Share to Facebook Share to Twitter Share to Linkedin Ivo Gueorguiev, co-founder at Paynetics. getty Software as a service (SaaS), where software services and licensing are accessed online via subscription, has become the backbone of modern business operations, with its value reaching approximately $195 billion last year. As the landscape becomes increasingly competitive, marked by evolving business models and shifting user expectations post-pandemic, SaaS providers are facing challenges that range from soaring acquisition costs to shrinking return on investment. These challenges have made new revenue streams vital to enhance customer retention strategies. Amid this struggle, embedded finance offers innovative solutions to address these challenges. In this article, I’ll explore how embedded finance can impact SaaS companies and the challenges they’ll need to overcome to successfully incorporate it into their products. What is embedded finance? Embedded finance integrates banking and payment capabilities into nonfinancial ecosystems. For example, this could mean purchasing insurance when booking a holiday or applying for a bank account when you use expense management software. The goal is to generate revenue and increase the value of existing products. MORE FOR YOU WWE Raw Results, Winners And Grades After Great Wyatt Sicks Follow-Up College Football 25: EA Unveils Important Dates For Info Rollout Leadership: What Exactly Are You Bringing To The Table? The technology that powers embedded finance is generally application programming interfaces (APIs) that connect customer-facing interfaces with infrastructure financial services providers. Companies also use embedded financial products through software development kits (SDKs). A few reasons that SaaS companies are using embedded finance are to: Stop churn and boost loyalty. Embedded finance offers financial services—like bank accounts, payments and lending—that can help providers deepen their relationships with customers. Additionally, these value-added services can reduce price competition and maximize the return on customer acquisition investment. By analyzing financial data generated through embedded finance tools, SaaS providers can also gain valuable insights into customer behavior and preferences, enabling them to tailor their offerings more effectively. Unlock new revenue streams. Embedded finance can also allow SaaS providers to diversify their income streams and enhance revenue. For instance, a substantial portion of Shopify’s revenue is derived from what it terms “merchant solutions”—essentially, embedded finance. In March 2023, Shopify reported a threefold increase in revenue—$1.1 billion, a 31% rise year over year—from merchant solutions. This starkly contrasted with their software-only revenues, which stood at $384 million and grew at 11% year over year. These supplementary services include financial products and fulfillment services like Shopify Payments for payment acceptance for merchants, a lending product known as Shopify Capital, and bank account and debit cards as part of Shopify Balance to help merchants manage their finances. By partnering with regulated fintechs, SaaS providers can tap into transaction fees, interchange revenue and premium financial service offerings. Moreover, through experimentation with various financial services and business models, providers can unearth opportunities for scaling and differentiation. Empower customers. From automated expense management to real-time financial insights, integrated financial services offer tangible tools that enhance customers’ competitiveness. With access to capital and financial tools within their familiar SaaS environment, customers can streamline their operations and make better-informed decisions. Beyond improving customer competitiveness, embedded finance fosters financial literacy and responsibility among users. Giving customers access to financial tools and resources means SaaS providers can help educate them on key concepts and best practices. This not only strengthens the provider-customer relationship but also contributes to the long-term success and stability of the businesses. Preparing For Embedded Finance By integrating financial services alongside their core offerings, SaaS providers can position themselves as comprehensive solutions for their customers’ needs. However, implementing embedded finance capabilities also brings about several challenges. SaaS providers must navigate regulatory complexities, including compliance with financial regulations such as know your customer (KYC) and anti-money laundering (AML) regulations. Businesses unfamiliar with KYC and AML will need to choose their embedded finance service partners carefully and ask about how these partners can eliminate the regulatory burden and maximize compliance. With embedded finance, data security and privacy compliance also become an even bigger focus, as handling financial data adds another layer of sensitivity and opportunity for scrutiny. To manage data security and compliance, SaaS companies should find ways to improve the customer’s understanding of the technology. Additionally, managing potential conflicts of interest arising from offering financial services alongside software solutions requires careful consideration and transparent communication with customers. Consider whether offering embedded finance supports good customer outcomes and isn’t simply for fulfilling revenue targets. Are you acting in the best interest of the customer? If not, prioritizing education and knowledge-sharing with partners or other industry professionals will help ensure your organization is prepared should conflicts arise. Finally, SaaS companies need to consider the ethics of embedded finance by understanding who is responsible for keeping up with regulatory changes and how to navigate complex commercial relationships with financial institutions and third parties. A robust communication strategy internally and externally that works closely with partners and technology providers to define a clear approach to embedded finance will ensure all stakeholders are on the same page. Conclusion From automated invoicing to real-time financial insights, embedded finance equips users with multiple solutions in one place, eliminating the need for disjointed systems in ways that can ultimately lead to happier users. By addressing these challenges, SaaS providers can use embedded finance to simplify the user experience and streamline customer operations. Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Do I qualify? Follow me on LinkedIn. Check out my website. Ivo Gueorguiev Editorial Standards Print Reprints & Permissions
Categories: Finance
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