Embedded Finance is rapidly transforming SaaS platforms, enabling businesses to integrate financial services seamlessly and unlock new revenue opportunities. As small and medium-sized businesses (SMBs) increasingly demand financial solutions within their existing platforms, the SaaS landscape is evolving to accommodate these needs. In this discussion, Aditi Shankar, a fintech and payments expert and Partner at Boston Consulting Group, provides her point of view on the Embedded Finance market, highlighting the market's growth trajectory, strategic significance, and what we can expect next.
Interviewer: Could you elaborate on the current market size and its growth trajectory? Is the macro environment putting a hold on the pace of industry growth?
Author: Certainly. There have been some serious macroenvironment headwinds over the last two years, which has meant software players are pressured on fundamentals and starting to become more constrained on which use cases they chase, as well as on go-to-market efficiency in growing the business. However the growth outlook starting 2025 onward is looking strong once again. Most recent research "Embedded Finance Report 2024" from BCG and payments provider Adyen, indicates that the embedded finance sector has expanded to a total addressable market of $185 billion in 2024, marking a 25% increase over the past two years. This growth is attributed to a favorable interest rate environment and the overall expansion of banking and payments revenue pools.
Interviewer: What factors are driving SaaS platforms to integrate embedded financial services?
Author: Several key factors are influencing this trend.
Firstly, there's a growing appetite among small and medium-sized businesses (SMBs) for financial products that are seamlessly integrated into their existing platforms.
Secondly, platforms that have adopted embedded finance solutions have observed revenue growth up to three to four times their current subscription income. Not only revenue but margins remain high as well, particularly for providers who offer vertical specialization, value-added services, and features beginning to grab a larger share.
Lastly, less than 20% of the market is currently addressed, leaving significant room for platforms to expand.
Interviewer: How does embedded finance serve as a strategic imperative for SaaS platforms in today's market?
Author: As SaaS markets mature, embedded finance becomes crucial for staying competitive. It drives average recurring revenue (ARR), attracts investor interest, and sustains long-term platform growth. Platforms that do not seize this opportunity risk falling behind and losing market share.
Interviewer: Could you provide insights into the specific financial products that are gaining traction within SaaS platforms?
Author: Certainly. The report identifies several embedded financial products that are gaining traction:
- Embedded Payments: Payment processing for online or in-person transactions that an SMB can access directly through a SaaS platform without third-party referrals.
- Capital: Short-term unsecured business loans that SMBs can directly access through a SaaS platform without going through a separate lender.
- Accounts: Business bank accounts integrated into a SaaS platform that SMBs can use for pay-ins and pay-outs.
- Issuing: Physical or virtual credit or debit cards that SMBs can use to instantly receive and spend funds, offered and branded by a SaaS platform.
These products meet the evolving needs of SMBs and provide SaaS platforms with avenues for differentiation and revenue growth.
Interviewer: What are the potential risks for SaaS platforms that choose not to integrate embedded financial services?
Author: Platforms that do not embrace embedded finance may find themselves at a competitive disadvantage. They risk losing market share to competitors who offer more comprehensive, integrated solutions. Additionally, they may miss out on significant revenue opportunities and struggle to meet the evolving needs of their SMB clients.
Interviewer: In conclusion, what steps should SaaS platforms take to successfully implement embedded financial services?
Author: Platforms should start by assessing the specific needs of their SMB clients and identifying which financial products would provide the most value. Collaborating with experienced partners can facilitate the integration process. It's also essential to stay informed about regulatory requirements and ensure compliance throughout the implementation.
Interviewer: Thank you for sharing these valuable insights.
Author: You're welcome.
Embedded finance has become essential for SaaS platforms striving to stay competitive. Integrating financial products into their ecosystems allows providers to enhance customer relationships and expand revenue opportunities. With the market changing rapidly, companies that adopt embedded finance and collaborate with experienced partners will be better equipped to adapt to shifting demands and regulatory requirements. Taking proactive steps now will help SaaS platforms strengthen their position and maximize long-term growth.
