WORKWEEK

I met Itai, the CEO of Unit, on one of my first trips to San Francisco after starting Fintech Today. It was February 2020, and I had spent the last year familiarizing myself with the banking-as-a-service space. 

We spent several hours talking about fintech, especially the banking-as-a-service sector. Unit was just finishing up their (oversubscribed) seed round, and the space was still nascent. 

Itai and I chatted a lot about the potential of platforms and other SaaS companies to change the ecosystem by embedding different financial features into their product offerings. 

2 years later, we’re still in the early innings of embedded finance, but there are abundant signs of traction and validation for Itai’s hypothesis. Companies like Invoice2go, Roofstock, and AngelList have added embedded banking features easily and profitably, transforming their businesses and setting themselves apart from competitors. 

In a crowded space, Unit has become a market leader by helping companies large and small add products that improve the customer experience and generate robust new revenue streams. 

For years, traditional banks have been letting their customers down, consistently failing to provide them with modern and flexible banking solutions. This creates an opening for tech companies. They’ve already earned their customers’ trust; now they’re in a prime position to offer them banking solutions tailored to their unique use cases, in their exact moments of need.

When they compete for business with traditional banks, tech companies have two key advantages: data and convenience. Thanks to the wealth of data these platforms gather from their customers, they’re able to offer loans at better terms. With customers using these platforms with daily or weekly frequency, tech companies can offer these loans within familiar products and enable a simple and easy onboarding process. Not just that, based on the data of other similar customers, tech companies can offer financial products to users before they know they even need them.

Availability of funds is another key value driver for end-customers. When using traditional banks, many consumers and SMBs wait days or even weeks to get paid. By contrast, when they bank with platforms they use to run their businesses, they can get paid within 24 hours, sometimes even on-demand.

For the platforms themselves, there are several key advantages to embedded finance. Because people seldom change banks (the average age of a checking account in the United States is 17 years), banking tends to make platforms stickier and more engaging. 

Embedded finance also helps platforms make money, providing crucial new revenue streams as VC funding tightens up and the economy seems headed for recession. More precisely, embedded finance helps companies monetize through interest on deposits, interchange from card swipes, payment fees, financing revenues, and subscription tiers. 

It’s happening across the board—from publicly traded companies to large- and medium-sized startups. Shopify is a great example of a company that’s used embedded financial features to transform their business. 

By powering online stores for ecommerce merchants, Shopify was able to accumulate data on how each merchant grew. Many of these merchants were conspicuously underserved by their banks, who didn’t understand their business models and weren’t providing efficient capital for growth. By contrast, Shopify Capital knew how much they made, how much they needed, how to underwrite them, and how to price the loans. 

Today, business is booming. More than 60% of Shopify’s revenue—nearly $2.3B—comes from merchant services—primarily loans from Shopify Capital. 

The good news for smaller companies is that they don’t have to spend years and millions spinning up these financial features, as Shopify did. With platforms like Unit, launching banking can be accomplished in a matter of weeks, for a fraction of the cost. 

The fact that Unit requires vastly less time and money to implement can be traced to the ways they remove complexity for the companies they serve. Unit “wraps” multiple bank relationships and shoulders the burden of compliance; the result is that their clients can focus on other priorities. 

By contrast, earlier banking-as-a-service solutions required hiring a team to find and manage a bank partnership, become and remain compliant, and handle periodic audits + manual reviews. That process was perilously expensive (often $2M) and took years. 

For developers, the easiest way to get started is by using Unit’s sandbox or Pilot: you can demo all of Unit’s features with the sandbox, or get started building ASAP with real funds with Pilot.

While large public companies have successfully experimented with embedded financial features, startups have been the fastest to move into the space. AngelList is a great example, recently adding banking features like interest-bearing checking accounts, physical and virtual debit cards, and free wire transfers. 

Another company, Invoice2Go, helps hundreds of thousands of small businesses in over 150 countries manage their finances. While their core product focuses on powering invoices, they have recently expanded into marketing, CRM tools, and helping businesses find accounting solutions. CEO Mark Lenhard said that adding banking was a no-brainer, as it makes their entire product suite more valuable to end-customers.. 

“We chose Unit because their technology is the best in its class,” said Lenhard. “Also, we let our engineers take a spin through the docs, and they gave us the thumbs-up. That’s an important signal.”

Invoice2go’s new banking features are already showing traction: in just a few months, the company’s seen thousands of bank-account applications, 74% of which were auto-approved. Over the same time, they’ve processed several hundred thousand dollars’ worth of ACH payments.

Another example of embedded finance in action is Wethos, a platform that helps designers turn their freelance businesses into full-service agencies. Their software makes it easy for gig economy workers to form project-based teams and collaborate, then bill clients and share revenues accordingly. 

Embedded finance has transformed Wethos. They were able to launch their first banking products within 6 weeks, with just 2 engineers, accelerating their product roadmap by 2 years. Within 6 months of launch, they had processed $1.5 million in payments, and is seeing 40% month-over-month user growth. It helps with retention too—customers that use Wethos’s banking products are retained 6x more than those who don’t.

It’s clear that platforms have a lot to gain from embedding financial features. They create value for end-customers while driving engagement, retention, and revenue for the platforms themselves. As Unit expands its product offering—business credit cards are launching in the next few months—we expect more and more companies to give embedded finance a look as they seek to transform their product experience and bolster their bottom line.