Explore the expansive possibilities of Embedded FinTech

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Jamie Hamilton: In 2011, Marc Andreessen wrote an essay about how software was “Eating the world”. And 11 years later, as Marc predicted, consumers and businesses alike use software on a daily basis to streamline their lives and/or operations. But I’m here today to explain, perhaps not as well as Marc did, why FinTech is now eating the software world. The premise of this idea, put differently, is what is known as embedded FinTech. And I’m here to try to explain what that means and bring to life some of the trends we’re seeing at the convergence of software companies and FinTech companies. So the concept of embedded FinTech is really born from two fundamental realities. The first, which is a recent phenomenon, is the fact that both businesses and consumers now have greater confidence in getting their financial services from non-financial services. Or better said, somewhere other than a bank, a payment processor or even an insurance company.

The other reality is, generally speaking, the lifeblood of any business is its ability to collect revenue and pay its employees and suppliers. If a company can’t pay its employees and suppliers or can’t collect revenue from its customers, product-market fit won’t matter for long. Given these two truths, FinTech companies have now begun to embed financial service offerings from payment receipt to payment disbursement and billing to payroll, even business and consumer loans directly inside or embedded in the software that businesses already use to run its business. This is found in every facet of the economy and virtually every vertical market we encounter, from healthcare, to real estate, to construction, to education, to legal, to government, to hospitality, to retail. I could go on, but you get the point. The software companies that serve these vertical markets possess scarce assets, which in particular are one, a large and trusting customer base, and two, unique insights into the needs of their specific vertical market.

But in general, these software companies don’t understand financial services. That said, by capitalizing on the assets they have, which in turn is relying on customers and vertical market knowledge, these software companies can offer financial products and services to their customers naturally within their software workflow and capture some additional revenue along the way. Let’s perhaps bring this concept to life in a real-world example. Take a field service management software company that specializes in providing workflow software to the HVAC repair end market. Their end customer, the HVAC repairer, uses the software for a number of business-critical aspects of their operations, including scheduling and dispatch, customer management, marketing automation, all the way through quoting customers.

So why doesn’t this software also offer financial services? Think for a second about the financial services needed on the daily journey to an HVAC repair. First, the HVAC repair company has a fleet of trucks that require fleet-specific credit cards to refill the tanks. Second, the plumber in the field may need to obtain certain parts for a job that must be tracked in order to bill a customer correctly for a job with time and materials. Third, when that job is completed, a payment needs to be collected or an invoice needs to be sent, and the end consumer wants to pay for that repair in whatever way they prefer. But wait for number four, maybe let’s say that uh, the defective HVAC unit isn’t repaired and the consumer instead needs a whole new HVAC system and he or she needs to be approved for a personal loan to finance that HVAC system at the place. And fifth, let’s not forget the HVAC company employee who did the repairs. At the end of the long day, he or she may want to access his or her pay immediately. In this rolling example, there were five possibilities where financial services could have been a click of a button inside that HVAC software. Again, from receiving payments coming in for a completed job, to tracking payments going out for fuel or parts, to paying employees at the end of the day, to the consumer loan being offered to that end customer. And I wasn’t even talking about business loans or insurance.

This example is just one of many, but hopefully contextualizes the opportunity for embedded FinTech. This is obviously easier said than done, and there are many more nuances than I am describing now.

Fortunately, at William Blair and our 175 technology investment bankers, we can collaborate and advise clients on these areas of convergence, giving us the unique opportunity to see these trends play out in the real world compared to this hypothetical example. So in conclusion, we believe that we are going to continue to see the development of a vertical market system with disk software companies integrating financial services into their offerings. There is a huge opportunity for these software companies to further entrench themselves with their end customers, earn more revenue for themselves as they become the channel for financial services and to borrow from Marc Andreessen, that’s why we believe we are at the dawn of fintech . companies are getting their proverbial bite out of the software world.