According to Ted VanDeburg at Infiniciept, which helps companies become PayFacs, owning the customer journey is another reason software companies should seek to embed payments. In this case, the roadblock might be that referring clients to an outside 3rd party for payments significantly impacts customer satisfaction, while owning payments removes this burden. Your company might also be able to provide payments with lower fees, due to the removal of fees that would typically be paid to processors and / or other third parties. In other instances, clients might benefit from better working capital solutions, in which case it might be more useful to consider facilitating loans that enable long-term expansion. For example, Level helps independent contractors access innovative working capital products for items such as tools, equipment, vehicles, and more. Companies that partner with Level not only provide new financial products to their customers, but also potentially increase revenue per client as their business grows. In summary, a clear focus on the end customer will help guide you on whether or not it makes sense to integrate financial services, and if so, which product.

For example, Hostos Monegro, Director of Product Management at LeafLink, considered invoice factoring as their first financial product given the unique needs of their customers. In this case, the company purchases invoices from Cannabis brands at a discount and then provides adjusted terms to dispensaries, speeding up time to payment for suppliers while enabling dispensaries to better manage working capital needs.

Driven by its data-driven insights, Toast launched Toast Capital in 2019, allowing its restaurant customers to secure loans that fit their unique needs. Steve Fredette, Co-Founder of Toast, noted that Toast is able to provide its customers with quick and simple access to loans, because the platform has already completed KYC & compliance requirements on its customers, and can also offer better pricing due to the unique data and deep understanding of its customers.

As we look beyond payments, the market opportunity for such lending & insurance products could be equivalent if not greater than payments. According to Simon Torrence, the three products together comprise an addressable market of ~$7.2 trillion (3), with $3 trillion for insurance alone (4).

Lastly, we also believe timing has a lot to do with the available infrastructure as it relates to financial technologies. For example, before the arrival of PayFac companies, bringing payments in-house was price-prohibitive for most software companies, but this is not the case anymore. Charles Birnbaum, Partner at Bessemer, described a shifting of gears in fintech right now as it's becoming easier to launch niche financial products. Companies such as Stripe, Finix, Plaid, Alloy, and Lithic have made it vastly easier to build, deploy, and embed payments & other financial applications.

We believe the same pattern will hold for a much broader array of financial services. As we look forward to innovations in areas such as crypto, blockchain technology, NFTs, and DeFi, we believe a new generation of infrastructure companies will enable the same type of proliferation of financial innovation. For example, new startups are making it much easier to launch blockchain applications, accept cryptocurrencies as payment, or convert a product into a one-of-a-kind digital good. Solidus Labs, a 645 portfolio company, is one such example of a company that provides much-needed crypto infrastructure, by creating the first automated market surveillance and risk monitoring hub tailored for digital assets.

Similarly, 645 portfolio company Squire, has arguably the most unique data available on barbershops, which provides the opportunity to offer a broad range of financial services. Their current financial products include One Touch Payout, Smart Rent Collection, and Gift Cards. Regardless of the approach that is chosen, embedding financial products usually requires adding a new set of capabilities to the team. According to Infinicept, it’s important to invest in “tools, people, and process” in order to effectively manage risk as well as compliance.

Rebecca Liu-Doyle from Insight Partners noted that there is an important distinction between startups that are just a marketplace providing access to different providers, and those that truly assist with underwriting services. Looking deeply at the partnership from a technology perspective is very important before choosing the right partner, which includes looking at how well documented the API is (if available) as well as evaluating the team and how knowledgeable they are about the needs of the market.

As such, we recommend thinking through these considerations at the beginning of the process, and re-evaluating post product launch in order to benchmark the success against initial expectations. For example, Paul Sirisuphang, COO & Co-founder of 645 portfolio company RentSpree, noted that “when they began to consider offering rent payment & renter’s insurance, they thought about the entire rental journey” and they associated business value to each feature. This enabled them to hone in which features would be most important to their customers, and use that as a guiding framework for new product introductions. Similarly, Steve Fredette, Co-Founder of Toast, mentioned their team thinks about ROI for every decision they make, and strives to make as many data-driven decisions as possible.