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Hi embedded finance friend

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Does every bank need an embedded finance strategy?

In the newest podcast episode, I am speaking with McKinsey’s Sarina Deuble, who is an Associate Partner with a strong focus on embedded finance and banking-as-a-service.

In our conversation, we are speaking about the historical context of embedded finance, comparing it to previous financial distribution channels and examining its growth, particularly over the last five years. Sarina outlines the significant role of big tech and partnerships in this space, mentioning that embedded finance in Europe could capture a significant revenue pool by 2030.

You can find the episode on Spotify, Apple Podcasts, and Youtube.

Is Europe falling behind the US with embedded finance adoption?

What happened: A new study finds that 33% of SMEs in the U.S. have used an embedded finance product via a SaaS platform, compared to just 11% in the UK and 6% in Germany and France (TSG Payments). The global payment advisor PSE and analytics and consulting provider TSG analysed survey answers from 1,000 SMEs in Europe and the US.

According to the study, the major challenge is not a missing demand from SMEs in Europe for embedded finance solutions. Instead, European SaaS platforms have struggled to promote embedded finance and capture the interest of merchants.

My comment: Even if you are not the writer of an embedded finance newsletter, you will probably not be surprised that the adoption of embedded finance in the US is higher than in Europe (especially after reading this edition).

I am not going to go too deep into the reasons for this, but I want to highlight that the study focuses strongly on embedded finance use-cases from SaaS providers. It is important to understand that vertical SaaS companies tend to launch embedded finance products much faster than ‘traditional’ horizontal SaaS. And the US market is most advanced when it comes to vertical SaaS adoption. I do see a similar trend in Europe as well but likely smaller and a few years behind.

Pipe launches embedded card offering

What happened: The US lending provider Pipe has extended its embedded offering with a card product in the US (PYMNTS; Pipe). The solution targets software companies that want to offer business cards to their customers. The cards are charge cards that need to be paid in full fifteen days after the close of the statement period. Pipe highlights that the card product is still under development.

My comment: The product offering and positioning of Pipe have changed so much over the past years. When Pipe was founded in 2019, the company purely focused on revenue-based financing product offerings and was one of the hot players in a hot market. However, the market has changed quite a bit and Pipe has transformed into a company with a strong focus on embedded finance. While the card product is US only, the company also continues to grow its as-a-service offering in the UK, where it announced a new partnership with GoCardless last week (Payments Dive).

Green Dot launches embedded finance brand

What happened: The US bank Green Dot has launched a new brand specifically focusing on the opportunity of embedded finance. Arc, the name of the new brand, provides banking and payment services for brands and fintech companies in the US (Finextra).

My comment: I see it as a good sign for the US market that a bank like Green Dot is launching a new embedded finance venture. You might know this is not Green Dot’s first move. Green Dot was founded in 1999 as a direct-to-consumer bank with a strong focus on teenagers and young adults. But in the world of embedded finance, they became known for their partnership with Walmart, Uber, and other tech giants. Especially the partnership with Uber was an important case study, perhaps also because of the unpleasant end of the partnership (Payments Dive). Green Dot’s CEO has publicly mentioned that losing some banking-as-a-service clients will not affect the company badly.

Additionally, the US Fed has fined Green Dot for numerous unfair and deceptive practices (Reuters). These practices do not seem to be directly linked to their banking-as-a-service activities. But since other US regulators are taking a very close look at bank’s with a fintech or embedded finance model, the punishment wasn’t great timing either.

But knowing all of this, the launch of Arc seems like Green Dot is doubling down on embedded finance and partnerships with unregulated companies. This does not mean the industry as a whole has managed to leave the issues with consent orders behind (Consumer Finance Monitor), but perhaps this means the industry is on the right path.

Youlend secures $1 billion financing facility

British embedded lending infrastructure provider Youlend has announced a new $1 billion financing facility from Castlelake (Finextra). The global alternative investment firm Castlelake has supported Youlend in Europe already with subordinate debt in 2023 via it’s private securitisation deal with J.P. Morgan. The new partnership is solely focused on the US, where Youlend has announced new strategic partnerships with Etsy, FreshBooks, and Paysafe. At the same time, Youlend’s British fintech partner Dojo announced that it has extended over £1 billion in funding to British SME’s since the launch of the cooperation in 2020 (Fintech Finance News).

Insightful reads

• Adyen and BCG estimate a $185 billion embedded finance opportunity for SaaS platforms, a 25% increase since 2022 (Finextra).

• The US The Consumer Financial Protection Bureau has ordered Apple and Goldman Sachs to pay in penalties and compensation for Apple Card-related failures (Fintech Futures)

• The launch of X’s payments product is expected to be delayed after the company withdrew application for their license in New York (Ars Technica).

• The South Korean carmaker Kia Motors has announced CarPay. The first application available will be with Parkopedia, which helps drivers in Europe locate available parking and pay for it conveniently through the vehicle’s navigation screen (Finextra)

• Marqeta launches their own BNPL tool called Marqeta Flex in the US in partnership with Klarna and Affirm (Finextra). The first partner is fintech company Branch that enables a post-purchase BNPL service.

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