Embedded fintech: The new product future for financial institutions

03/22/21 / by Kyle Bazzy

Our very own Derik Sutton spoke with Zack Miller of Tearsheet to discuss the topic of embedded fintech. What is it, and what are the benefits for financial institutions?

With APIs and embedded finance, it’s getting easier for software firms to integrate financial products into their offerings. So, software used by the construction industry, for example, can incorporate payments via a tie-up with a fintech company.

At Tearsheet, we’ve had two conferences devoted to this trend — Apple, Google, Facebook, and the biggest brands in the world are launching financial services through software integrations.

Derik Sutton leads marketing insights at Autobooks, a small business product suite that integrates directly inside of a bank’s existing digital banking channels. So think cash flow management, sending digital invoices, accepting online payments, accounting and financial reporting, all directly integrated inside of a bank’s online and mobile banking channel. The firm works with community banks all the way up to top 10 banks like TD Bank.

Autobooks is powered by Microsoft Azure for financial services.

Podcast Discussion

Derik Sutton, Autobooks: Everybody talks about how SaaS companies are embedding fintech into their solutions. If you go out and build a direct to consumer application — maybe you make an invoicing tool for a construction vertical. So, you are really good at helping construction companies build detailed invoices that they can send out to their clientele. It only makes sense as a SaaS company that if you do that, that you start to then embed fintech into your application. You embed the ability to accept a payment, as an example, into your application.

And so I think SaaS companies, when they’re looking at their valuations, and then they’re looking at payment company valuations, they’re starting to see these returns on revenue, these returns on multiples that are just crazy once you integrate fintech.

Take a company like Wave. When Wave started out, it was just a free online accounting service that monetized its customer base by selling advertising. With a growing user base, Wave had a good solution, but it was really hard to monetize the customer base through that model. Plus, users were requesting that their accounting service offer payments functionality.

Derik Sutton, Autobooks: When Wave started to embed financial services, starting with payments, and then moving into lending and things of that nature, all of a sudden that revenue grew.

I think that’s what a lot of these SaaS companies are looking at with fintech. It’s taking their existing addressable market, being able to embed and add something that just makes sense, like payments, and then effectively increasing the revenue opportunity per customer per unit that they had inside their application.

This hasn’t been lost on banks. They’re watching the evolution of financial services outside the walls of their institutions. That got Derik thinking — what if the roles were switched? What if banks started embedding financial services in their offerings?

Derik Sutton, Autobooks: Well, why isn’t the inverse true as well? Why wouldn’t banking organizations and financial institutions start to embed these SaaS vertical type solutions back into their banking environment?

At the core, that’s really what Autobooks has done. We’re an integrated, small business product suite that includes a general ledger for a business owner to manage their accounting needs. We can also execute vendor invoice payments through bill pay.

But most importantly, we enable small business owners to send digital invoices and get paid online on those or share a secure payment form link that they can get paid through.

Now, small businesses definitely need help with cash flow. Autobooks could have gone directly to the market, acquire new customers and onboard them. Instead, the firm decided from the onset to partner with banks.

Derik Sutton, Autobooks: But instead, what we found is that there’s a need for these entities that already have a banking relationship. They’re already managing their finances directly through a bank. And banks really want to better serve the micro/small business and nonprofit community.

So now for every bank that really cares about small business banking, that’s a vertical inside of banking.

Derik Sutton, Autobooks: Wouldn’t it be valuable to bring the tools to enable a business owner to get paid? Isn’t it valuable to integrate those directly back into the banking ecosystem relationship?

Derik Sutton, Autobooks: We think that that’s a really interesting concept for banks to consider moving forward: how do you find niche vertical fintech solutions, bring them back into the banking ecosystem, and then directly integrate those for a vertical that you really want to serve better and monetize moving forward?

Going deeper, understanding what your customers want, requires doing some real leg work, really getting to the bottom of their pain points. Banks need to listen and ask about the right things.

Derik Sutton, Autobooks: When you ask people these types of questions, don’t lead the witness with asking them to tell you about their banking experience, because most people are nice, they’re going to tell you nice things.

And just really dive into that. You will quickly surface many different new opportunities and ideas through a conversation like that.

Derik Sutton, Autobooks: I look at my friends at Incredible Bank up in Wisconsin. I think they’ve done a really good job about not just embedding fintech, but understanding their vertical really well, which is luxury RV lending.

I think that’s a really good one.

Derik Sutton, Autobooks: I think these SaaS companies are going to continue to grow in value. And they’re going to be real threats to traditional banking.

These SaaS companies are looking at all these banks, wanting to bring some of that into their environment.

Derik Sutton, Autobooks: I think on the other side of that equation, for banks and credit unions throughout the country, I think you’re going to see many institutions start to slim down their offerings.

The tipping point is really finding these fintech solutions that understand how to integrate back into the banking ecosystem.