Embedded finance is not just a trend - it's the new operating system for modern platforms.
The opinions expressed in this blog are solely the author’s and do not reflect the views of PayPal.
The evolution of payments and financial services within platforms has reshaped how commerce is conducted over the past decade. What was once a novel (hint: every company will be a fintech company) has matured into a core business strategy, with software platforms and marketplaces having claimed an ever-growing share of global payment volumes.
Companies like Shopify, Toast, Mindbody, ServiceTitan, Airbnb, Uber, and Etsy stand out as clear examples of how these platforms have revolutionized industries and become essential to modern commerce.
This move towards embedded payments has generated incredible value not only for the winning platforms, but also for the enablement players (e.g., PSPs, BaaS providers).
Research, software platforms account for nearly 60% of US SMB payment volumes and about a quarter in Europe. The software platforms are expected to continue to grow their share of payments volumes as they digitize broader verticals and introduce new embedded financial services beyond payments.
RECAP: What payment models are available to software and marketplace platforms?
While financial services can add a lot of value for customers, ultimately, a platform acquires and retains its customers because of its differentiated software/services, not the financial services it offers.
In this section, we highlight the different models that have gained traction among platforms across varying scale:
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Reselling or white labeling payments from payment service providers (PSPs): easy to get off the ground, with minimal internal responsibilities and cost overheads. Best suited when early in the journey and to test customer adoption. However, it can be difficult to monetize materially until you have the scale to negotiate better rates with your PSP. Also creates a dependency risk on a single provider
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Embedded solution (become a payment facilitator): the platform takes a more active role in processing payments (e.g., perform merchant underwriting and onboarding, compliance, reporting, etc. in house), usually with the help of other software vendors. Opportunity to capture higher bps on the transaction volume in exchange for taking on the risks and operations associated with collecting payments
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Hybrid approach: mix of the above, depending on different flows/use cases, regulatory constraints, regional requirements and other platform specific reasons
Considering the tailwinds, we are also seeing a new generation of payment service providers emerge, with a sharp focus on offering services to the software platforms. Some of the examples include: Finix, RainforestPay, and Forward.
Platforms, like (enterprise) merchants, are seeking control, transparency, and flexibility. Based on our conversations with founders and investors, it comes as no surprise that horizontal PSPs have not been able to keep up with vertical specific use cases and customizations necessary for platforms.
At a high level, we are seeing various trends converging towards three large over-arching themes:
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The multi-product fintech approach is, however, increasing the overhead and complexity at the platforms as they manage multiple partners for commercials and integrations, which often don’t connect with one another
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Platforms are seeking to take control, and want to work with best-of-breed solutions versus having to lock themselves in with a limited set of providers, which might have limited capabilities outside of their core offerings
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For example, we this with Stripe in 2024, where they announced the de-coupling of their payments processing platform from rest of the Stripe offerings (including Treasury, Billing, Fraud tools, etc.)
invest actively in vertical SaaS/AI business models (e.g. Aufinity, Robin AI), as well as the enablement players (e.g., Formance, Modulr, Pliant). If you are a founder building and scaling in the space, please give us a shout!