Neil Kenley, Vistara’s fintech expert, shares an overview of how advances in financial infrastructure are creating opportunities for every company to embed financial products into their offering.

Financial technology (fintech) is rapidly becoming a greater part of our every day lives. Now there are  dozens of Neo banks vying for our attention and more free financing options than ever when buying that new couch. We have seen an explosion of financial services products offered to both consumers and businesses over the past few years, and that is in no small part due to an increase in venture-backed companies building out the ecosystem. With $34bn of investment made into the fintech sector in Q2 2021 alone, the opportunity has clearly been recognized by the venture capital community.  CB Insights reports that this figure represents as much as 20% of all venture dollars invested in the quarter (Source).

One particular idea, which has been gaining significant traction, is embedded fintech; a segment that is expected to grow to ~$230 billion in revenue by 2025 (in the US alone), more than 10x where it is today. (Source)

What is Embedded Fintech and Why is it Thriving Now?

More and more non-financial businesses are providing financial products to their customer base and streamlining the customer experience in the process. By utilizing their distribution network and data, technology companies can offer unique financial services to their customers, adding meaningful new revenue streams while also creating longer lasting relationships with customers and lowering churn.

This can be as simple as using your own embedded payment stack that allows you to retain processing fees that are normally captured by incumbents like Stripe and Paypal, or more sophisticated offerings that easily allow vertical software companies to provide bank accounts, loans or working capital to their customers.

These types of offerings have been become more prevalent because it has never been easier to create financial products. On the back of open banking regulations, the infrastructure layer of financial services is now being built out, allowing companies to build banks, process payments, issue credit cards, loans or insurance all through the use of APIs. The historical need for tech companies to directly partner with financial institutions is no longer required, creating endless opportunities for new solutions.

Embedded Fintech in Action: An Easy Way to Add Top-Line Growth

When it comes to embedded fintech, there is no one-size solution for non-financial companies. Businesses have been able to grow their top line while providing value-added products to their userbase in a number of ways.

Embedded Insurance

Recently, Hodinkee a media company and marketplace for luxury watches launched a seamless insurance product into their offering. Hodinkee users can instantly sign up for a low-cost insurance product that protects their watch, without ever leaving the Hodinkee website.  Hodinkee acts as the insurance broker while Chubb underwrites the policies. By acting as the insurance broker they are able to collect a meaningful amount of insurance premiums, on top of the revenue from their core business.

Embedded Lending

We have seen the rise of ‘buy now pay later’, in the consumer segment with companies like Affirm, Klarna, Apple and Afterpay providing credit to consumers. We see similar dynamics popping up within the professional services and B2B segments. LegalMate is BNPL (Buy Now, Pay Later) for the legal industry and provides lawyers with the option to extend credit to their clients and receive their invoices upfront to better manage cashflow and eliminate any collections risk. LegalMate allows clients to pay overtime and manages all collections and monitoring, allowing lawyers to focus on their practice.

Embedded Banking

By using banking as a service platforms like Unit and Moov, companies are able to build banking products in weeks not years, without the need for bank licenses. This allows companies to create bank accounts for customers, issue debit cards with unique features and manage invoices and payments. Recently, Unit worked with Wethos (an end-to-end platform for freelancers) to provide their users with free business bank accounts and debit cards. Not only does this create increased loyalty and stickiness, but it also allows the company to earn net interest income on deposits and ACH/Interchange fees from their debit transactions.

Embedded Payments

Companies like Tilled are building the infrastructure that allows software providers to rapidly act as a payments facilitator (“PayFac”) without large upfront costs or increased risk (Tilled manages the KYC, fraud management and the chargeback process). By leveraging Tilled, companies can quickly monetize any payments flowing through their software using an easy-to-implement API. For example, if your customers are processing >$100M in payments through your software, there could be an opportunity to capture more than an additional $400K per year by acting as a PayFac.

Challenges to Incumbent Financial Institutions

The rapid pace of financial innovation and new data-driven financial products are having an impact on incumbent financial institutions. Customers are asking for more personalized products and pricing that better represents their unique profile. Given the more siloed nature of data within many traditional financial institutions, they struggle to combine this information into a unified view of their customer and are unable to provide a level of service on par with todays fintech offerings or digital first banks. Our portfolio company Zafin knows a thing or two about solving these issues for financial institutions. Zafin’s SaaS product and pricing platform is a key part of any core modernization journey, creating the backbone needed to allow financial institutions to deliver digitally enabled personalization for products and pricing. Their easy-to-use interface allows banks to rapidly deploy bespoke products, personalized pricing and offers, as well as packages and experiences that are highly tailored based on a 360^o view of the customer.

Vistara is Poised to Support the Opportunity for Innovation in Fintech

We at Vistara Growth believe there are numerous unique business models and opportunities arising everyday in the embedded fintech space that may make it difficult for traditional lenders to react. We are incredibly excited by the sector and are looking for ways to support the ecosystem.

If you are a vertical software provider thinking about embedding finance into your offering, or if you are building the infrastructure that powers this segment, we would love to connect with you and explore how we can help enable your growth.

About Vistara

Vistara Growth provides highly flexible growth debt and equity solutions to leading technology companies across North America.  Founded, managed, and funded by seasoned technology finance and operating executives, “Vistara” (Sanskrit for “expansion”) is focused on enabling growth for the ambitious entrepreneurs we invest in, our investors, our people, and the communities we operate in. 

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Kathleen Kaulins, Vistara’s health care technology expert, shares her observations on dramatic shifts happening in the healthcare space during the year of COVID-19.

How COVID-19 Changed HealthCare

COVID-19 has drastically altered how patients access and consume their healthcare. As a result, integrated digital experiences are now expected by patients, and these expectations will continue to persist after the pandemic passes. In fact, Forrester’s Healthcare Consumer Experience Study found that nearly a third of patients either changed or stopped going to their healthcare provider due to a poor digital experience. The heightened priority of creating a cohesive digital health experience and desire for greater transparency within the healthcare industry has led to innovation across the full spectrum of the patient journey and care delivery models. Evidence of this can be found in a few key areas:

Consumerization of Healthcare

Just as consumers have broadly come to expect personalization, immediacy, and consistency across their consumption of goods and services, patients now expect these same experiences in healthcare. A recent study found that 51% of patients ranked convenience and access to care as the most important factors when making healthcare decisions (compared to 35% prioritizing quality of care). As a result, Vistara believes companies that have patient-centered technologies that improve the convenience, speed, and transparency of care are well positioned to meet the expectations of increasingly empowered patients.

Example: Telehealth

The largest impediment to telehealth’s historical traction was a lack of patient adoption. Due to the COVID-19 pandemic that included stay-at-home orders and social distancing that restricted in-office visits, many patients were forced to use virtual media to consume their care. Forward thinking companies like 98point6 enable patients to access primary care on their own schedule from their mobile phone 24/7. Using artificial intelligence to triage patients and then connect them virtually with the best matched doctor, the platform ensures the same quality of care patients expect from in-person visits. As a result of these improved technologies, more convenient access, and a lower cost of care, it is likely that telehealth remains a staple of post-pandemic patient care.  

Infrastructure & Operations

It is clear that operating and managing healthcare practices has becoming increasingly complex. For example, in spite of hiring staff to assist with administrative workflows, doctors still spend two hours on paperwork for every hour of patient care. As a result, there have been a growing number of tools and software offerings intended to help both providers and payers ease their clerical and administrative burdens. Vistara believes companies that can address a number of these current pain points (e.g. scheduling, insurance verification, payments, etc.) are well positioned to be platform plays as disparate tool offerings are likely consolidated over time.

Example: Electronic Health Records

Electronic health records (EHR) have been at the core of the patient experience since their inception and serve as the conduit for storing and exchanging health data electronically. As a result, they are rarely replaced despite the fact that many offerings are outdated and unable to meet the current needs of providers and patients. Innovative providers such as DrChrono have not only built mobile-first, cloud based EHR offerings, but have also integrated additional functionality related to practice management, medical billing, and revenue cycle management. Companies that have roots in EHRs are poised to be effective platforms upon which additional functionality can be added given their ability to easily integrate with a patient’s existing healthcare data and uniquely provide a cohesive patient experience.

Data & Insights

As patients demand greater control over their own healthcare data, interoperability (the sharing of data across systems and from a variety of sources including hospitals, labs, pharmacies, and doctor offices) is required for true digitization of the patient experience. Additionally, healthcare organizations increasingly under pressure to drive efficiencies are turning to data to help increase productivity and cost savings across the board and are incorporating predictive insights into all facets of their businesses, clinical and non-clinical alike. As a result, access to data and the use of analytics is at the heart of all healthcare considerations.

Example: Payments

Medical billing is a painful and inefficient experience for all stakeholders. Specifically, patients don’t know what they are paying ahead of consuming services and close to 70% of hospital bills go uncollected, which in turn increases costs across the healthcare system. Companies like Cedar, are successfully leveraging data to provide a patient financial engagement platform that creates full revenue cycle visibility, resulting in a 30% increase in patient payments. Vistara believes that data and analytics companies that have direct ties to reimbursements are well positioned given the level of current frustration for patients, providers, and payers. Companies that can use data to solve these frustrations will have a tangible and outsized financial impact.

Integrated Patient Experience is Here to Stay

COVID-19 has forced patients and practitioners alike to adopt new technologies and embrace virtual care experiences. As a result, healthcare organizations now realize that the digitalization of the patient experience is in fact here to stay. Simply offering select digital touchpoints is insufficient, and they instead must provide an integrated patient experience. As digital engagement strategies are no longer seen as a “nice to have,” a number of innovative companies are working to eliminate the fragmentation that currently exists between in-person and digital experiences. We expect this to serve as a catalyst for true digital transformation within healthcare.

About Kathleen

Prior to serving as Director, Investments, Kathleen spent time as an operator in the healthcare IT space. Most notably she helped lead the finance & strategy function at Zocdoc, a New York-based digital heath company. While at the company, she evaluated and executed various expansion efforts including Zocdoc’s rollout to 50 US states, transition to selling health system customers, go-to-market and monetization strategies for new products, and changes to the company’s pricing model. Kathleen has a deep understanding of healthcare platforms and looks forward to connecting with innovative companies seeking growth capital to tackle pain points for patients, providers, and payers.

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