There’s been an interesting dynamic occurring in SaaS businesses over the last 5 years – Fintech solutions have slowly been added to their core software product especially in niche vertical markets such as construction and fitness. An example of this is Shopify, which initially focused their product offering on small businesses. They soon realized that this cohort was in need of more than just tools to build an e-commerce website – they also needed payment processing solutions, financing for working capital and insurance. Ant Financial, which owns the widely successful Alipay in China, is another example of a company that fundamentally is a tech platform that facilitates relationships with legacy banking partners. Because companies don’t want a lot of disparate tech solutions, it was easy for the SaaS businesses to create new revenue streams by offering these additional services. According to VC firm Andreessen Horowitz, by adding fintech, SaaS businesses can increase revenue per customer by 2-5x and open up new SaaS markets that previously may not have been accessible due to a smaller software market or inefficient customer acquisition. In the same way consumer brands have moved horizontally into adjacent categories to (hopefully) increase AOV, SaaS businesses are following the same path.
Up until now, most SaaS businesses that have begun offering fintech products to their customers have only done so as a reseller, which isn’t an optimal brand experience. Additionally, it’s not as lucrative from a margin perspective. The secret is embedding these solutions so they feel more organic. This can be through a private label model, but the more lucrative, and stickier route, is by shouldering some of the risk.
Let’s talk about how consumer brands can lift this vertical SaaS model and apply it to their business in three areas: financing, insurance and banking.
Consider a business like Purple which sells mattresses and accessories. Currently, the company offers financing to their customers via a reseller relationship with Affirm and Splitit, but this is nothing but an expense for the company and the experience is less sticky since the transaction happens with Affirm and not with the brand. There are a couple reasons why they should use an embedded model instead:
- As a result of being born a D2C brand, Purple knows a lot about their current customers. For example, they likely have insight when someone has moved (or is moving), they have purchase history to understand previous transactions from a customer – is their AOV going up or down, etc. This data would be extremely valuable to underwrite a loan. Right now Affirm can’t digest that level of data. They are selling a commoditized service which doesn’t take into account the nuances of the particular business. In exchange for this data sharing, the brand and partner bank could approve more customers on favorable terms thereby increasing conversion.
- Additionally, while a true expense under the reseller model, the embedded approach could allow Purple to actually profit off of writing loans. Moreover, in the b2b world they could extend financing terms to buyers offloading some of the risk and improving cash flow.
Taking the Purple example to another category, instead of offering extended warranties from a third party via a reseller relationship, why not underwrite the warranty themselves using their data they’ve captured as a D2C brand. I’ve been at a company where we took the ‘off the rack’ solution as a reseller and, while easier to initially implement, the user experience was far from optimal. Furthermore, we had very little input into how these plans were priced as the insurance company was underwriting based on industry wide formulas. Think of the data they have that would be valuable to the underwriters.
- Manufacturer warranty claims
- Location (apartment vs. home)
- Pets: Did they purchase a pet bed with their mattress (or in the past)
- Propensity to move, etc
All of this data is being captured. Why not use it to create another revenue stream.
Offering bank accounts to your customers makes sense if they are both collecting and making payments via the platform. This is a benefit to the consumer as they can keep a balance and don’t have to make frequent transfers. Green Dot Bank, for example, can offer an embedded solution that lives on your e-commerce platform.
Marketplaces (The Real Real, Goat, etc) are great examples of businesses that could embed bank account products for both buyers and sellers as there needs to be enough transaction volume to merit opening an account. But the benefit is a better customer experience as well as a platform to bring a loyalty program to life. Likewise, the company can monetize this experience via a flat monthly fee or interest sharing – promoting another incremental revenue opportunity.