Four reasons buying an embedded finance solution could be a huge win for your business

Four reasons buying an embedded finance solution could be a huge win for your business

If you are a B2B business such as a neobank or marketplace, or build vertical-focused software solutions, today you have a massive opportunity to add financial automations to your core offering. Automations such as invoicing, accounts payable, expense management, and more help drive faster growth, build stickier customer relationships, and generate more revenue.  

However, a critical decision you will need to make is whether to buy an existing solution or build something in-house. On the one hand, eager and talented tech teams may enjoy the challenge of solving some of these problems for your customers. But reality can be more complex than it appears. In this post, we will discuss the advantages of partnering with a specialist embedded finance solution, and share some context on challenges that come from building financial automations in-house.

Buying helps you avoid the 20% of complexity that is visible, and 80% that’s hidden

To start with, let’s take a look at the example of an invoicing automation tool. As invoices are standardized documents similar across most countries, it may appear to make sense to build it in-house. 

However, a point that is not alway well understood is that finance automations contain an incredible amount of edge cases and hidden complexity. For example, in the case of invoices each country has its own compulsory information, custom formats and industry and/or country-specific layout requirements. Likewise, country-specific tax and/or regulatory information needs to be added.

The implication for invoices is that different tax and/or regulatory information needs to be added for every country, often in a specific place or in a certain order on the invoice. Your solution needs to recognize payments, partial payments, payment amounts that vary due to exchange rates, payment methods including cash or check, and so on.

As you expand, your team will need to consider how to handle different currencies and currency exchange rates, new writing systems such as Cyrillic, Arabic, or Chinese, and different formats such as pdfs or printed forms. There are an enormous amount of edge cases which will need to be solved for your invoicing solution to work reliably all the time, and even in the markets for which you have already built your solution, any change in regulations means more work for your team. And finally, it will need to be able to run accounting for all of this complexity. 

The key thing to remember is that a large number of edge cases means building any financial automation is going to be much more complex than it may initially seem. In fact, according to our research, 80% of the complexity of any finance automation is invisible, meaning teams regularly under-estimate the resources they need by several orders of magnitude. Due to this, there is a big advantage in outsourcing this complexity to an embedded finance specialist.

Buying enables you to focus on your core business

Financial automations involve other people’s money, and that means understanding and being compliant with regulations, and ensuring your automation is highly reliable.

To meet these requirements, you need a complete team – product, compliance, and security, as well as developers. And you need to test features thoroughly before deploying, build in-house expertise around regulatory compliance, and so on. 

In a competitive hiring market, this is a daunting, expensive task and that will act as a drag and distraction from focusing on what your business really excels at. Would you really hire a whole 2-3 squads for this when you need to ramp up core products as well?

But on a more positive note, the flipside is also true. If you buy rather than build, you can devote your valuable talent and resources to your core business, and accelerate on building your own unique advantages. On a 3-5 year time horizon, this can snowball into an enormous competitive advantage for your business as you are able to innovate faster, with lower overheads.

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Buying enables you to unlock multiple revenue opportunities

The purchase and implementation cycle of a good embedded finance solution is typically much shorter than what it would take to build and ship a comparable financial automation in house – depending on how organized you are, as fast as a few weeks. And because embedded finance solutions are built by entire teams to cover use and edge cases of many clients, the functionality of a bought solution is also much richer than a comparable in-house solution. This has a number of catalysts for revenue growth, and means you can: 

  • Start to sell these features almost immediately, meaning you add a new revenue stream more quickly. 
  • Convert more customers thanks to better functionality. In fact, where an in-house solution might get a 1-2% conversion, an embedded solution powered by a player like Monite can reach 20-30% conversion – a 10x plus rate. 
  • Generate more revenue per customer thanks to the richer functionality. 
  • Earn on upsell of financial services such as factoring, BNPL, and so on.
  • Attract completely new customers due to the increased functionality you are offering.  
  • Reduce churn by a large margin while increasing LTV for existing clients. 

To summarize, the revenue opportunities of buying a solution can be far greater than simply a recurring fee for a new feature, and should not be underestimated. 

Buying means you benefit from network effects

To briefly recap what a network effect is, it refers to the concept that an increased number of customers improves the value of a service. 

In the case of your embedded finance partner, this means that every customer they add translates into more capital for them to build out new features, products, and integrations that benefit their entire customer base, including your business. 

If you buy a solution today, you will already benefit from network effects. The fact that they have a team of engineers focused on building out features, product, and integrations for all their customers means that functionality and edge cases will be far better covered than anything you build in house. But not only will you benefit from the network effect of today, you are also going to benefit from every new customer who comes after you, who will in turn enable long term, accelerated innovation by your embedded finance partner.

Embedded finance is at an inflection point

Finally, perhaps the most exciting part of this story is where embedded finance is in terms of the vendor landscape. For this, we can look at an analogy with payments innovation. 

A decade ago many tech teams would have built their own payments connections rather than risk outsourcing this business-critical function to a third party. After all, why would you trust this incredibly important function to a company you have no control over?

But over the last decade there has been an explosion in both the number and quality of payments APIs on the market. Today, it would be crazy to think that your in-house team could build payments connections that could compete with the reliability and functionality built by thousands of engineers and product experts at companies like Stripe, Mollie, or Adyen. 

Embedded finance is at a similar inflection point to payments a decade ago. Companies such as Monite are accelerating innovation and building scalable products that will help a wide range of B2B tech and financial businesses to unlock new revenue streams, deliver a better customer experience, and double down on their own innovations.

A decade ago small, relatively unknown companies such as Uber, Shopify, and Etsy, partnered with the first wave of payments APIs on their way to building groundbreaking companies. And today, innovative companies – both new and established – will do the same with embedded finance APIs. Will you be among them?