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Embedded finance: Unleash your startup’s potential with the power of fintech

November 28, 2023

Have you noticed how fintech is changing right before our eyes? And it’s not just about making transactions more convenient. Today, even our favorite ride-sharing apps and e-commerce platforms offer financial services right at our fingertips. This concept, known as embedded finance, is taking the fintech sector by storm.

In a recent workshop led by our Fintech Lead Veselina Markova, Stoil Vassilev (Venture Partner &  VP Corporate Development at Sumup), and Jack Thorogood (Co-founder and CEO at Native Teams), they really got into the nitty-gritty. In this article, we give you a glimpse into the workshop’s insights and share what we learned about this exciting shift in the fintech landscape.

Why fintech matters for growth

The integration of financial services, such as payments, lending, and banking, into a product is more than just a trend – it’s a strategic move that can revolutionize the user experience and foster customer loyalty. By seamlessly embedding fintech capabilities into existing platforms, companies can own the whole customer journey end-to-end, as well as drive higher engagement and retention rates among their user base. Moreover, fintech doesn’t merely enhance existing offerings, it opens up entirely new revenue streams for startups. Transaction fees, interest, interchange, and other monetization models have the potential to significantly boost profit margins. Additionally, embedding third-party fintech solutions grants startups access to new customers and valuable data, creating opportunities for better product development and innovation. 

Strategic considerations before adding fintech

Before committing significant resources to fintech, startups should consider several crucial factors:

1️⃣ Mission-critical vs. supplementary: Determine if fintech is mission-critical or just a supplementary offering. Fintech that directly powers core products deserves more investment than a nice-to-have add-on.

2️⃣ Scale and engagement: Evaluate if your startup has enough users and engagement to benefit from integrated financial services. Fintech provides the most value at scale with an established active user base.

3️⃣ Alignment with core product: Ensure that adding fintech will genuinely enhance your startup’s overall offering, rather than distract from the core product. Weigh fintech features against other opportunities.

4️⃣ Realistic costs: Be realistic about the costs of fintech, which are easily underestimated. Integrations require substantial technical resources and have high licensing and compliance costs.

Approaches to integrating fintech

Startups have flexibility in how they leverage fintech and the right approach depends on their needs, priorities, and maturity stage:

The first approach is to leverage fintech vendors:

  • White-label fintech solutions allow startups to improve their user experience quickly with relatively little upfront investment.
  • Basic integrations with vendors cost around 15-20K euros for the initial setup, plus ongoing monthly fees of around 5K euros.
  • However, third-party solutions provide less control over products and user data, and support may be lacking from vendors.

The second approach is to build in-house capabilities:

  • Direct ownership of fintech capabilities gives startups the most control over their product experience and maximum revenue potential.
  • Building in-house fintech usually requires a minimum investment of ~400K euros for licensing and infrastructure.
  • It also demands strong technical teams capable of handling complex integrations lasting 6-12 months or longer, along with extensive compliance and regulatory knowledge.

Our recommended approach is to start with vendor partnerships to validate product-market fit before making substantial investments to build capabilities in-house.

Choosing the right fintech partners

Rigorously evaluating potential fintech vendors across several dimensions is crucial:

  • Support capabilities – can they provide high-quality technical and customer support?
  • Longevity and stability – are they established players committed for the long term?
  • Flexibility – can they adjust to meet changing product needs?
  • Pricing – are they cost competitive and transparent about revenue models?

Startups should aim for staged integrations with vendors to test partnerships before making a full commitment. Additionally, they must be aware of regional differences in interchange rates that can significantly impact revenue models.

Ongoing fintech considerations

Startups must strike a balance between focusing on fintech capabilities and core product development.  Spreading resources too thin risks stagnation.

Managing multiple vendor relationships can provide flexibility and cater to regional needs, but it also adds overhead. Fintech directly impacts customer trust and a company’s reputation, so investing in strong in-house customer support capabilities early on is crucial.

For proven fintech offerings, startups should consider eventually bringing them in-house for more control and higher margins, but only after demonstrating product-market fit.

Key takeaways

  • While powerful, adding fintech requires a thoughtful strategy and serious commitment from startups. Leveraging vendors to validate product-market fit minimizes risk before major DIY investments.
  • Integrations inevitably take more resources than expected. Budget generously for technical teams and allow plenty of timeframes.
  • Deeply understand revenue models and regional differences that impact monetization. Fintech directly impacts customer trust so invest heavily in support.

As the lines between technology and finance continue to blur, we believe that the future of fintech is deeply woven into the fabric of every startup. Founders now have a golden opportunity to seamlessly integrate financial services into their offerings, not just as an add-on, but as a core strategy to drive growth, engagement, and revenue. And as embedded finance gains momentum, it’s evident that the next wave of successful startups will be those that recognize and harness its immense potential.

Are you ready to turn your startup into a fintech powerhouse? Reach out and join our #fintech portfolio.

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