seeing them take off to varying degrees.
The final space I would mention is insurance. Insurance is often separate from regulated financial institutions. However, it’s a financial services product that is sold and needs specific information about an entity holder to sell the product. So insurance is a natural candidate for embedded financial services as well.
Myers: What is the value of embedded financial services? Can you talk about the value chain?
Dimitrova: Absolutely. I’ll start by answering your first question, and then I’ll talk about the value chain. So, we see three primary benefits of embedded finance. The first is an increase in LTV or the lifetime value of a customer, which, by function, increases the total addressable market. The second is decreased CAC or customer acquisition cost. Finally, the third is improved customer satisfaction.
Each of these benefits is a function of a few things. For instance, increasing LTV comes down to improving customer retention and increasing the surface area of what you can monetize.
In terms of decreasing CAC, this comes down to the fact that you’re selling products to your existing customers, so you don’t have to go out and find these customers again. It also decreases risk since platforms can leverage data to better underwrite their customers. Those two points both lead to reduced customer acquisition costs.
Then as it relates to improving customer satisfaction, embedded finance’s value comes down to a couple of points. The first benefit is that customers can receive all their products from one vendor; they don’t have to manage multiple relationships or contracts. Secondly, it reduces the manual effort required of businesses. Those are how we think about the value for platforms and companies embedding financial services.
Now, talking about the value chain, I’ll lay it out from the front to the back end. First, we would include the end customer or business receiving the financial service. Second would be the platform, which is the entity embedding the financial service to offer their customer.
Third, there’s the enabler providing the infrastructure needed for the platform to offer those financial services. Sometimes the enabler will be fully regulated themselves, but often, they’ll work with a partner or financial institution. That adds another stakeholder to the transaction, usually a traditional financial institution or bank partner.
It can be a pretty complex value chain. But each stakeholder sees the benefits of this agreement since they’re all receiving something they wouldn’t have without partnering together. That’s the core of what excites us about embedded finance.
Myers: What would your recommendation be for those interested in embedded finance?
Hinkfuss: This is an uncertain time in the tech ecosystem, especially in Fintech. But, my biggest recommendation is to see this time as an opportunity to build relationships and figure out who the players and partners are that you want to have around the table as you continue to scale your business. That’s especially relevant for the management teams at platforms thinking about embedding financial services.
For the Fintech players themselves, we’re excited because this is a moment (especially after the SVB crisis) where the trust you have in the people around the table is critical to fulfilling the vision you have for your company. Rather than seeing this as a time to close in, I would encourage folks excited about the topics we discussed here to reach out and use this time to build relationships and [find] the type of partners they’d want to work with over time.