Developing an Embedded Finance Product: 3 Considerations for Founders
Updated on May 26, 2023
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At a Glance: When launching an embedded finance product, startups should answer several critical questions, such as whether to build it in-house, what data to collect and how to utilize it, and what leverage they have. Building in-house provides maximum flexibility but is also the most expensive and labor-intensive, while buying from a third party is the cheapest and quickest option but lacks functionality. Hybrid approaches provide a cost-effective middle ground that offers more flexibility than a third-party product. Founders must actively ensure that the embedded product scales with their business and meets customers’ needs, even if they are a non-fintech company.
The ability to offer embedded finance products has been a game-changer for a fintech industry. It has opened up the market for the companies that have expanded their product offerings, especially for the ones that have built their products fast. But that doesn’t mean it’s a good move for all startups. If, however, you’ve determined that an embedded finance product is a good fit for your business, you need to be prepared to answer some tough questions.
Although the development and launch of any given company’s embedded product may differ, founders should address several critical questions during the process: Should the solution be built in-house or outsourced? What data will be available and how will it be utilized? What leverage, if any, already exists to give this new product an edge?
These questions will not only shape the development and launch of the product but also influence its future. In the following sections, we will delve into each of these questions in more depth.
#1 Should You Build, Buy, or Go Hybrid?
When deciding to offer an embedded product, the first question to address is whether to build it in-house, work with a third party, or pursue a hybrid approach. Each option has its advantages and disadvantages. Building in-house allows maximum flexibility in creating tailored functionality but is also the most expensive and labor-intensive. Buying from a third party is the cheapest and quickest option but lacks flexibility in terms of functionality. A hybrid approach is a cost-effective middle ground that offers more flexibility than a third-party product, allowing companies to focus on their core strengths while leveraging API companies for heavy lifting.
Just as with building a credit startup, it’s crucial to identify a unique insight and support it with proprietary data when developing an embedded finance product. The aim of an embedded solution is to enhance the customer experience, and it’s the founder’s responsibility to identify opportunities and back them up with unique data.
Although each company’s individual needs may dictate their choice to build, to buy, or to go hybrid, a hybrid approach is typically the best option for most businesses. By using a third-party API, companies can leverage unique insights and data to create a more specialized solution while staying focused on their core strengths and product, rather than being distracted by compliance or engineering concerns.
#2 What Data Do You Have?
When building and launching an embedded finance product, it’s important to consider the types of data that can be collected. The more data the product provides, the more valuable it can be for businesses. Like with the core product, the data collected by the embedded product will be crucial for iteration and improvement. The data must offer insights to help improve underwriting models, evaluate opportunities for additional products, and customize terms for each customer.
An embedded product built in-house provides the most flexibility in terms of data collection, as the company can control all aspects of the product and determine which data is collected. However, this option is also the most time and cost-intensive, as clients will need to integrate with all data sources themselves and pay for them separately.
Third-party applications and APIs, on the other hand, tend to provide the least data. Some third-party products may not provide customer data or make only certain data available. If a third-party solution is the best option for a company, it’s important to inquire about what kind of data will be available and be aware that key data will likely come at a cost.
The hybrid model provides a compromise. Clients can integrate with simple, cheap, and quick sources while using outside vendors for pre-built standardized integrations. The hybrid approach involves a give-and-take; the company will still need to pay for access to data but considerably less than with a third-party solution while enjoying greater flexibility in terms of data access.
#3 Do You Have Leverage
In a previous article, we discussed expanding product offerings as a fintech company. While adding an embedded finance product to a company’s offerings may not necessarily make them a fintech company at their core, it will transform them into fintech-adjacent businesses.
Founders must learn that leverage doesn’t always transfer to additional product offerings. Even if a company’s first product is successful, the infrastructure built to support it may not be helpful for subsequent products, especially if it is a non-fintech business adding an embedded finance product. This is particularly true for companies building their embedded products in-house, as they need more external support. Therefore, founders must actively ensure that the embedded product scales with their business and meets the customers’ needs.
However, even fintech companies launching embedded products need to understand their leverage. For instance, Stilt’s primary product is a loan product tailored to meet the needs of the underserved immigrant market in the US. When Stilt launched Onbo, a B2B product, much of the internal infrastructure created to support the loan product was not applicable.
Launching new products can be challenging, and founders must approach it with clear eyes. If they don’t, they risk wasting time and money trying to fit square-shaped resources into a circle-shaped product.
Final Thoughts
Offering an embedded finance product can be a significant move for a startup, but it’s not the right decision for everyone.
Founders must address tough questions and carefully consider the options available, such as building in-house, working with a third party, or pursuing a hybrid approach. Each option has its advantages and disadvantages, and it’s essential to identify a unique insight and back it up with proprietary data. Founders must also consider the types of data that can be collected from the embedded finance product and the leverage they have to ensure the product scales with their business and meets customer needs.
By taking these considerations into account, founders can successfully develop and launch an embedded finance product that enhances the customer experience and drives business growth.
Frank Gogol
A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.