Embedded Finance Opportunities for ERP and Payroll SaaS Providers
Embedded Finance as a Material Opportunity
OC&C's research indicates that ERP and payroll SaaS providers could achieve an EBITDA uplift of 20-30% within a 2-3 year timeframe. This represents a significant opportunity, with the potential for even larger long-term gains.
How Embedded Finance Works in ERP and Payroll
The embedded finance value chain consists of three steps:
- End User/Customer: Small and medium-sized enterprises (SMEs) using SaaS applications.
- Software Platform: Cloud-enabled SaaS providers owning the customer relationship and journey.
- Financial Services Enabler: A mix of regulated and unregulated entities facilitating the integration of financial products into non-financial workflows.
Examples of financial services enablers include Swan.io (obtaining full banking licenses) and banks like NatWest launching their own Banking as a Service (BaaS) platforms.
Emerging Embedded Finance Products
Financial products can be embedded throughout ERP and payroll software workflows, including:
- ERP Workflow: Automation of payments, company cards for expense tracking, and financing opportunities.
- Payroll Workflow: International payments, earned wage access, and employee perks.
Typical Set-Up and Economics
- Company Cards: Monthly fees, interchange rates, and interest on funds.
- Business Loans: Revenue share on interest fees.
- International Transfers: Transaction-based revenue with shared margins.
Cost to Play
- Recurring fee to financial services enablers: £1,000-3,000/year.
- Technical integration: Initial development costs.
- Customer service/training: To support end customers purchasing financial products.
Potential EBITDA Uplift
- Estimated EBITDA uplift: 20-30% for a scaled embedded finance proposition.
- Example: A hypothetical B2B SaaS company with £100m revenue, 30-40% EBITDA margin, and average spend of £2,000/customer annually.
- Potential 20-30% EBITDA uplift with conservative assumptions on revenue share, attachment rate, and cost to play.
Sensitivity Analysis
- EBITDA uplift of 50-55% possible with 70% revenue share favoring the SaaS provider and a customer attachment rate of 15%.
Examples of Successful Implementation
Toast, a US provider of point-of-sale (PoS) software for restaurants, generated 80% of its FY22 revenue and gross profit through finance technology solutions, including payments processing and business loans.
Conclusion
ERP and payroll providers should consider embedding financial services to enhance their offerings, potentially leading to significant EBITDA improvements.