SaaS and Fintech: The Creation of Embedded Finance

SaaS stands for “Software as a Service”, an industry that has been growing exponentially for over 10 years, as shown in the chart below.

Source: https://www.statista.com/statistics/510333/worldwide-public-cloud-software-as-a-service/

This growth relates to the advantages of using SaaS against the old software model. In the old software model, you had to buy a software license and have the infrastructure to run and use it. That represented a large initial investment, long implementation periods, and the need to maintain and update the software. When SaaS companies materialized, they offered a simple solution by hosting, maintaining, and updating the software, and charging for the usage. That allowed companies to change from CAPEX investments to OPEX, reducing implementation time to just a couple of hours, or maybe days. For those reasons, the SaaS market will continue growing, according to Grand View Research.

Source: https://www.grandviewresearch.com/industry-analysis/saas-market-report

However, in the last couple of years, SaaS and fintech companies have become the perfect partners to create Embedded Finance, a product that has revolutionized the financial services industry. The fintech industry has seen exponential growth and is forecasted to continue growing.

Source: https://explodingtopics.com/blog/fintech-stats

Fintech companies offer more agile and easy-to-use financial services by combining technology with banking services. The first fintech ideas came in the late 90s, but the real growth was seen between 2012 and 2015 when these companies obtained market share in the financial services banks typically owned. So, how did the SaaS companies partner with Fintech companies to create embedded finance?

Fintech companies knew financial processes and had the money, and SaaS companies had the technology to embed software and create applications for online usage. Therefore, they joined forces to create embedded finance, a set of financial solutions provided by fintech companies, fully integrated into business' infrastructure through applications developed by SaaS companies without redirecting the customer to third-party destinations. Also, a huge number of consumers were left out of the traditional banking system and could use embedded finance to access credit, online payment, and insurance systems, or take advantage of “buy now, pay later” services. A report by the Federal Reserve in 2020 showed around 22% of Americans were either unbanked or underbanked, meaning around 60 million adults could only access financial services through embedded finance.

Source: https://www.federalreserve.gov/publications/2020-economic-well-being-of-us-households-in-2019-banking-and-credit.htm

Since the beginning, embedded finance has been a success. For example, during the last few years, and especially during the pandemic, the interest in embedded finance has been growing and media mentions jumped from 994 at the beginning of 2018 to more than 3000 in 2022, according to CB Insights.

Source: https://www.cbinsights.com/research/report/challenger-bank-playbook/

That interest has translated into growth, as from 2020 to 2021, the embedded finance industry grew 3.1x in venture capital funding, reaching 3.1 billion dollars, according to a report by Dealroom and ABM AMRO Ventures in 2022.

Source: https://www.forbes.com/sites/ronshevlin/2022/04/25/the-7-trillion-embedded-finance-and-baas-gold-rush/?sh=4c4decbd739f

This industry is equipped for continued growth. More and more companies are adding embedded financial services to their websites and applications to give customers a more agile, easy-to-use, and safe payment system to get credit, or insurance. That is why embedded finance is expected to turn into a 7.2 trillion-dollar market by 2030, approximately double the current market value of the top 30 global banks and insurers.

Source: https://openfuture.world/embedded-finance-a-game-changing-opportunity-for-incumbents/

In my opinion, embedded finance will revolutionize the way we use money and how companies interact with their customers, and that is why venture capital firms are pouring billions of dollars into this industry. The banking services as we know them are becoming obsolete and integrated solutions like embedded finance are set to replace them.