Embedded Finance Opportunity for SaaS Providers
Introduction:
OC&C's research highlights the significant potential for ERP and payroll Software-as-a-Service (SaaS) providers to leverage embedded finance, offering a pathway to substantial earnings growth. The opportunity could lead to a 20-30% increase in EBITDA within 2-3 years, with even greater long-term potential.
Embedded Finance Value Chain:
Embedded finance transforms traditional SaaS workflows into integrated financial services. This process involves three key steps:
- End User/Customer: Small and medium-sized enterprises (SMEs) using SaaS applications like ERP and payroll software.
- Software Platform: Cloud-based SaaS vendors acting as intermediaries between users and financial services.
- Financial Services Enabler: Providers offering a mix of regulated and unregulated services to integrate financial products into non-financial workflows.
Emerging Embedded Finance Products:
ERP and payroll software workflows offer numerous touchpoints for embedding financial products, including automated payments, expense tracking, workforce management, and employee benefits. Key products focus on:
- Company Cards: Facilitating corporate spending with potential revenue streams from monthly fees, interchange rates, and interest on deposited funds.
- Business Loans: Sharing interest fees charged to users between the BaaS provider and the SaaS vendor.
- International Transfers: Generating revenue per transaction, with margins shared across the value chain.
Cost to Play and EBITDA Impact:
The cost to integrate embedded financial products includes recurring fees, development costs, and customer service. Research suggests that the 'cost to play' constitutes approximately 30% of incremental revenue generated through these products. With scale, these costs benefit from economies of scale.
EBITDA Uplift Potential:
OC&C estimates a potential 20-30% EBITDA uplift for a scaled embedded finance proposition. An illustrative case study based on a hypothetical B2B SaaS company with a 30-40% EBITDA margin and average spend of £2000 per customer suggests this uplift is feasible. Sensitivity analysis indicates that a larger number of products, higher attachment rates, and a greater revenue share for the SaaS provider could lead to a 50-55% EBITDA uplift.
Case Study Example:
Toast, a US provider of Point-of-Sale (PoS) software, demonstrated significant revenue and profit growth from its financial technology solutions, accounting for 80% of its FY22 revenue and gross profit. This showcases the potential for ERP and payroll providers to capitalize on the embedded finance opportunity.
Conclusion:
Embedded finance represents a transformative opportunity for ERP and payroll SaaS providers, offering a path to enhanced profitability through integrated financial services. The combination of streamlined processes, expanded service offerings, and potentially high revenue shares makes this an attractive avenue for growth. However, careful consideration of the costs, scale benefits, and strategic alignment with customer needs is essential for realizing the full potential of this opportunity.
