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Embedded finance, the path to profitability

Integrating financial services can help companies drive growth, boost user engagement, increase loyalty, and add new revenue streams on top of higher-priced subscriptions.

Constance Laux and Sarah Wachter
August 29, 2022

Freeze your hiring! Cut back on marketing! Extend your cash runway!

As economic uncertainty dominates the news, venture capital firms are urging their portfolio companies to cut costs and look for ways to cushion their cash position. Hypergrowth at any cost is no longer acceptable and the easy money era is over. That’s why growing tech companies are now focused on finding ways to increase profitability while ideally keeping acquisition costs stable. Embedding finance into your product is a proven way to do this — let’s explore.

Increase the profitability of your business, in any economy!

Embedded finance empowers product leaders to enrich their software with banking flows that drive engagement, boost user retention, and create new revenue streams. Banking products are notoriously sticky: your customers are much more closely tied to your systems and thus less likely to churn.

Besides staying with you longer, users are willing to pay more for the improved experience. In 2020, a16z famously argued that SaaS businesses could increase revenue per customer by up to 5x with embedded finance, and this prediction wasn’t far off.

Some of our partners have already seen their customer lifetime value triple just 6 months after going live — a SaaS partner even reported 15€ in additional MRR among users who had adopted the new offering. In these changing economic conditions, embedded finance is the way forward for many startups. But, how does that work?

Make your product stickier

The banking industry's first secret is that it is a sticky business. Financial apps, personal or professional, become especially sticky once banking features are added to them, and mobile banking retention rates are extremely high – higher than for almost any other type of app.

As a provider of both software and financial services, you’ll have a deeper understanding of your customers’ dynamics and needs. You’re empowered to create a much smoother user journey, by letting your customers earn, store, manage, and move money without ever having to leave your platform.

Add revenue streams on top of existing business

Much about a product’s success hinges on a smart pricing model. People usually assume that the better the product, the more you can charge for it. But higher subscription fees aren’t the only way to monetize a product with embedded finance — only with fintech can you have revenue streams that are non-subscription based. To give you a better idea, let's look at some detailed examples:


Payment revenues

Payments are a perfect entry point into financial services: these features generate data, trust, and very likely, additional banking needs. With embedded finance, companies can facilitate accounts and payments just like a regular bank — and earn revenue from transaction fees.

For Europeans companies, this essential layer of the banking experience usually means payments on the SEPA network. This how people get to make real-time bank-to-bank transfers. Such operations can be push payments, where the payer initiates the sending, or pull payments, where the payee pulls funds into their account (like with direct debit).

In terms of monetization, it's very straightforward. Let's say a software company itself pays €0.15 for a SEPA Direct Debit, and decides to charge their customer €0.40 for this exact payment. Each SEPA transfer will generate a net revenue of €0.25.

We have multiple partners who make a margin on such transfers, charging a fixed fee, sometimes even a percentage, on each operation performed. Providing you have a large user base, these small streams will eventually create a big river of cash flow!

Interchange revenues

The secret sauce of the payment business is what we call interchange. This is a very common revenue driver for fintechs. Banks, neo-banks (e.g. Revolut) and even retailer companies (e.g. Ikea) all generate very meaningful revenue from interchange.

Interchange allows the card issuer (this could be your company, via embedded finance) to take a portion of each payment made with its cards — say, 1.50%. So, for every €100 spent with a card, the issuer gets around €1.50. It’s calculated per transaction volume, but other variables are taken into account, including issuing country, type of card, total transaction amount, and even the merchant category.

Be aware, the perks of interchange are less relevant in the consumer space. A European 2015 antitrust law caps consumer card interchange fees: 0.2% for debit and 0.3% for credit cards.

Corporate card fees, however, are not regulated and often range between 1%-1.50% percent, depending on some of the variables mentioned. Therefore, when analyzing expected interchange in your revenue projections, you should consider the average monthly spend per card (per account). This may vary wildly between use cases, but our partners typically model between 5-8k € for SME business expenses.

Financing revenues

Credit revenues are what they sound like. You give your customers the funds they need today and expect them to pay them back in the future, with an added fee or with interest.

What is interesting about embedded lending, especially for B2B, is that in many cases platforms can create innovative financing options that banks don’t even offer. For starters, banks aren’t specialized enough to address many niche financing needs. And when it comes to the quality of customer data, banks aren’t anywhere near as strong as tech companies.

Tech companies naturally have deep visibility into the dynamics of their customers’ lives and businesses. Hence, they’re able to make more informed lending decisions and even take automatic repayments as a percentage of future earnings.

The income you’ll get from credit revenue depends of course on the financing volume and terms. Cases can vary widely, but if you’d like some help forecasting your project, please feel free to contact us!

Software subscription revenue

Last but not least, the most obvious source of new revenue: charging more for your software subscription. It’s only natural to add to your subscription fee when you’ve added new features and improved your overall customer experience. In our experience (with our 50+ partners), we estimate that tech companies increase their software subscription price by up to 20% after integrating financial features.

Perhaps, by adding an extra €20/month in software subscription, you can afford to offer payments at a cost or share interchange as part of an incentive program and still end up with a great revenue stream from software subscription.

Or, if you feel your product is not yet robust enough to justify an increased price, you can always sell individual banking features as add-ons. By allowing your customers to personalize products with additional, optional, one-time charged services, you can guarantee a new revenue source while you experiment with product adoption and pricing.

You can experiment with a range of pricing strategies:

  • High-margin software + low-margin financial features
  • Low-margin software + high-margin financial features
  • Medium-margin software + medium-margin financial features

Let’s recap

Software companies who embed financial services — tailored specifically to their core users— can drive growth, boost user engagement, increase loyalty, and add new revenue streams on top of higher-priced subscriptions. Embedded finance is a feasible path to a:

🍯 Stickier product

🛎️ Financial services reselling

➗ Interchange share

Which individually and altogether leads to:

📈 Increased revenue and profitability

To help companies understand the impact of financial features, we’ve created a tool to estimate revenue potential. It’s quite easy: enter your key assumptions into our spreadsheet and we’ll show you how your company’s income is impacted by the different revenue streams discussed in this article.

Try our calculator and see how much additional revenue you could generate with Swan.

Constance Laux and Sarah Wachter
August 29, 2022
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