How can you make money with Embedded Finance?

In my role as an Embedded Finance advisor, I have worked with a dozen of different brands, infrastructure providers, and banks, helping them on their unique Embedded Finance journey. In this article, I want to share what I've seen as the four most common ways for non-financial brands to make money with Embedded Finance.  

Before diving in, you should know that Embedded Finance is very broad. On the one hand, brands could integrate payment, banking, lending, investment, or insurance products. On the other hand, the industry and type of non-financial brand are equally important. Therefore, a B2B Software-as-a-Service company launching a lending product will think very differently about the ways to make money than a retailer launching a credit card.

In this article, I will try to cover the nuances as much as possible, but let me share the four revenue opportunities right here:

1. Direct charging
2. Kickbacks
3. Data insights
4. Increase usage of core product

In addition to these revenue opportunities, some non-financial brands can improve their bottom line by reducing costs thanks to Embedded Finance. The best examples are big retailers like Ikea and Starbucks, which offer their own cards to customers. Whenever a customer buys something at a store with this store’s branded card, the merchant can reduce their payment costs significantly. However, I have excluded examples like this because they only work for a very narrow type of company.

Direct charging

Let’s start with the most obvious one. Whether you offer a product, financial services, or a completely different product, you have the ability to charge your customers for their use. Let’s say you want to launch a bank account for your users; obviously, you can charge a monthly fee for it. The process is essentially identical to what banks undertake. In this section, there are two points I want to highlight. Firstly, while charging for financial services is quite obvious, it is often not easy. Nowadays, you can open a bank account with dozens of different banks or brands; why not go for the cheapest one? This is where a non-financial brand needs to excel and create an unfair advantage over its competitors. If a customer can draw a direct comparison between your product and a bank, it means you have failed your Embedded Finance mission. You must provide your existing customers with no logical reason to use another banking product. Secondly, there are significant distinctions between various financial products. Payment acceptance products stand out, but lending products also fall into the same category. If you look at the biggest names in Embedded Finance, you'll likely find Toast or Shopify in the US, and Mews in Europe. All of them incorporate payment acceptance into their product offerings, and because their customers have no other options, they not only generate significant revenue but also leverage these benefits as an unfair advantage.   

Kickbacks

Instead of charging directly for a financial product, non-financial brands can also generate revenue from kickbacks. There are different examples, but interchange revenue from a card product stands out. If a non-financial brand offers a card to its users, it can make money from every single transaction. Let's say this user buys a coffee from a local café. To accept this payment, the café will pay a certain percentage. A portion of this fee, called Interchange, serves as a kickback for the bank issuing the card. These kickbacks encourage banks to offer cards to their customers. The important word here is bank. The interchange always goes to the regulated institution first, and as mentioned earlier, most non-financial brands are unregulated. However, almost all infrastructure providers transfer at least some, and sometimes most, of the interchange to the non-financial brand. Be aware that your market may regulate interchange, and the potential revenue from it depends on a variety of factors. In the EU, for example, there is a cap on interchange for consumer cards, which limits revenue potential, but there is no cap on interchange for corporate cards. This is one of the many reasons why more companies are exploring Embedded Finance use cases for corporations than for consumers. 

In addition to the uncapped interchange, businesses' high average transaction size and spending behaviour make any slightly successful corporate expense management solution an interesting business. This presents a significant opportunity for various software providers, including those in the business travel or HR sectors.

Data insights

The first two revenue opportunities for non-financial brands were rather obvious, weren’t they? Let’s go a bit deeper and discuss how data insights can increase revenue for non-financial brands. It`s clear that a company launching its first financial product can gain additional valuable insights about its users. But how can we leverage this to boost revenue? Let’s take Metro as an example. Metro is a Germany-based wholesaler operating in 21 different countries and it founded Metro Financial Services in 2021 to provide financial products to its customers. Their typical customers are restaurant, hotel, and similar business owners, and the very first product of Metro FS was a detached debit card with a 1% cashback feature. Metro can market this product in many ways, but the team firmly believes data insights are most important. Where else do our customers go to make purchases? How much are they spending at Metro compared to their competitors? Are there any other relevant spending patterns? Metro can use all of these insights to improve its offerings and boost revenue.

Increase of usage of core product

Finally, we arrive at my personal favourite Embedded Finance revenue source for non-financial brands. In many cases, launching a financial product leads to the average customer using the core product more often. This may sound like a trivial benefit. However, don't let this deceive you. If you are analysing the most successful Embedded Finance companies, you will realise that they all achieved significant growth in their core product. The most obvious example is when marketplaces and digital platforms launch lending products. Yes, these companies will also directly charge for a loan, but the biggest impact is somewhere else. Shopify is a wonderful example. If you research why they launched the Shopify Capital product, you will realise that Shopify didn’t want to offer lending products. However, almost every single merchant using Shopify cited cashflow constraints as one of their biggest growth challenges. A company like Shopify can grow in two ways: either onboard new customers or help existing customers grow. While offering the lending product, many Shopify merchants were able to grow significantly faster. What did these merchants do when their growth accelerated? More sales on Shopify lead to more revenues for Shopify. For Shopify, but also for many other companies, lending products have created a so-called flywheel, which puts the company onto another level.

And what does the business case look like?

In my experience, when non-financial companies embark on the journey to build and launch financial products, they often include in their business model the revenue opportunities for direct charging and kickbacks. However, the other two revenue opportunities are typically absent. There is a straightforward explanation for this. You can calculate the revenue channels for direct charging and kickbacks. The other two are much harder to predict because they depend on how they align with the core business strategy. This makes it harder and hence many brands decide to leave it out. Therefore, for many companies, the initial model fails to account for the two biggest revenue opportunities associated with Embedded Finance. Some companies might consider it the “cherry on top," and perhaps it shouldn’t be the only driver for launching such products. But I believe brands need to understand all possible revenue channels, not only for the business case but also to build the product correctly.

If you are keen to learn more about Embedded Finance opportunities, subscribe to the Embedded Finance Review weekly newsletter. On October 10th, we will share an extensive Embedded Finance intro deck for non-financial brands with all subscribers.

About Lars Markull

About Embedded Finance Review