Insights

The secret to making embedded payments work for your sector

Modulr By Modulr on 16 March 2021   •   6 mins read
<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >The secret to making embedded payments work for your sector</span>


Thanks to the rise of the infrastructural fintech, Modulr has had front row seats to see how Software as a Service companies – and many of our customers - are adding financial services to their core offering.

Switched-on SaaS companies are now embedding financial products built on payments infrastructure – from loans to cards to complex supplier and payroll flows  – directly into their vertical software and taking advantage of the new market opportunities that this brings.

Let’s take a look at how fintech is driving the next evolution of vertical SaaS.
 

 
While consumers of services in horizontal markets (i.e. products that more or less serve multiple industries without much customisation) often pick and mix from multiple software vendors, those consumers of services in vertical markets (i.e. specific services only for a particular industry or sub sector) tend to prefer software that’s purpose-built for their specific industry and use cases.

This presents vertical SaaS companies with an opportunity to grow the revenue per customer by making their product stickier – that’s to say, making it so indispensable that it would mean a considerable investment to switch. And that's even if they'd want to switch considering how easy it would be to have all their business tools in one place.

Layering on financial products by offering native integrations of financial services is a very effective  lever – increasing the lifetime value of a customer, without increasing the cost of acquisition.

But the secret lies in embedding the fintech, rather than just reselling it, as this improves margins and helps you to deliver a suite of products that really resonates with your vertical. Plus, it makes for a more seamless customer experience, through a familiar, trusted and branded interface, rather than redirecting customers to a strange third-party site.

And, thanks to the fintech infrastructure players, it’s never been easier for vertical SaaS businesses to embed a variety of financial services into their offering.

While payment processing is often the logical first step on the embedded services ladder, companies can now layer a range of financial products and services – such as lending, cards, payroll– into their offering, based on the needs of their vertical market. 


But let’s start at the beginning, and take a closer look at payments

Many vertical software companies have waited to monetise payments until their core business was scaling.

Reselling or white labelling payments from payment service providers (PSPs) is one way to incorporate payment functionality but this can be difficult to monetise without passing the additional costs associated with wholesale fees on to the customer.

Other businesses, however, have embedded payments to become payment facilitators themselves.

And it’s the infrastructure FinTechs who are making this possible, and with increasing complexity. This might look like managing payment flows across different stakeholders, for example, such as hundreds of contractors on a construction site, or rental property software collecting rent from tenants, splitting fees and paying out to landlords.

But, payments aren’t just the forerunners in the embedded finance space, they’re also the gateway to other financial service offerings, such as lending.
 

Monetising the lending experience

While some businesses add-on lending to their vertical offering by way of referral, others choose to leverage what they already know about a customer, so that they can better underwrite, integrate and monetise the lending experience.

So, if you’re a software company that owns the transaction data needed for underwriting risk, then an embedded solution will work best for you, particularly if your vertical is one not well understood by a traditional bank.
 
While the main way to offer a loan used to be through referral, in exchange for a referral fee, nowadays companies can work with as-a-service providers to develop the underlying operations of a lending programme more easily than before.


Next up, cards 

Cards are fast becoming one of the most interesting areas of the payments space and the potential for innovation and originality here is huge. 
 
Many vertical markets can benefit from virtual or physical cards. From challenger banks disrupting the status quo, to lenders and employment service providers keen to seize a competitive advantage by offering entirely new card payment products.
 
But, the process of launching a card programme is by no means a straightforward one. The supplier ecosystem is a complex space and one that’s hard to navigate.
 
Luckily, the infrastructure is evolving, with FinTechs like Modulr streamlining the process.
 

Where payments start, account infrastructure (often) follows

Account infrastructure can help manage the inflow of payments, which is particularly useful in service industries.

Nowadays, E-money accounts provide an alternative to bank accounts, offering digital API access to faster, real time payments infrastructure, and much more.

And there are a wealth of other services with embedded potential - less mature perhaps than those we’ve discussed, but the landscape is constantly shifting as more infrastructure providers emerge.

One example of this is payroll  - given the complexity and manual nature of traditional payroll systems, there is a compelling case for offering an embedded, API-driven alternative.
 
The complexity of traditional payment flows makes reconciliation difficult and this is further compounded by an outdated banking infrastructure, with its reliance on manual process.

Luckily, a new generation of FinTechs is emerging in this space, powered by direct access to critical payments infrastructure such as Faster Payments, that are able to provide more agile and reliable methods of making and reconciling payments - delivering benefits that can be passed on to a number of vertical markets.

 

Enhance eCommerce with embedded payments

ECommerce marketplaces challenged with attracting merchants and retailers away from the competition can now harness the power of fintech to provide a full suite of market leading financial solutions, including payment accounts, cards, Faster Payments, Direct Debits, Payment Initiation via Open Banking, Confirmation of Payee, 24/7 access and instant notifications. Pass on this functionality to merchants as a new service or use it internally to improve control of funds and manage treasury and reconciliation. eCommerce marketplaces can even use FinTechs like Modulr to manage end to end physical and virtual card issuing programmes.

Enhancing an offering with embedded financial services allows eCommerce platforms to leverage new monetisation opportunities by providing instant access to earnings or generating interchange on merchant card purchases.


Modernising and monetising Marketplaces

Understanding and meeting the ever-changing needs of the gig economy can be challenging for many on-demand delivery platforms. Launching new financial services for this dynamic workforce affords an important differentiation.

Powered by API and direct access to the critical payments infrastructure, payments as a service platforms like Modulr have been designed to seamlessly integrate and embed financial services into the propositions of marketplaces and on-demand platforms; helping to improve user experiences, open-up new addressable markets and leverage new revenue possibilities.

Enhancing a marketplace with value-added services makes it ‘stickier’ and builds long-lasting relationships with users while gaining valuable insights into their behaviour.


So, what’s the secret to making embedded payments work for your sector?

Well, that lies in harnessing the power of infrastructural fintech. They are uniquely positioned to facilitate native integrations of financial services into non-financial verticals to improve user experiences, open-up new addressable markets and new revenue possibilities.

The embedded finance trend is here to stay and, what’s more, this is just the beginning.
Switched-on SaaS companies are now embedding financial products built on payments infrastructure – from loans to cards to banking experience alternatives – directly into their vertical software and taking advantage of the new market opportunities that this brings.