Thoughts on embedded finance and what Fintech can learn from vertical fintech.
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The one area of promise I am most excited about at the intersection of finance, technology and business (including agriculture or any vertical) is embedded finance.
It combines a knowledge of financial services, technology and real life hindrances that can be solved using both the former. As I discussed in my recent post, Fintech is evolving and it is pointing in this direction and also gave a nod to some opportunities such internet of things, APIs and customised infrastructure which enable embedded finance.
However, we only see solutions and visions of embedded finance in the market through fintech goggles i.e. companies in fintech who have brought a specific set of solutions to market.
In this issue, I want to discuss what embedded finance looks like through a vertical viewpoint and not just fintech goggles. This gives me 5 things to think about when I look at the future of embedded finance.
Let's consider:
What is embedded finance again?
Fintech Echo chamber
Agrifintech propositions so far
Vertical view points - 5 things to consider
📰 Also, news and updates including:
⦿ E-Farm in Europe raise $$ but what do they do?
⦿ Nori announce change and funding
⦿ Major U.S. Banks share their thoughts on how they use tech in Agriculture Finance in an American Banker article
⦿ Some first principle insights from iProcure, on digitising the ag retail trade in East Africa.
⦿ Plus - don't snooze on this newsletter 👀
Embedded Finance
Firstly, what is embedded finance?
The best way to think of it is like John Deere Financial but for everything. John Deere is the host company and JDF, their captive finance company, offer finance (credit) at the point of transaction. 'Big deal!' I hear you gasp!
When you start to digitise workflows, many more transactions require finance to close out those jobs - not just equipment procurement - and so having finance 'embedded' in that workflow can get the job done quicker, arguably with better information using adjacent data.
Embedded finance is the sweetspot where digital workflows and digital finance go hand in hand, but the key thing is understanding those digital workflows first, understanding any financial friction (or other friction such as data, human capacity, trust, connectivity, controls etc) and finally what financial service could help resolve the financial friction and complete the 'jobs to be done'. 🤝
Embedded finance refers to embedded payments, embedded credit, embedded savings, embedded insurance or even embedded investments.
This overview from Bain is a 'go-to' resource and the figure below neatly sets out the value chain and actors.
Source: Bain
Fintech Echo chamber
Act 1, Scene 1: Fintech Conference
Niall: Hey, so what do you do exactly?
Fintech co: We build embedded finance products for companies so they can build financial products for their industry context
Niall: Like what exactly?
Fintech: We can make card issuing and payments really simple for companies to use with their clients for their own context.
Niall: How would that work in Food and Agriculture say?
Fintech co: Well, we would speak to the company in that sector and then give them some card issuing and payments APIs for their context. Have this free pen. Goodbye.
Of course, 'Fintech co' here could be any company as this offering, while interesting and potentially relevant, has become crowded and undifferentiated.
A lot of the companies in this sector - specifically embedded payments - have developed fantastic rails to develop digital financial services and I don't doubt that their technology is amazing for payment API's or cards (physical or virtual).
However, finance at an industry level is more complicated and nuanced and banks are typically divided into specialist teams. I suspect working in Fintech, it is difficult to see what those sector specialists need.... so far.
This is one of the reasons I started writing about Agrifintech. So... even if your not an Agrifintech die hard, I think there are some fascinating insights into Embedded Finance from some of the propositions we've already seen.
In 2022, 52% of all funds raised for agrifintech were directly for embedded finance propositions with $788m invested into companies developing propositions, from a grand total of $1.5bn. Note: Propositions not infrastructure.
Agrifintech investment categories in USD - To Graze
Embedded Credit is a major use case, both directly and indirectly via financing marketplaces. Risk management and market access have all featured heavily. Here are some examples:
⦿ Farmers Business Network (U.S.) have developed a growing empire of digitised business in agriculture retail, developed their own IP, have taken part in venture investing (e.g. Greeneye Technology) and have developed a captive finance company to go along side it. Credit and Insurance are two key financial products that they offer to enable their own ecosystem.
⦿ Sayurbox is a B2C food logistics platform serving 1m consumers across Indonesia and using 10,000 farmers to supply them. Their main offering to those growers is reliable market information (data) and market access (managing market risk through my own fintech goggles 🥽 ). The data insights these platforms can offer to lenders, buyers and sellers make them great resources for financial decision making.
⦿ As I discussed in this piece on Bushel and their Wallet product, payments are still important and definitely ripe for further exploration.
These are great examples and demonstrate a range of embedded services.
What really makes this interesting to me is how embedded finance starts to take shape and I think having a vertical viewpoint (versus Fintech goggles) raises some fascinating questions.
Vertical view point
As fintech starts to develop vertical propositions, these are some considerations.
🌀 Product design - Who will design a superior embedded finance product? Will it be sector specialists or fintech? Maybe a bit of both?
🔑 Industry bits and bobs - Context is key, so let's start to wrap our heads around it. I think the low hanging fruit of embedding with digital only businesses has already being plucked. The real world is tricky 😬. Which brings me to....
💡 Financial IP - this is an idea I want to develop further. Embedded finance is both transactional and strategic and somewhere on that continuum there is real intellectual property up for grabs, especially as we get further into the real world of bits and bobs.
💸 Investors - Industries are nuanced, including both Financial Services, Technology and Food & Agriculture. Where does embedded finance investment come from? We've all seen dud projects that don't work get funded by a different set of investors every few years. Also, there are great projects that don't get funded because they meander outside of core sector competencies.
🤝 Brands - are these aligned and how do partnerships work for both parties that don't leave brands exposed ? This thought was prompted by this post on LinkedIn from an industry veteran, which is well worth a look.
I certainly don't have all the answers here but these feel like a good starting point. Maybe you see other considerations? If you do, I hope you email me with your thoughts. 😀
E-Farm offer an actual buyer and seller led marketplace for equipment in Europe and two months ago crossed the €100m GMV mark (i.e. total transactions). This differs from TractorZoom, for example, who gather market data on auctions and dealership sales.
Providing payments and security for these types of payments has been essential to growing the business. Their largest transaction was for €485k! This impresses me as getting buyers, or buyer banks to part with numbers like that requires trust in their system and process.
Carbon is complicated. Marketplaces are complicated. Agriculture is complicated . So... although this round may not be a blockbuster we've seen from other marketplaces at $6.25m, kudos to Nori for grasping the hard pieces and for Paul deciding to step aside as CEO in the company he founded.
⦿ Last month, the American Banker covered an article on Why agri-focused fintech is sprouting, which had unmissable insight from some of the U.S. Banks. (You can view it for free but may need to register).
For example, Bremer Bank outlined how they are already customising some internal technology for ag customers. First National Bank of Omaha (FNBO) are fintech force in the U.S. and they seen a different opportunity: using social media as customer acquisition. This was interesting.
Finally, banking technology provider Nymbus is also working on Prospr, which is aimed at younger (under 35) and beginner farmers.
However, there is one line which I think we all agree on:
Agribusiness has complexities that go beyond general vendor solutions for consumers and small businesses
We are digitizing the supply chain by providing retailers with a mobile-based retail ERP system, one which includes point-of-sale, inventory management, order processing, purchasing, CRM, and business analytics capabilities.
⦿ I am envious of writers who can take topics and make them crystal clear.
One of my absolute favourite newsletters at the minute is Prairie Routes Research from Brenda Tjaden. It is absolute gold if you want an informed, no BS, practical view on valuing food and ecosystems.
That is everything for this week. I hope you have enjoyed this thought piece and do reach out with your own thoughts.
Welcome back and a special hello 👋 to our new subscribers.
The one area of promise I am most excited about at the intersection of finance, technology and business (including agriculture or any vertical) is embedded finance.
It combines a knowledge of financial services, technology and real life hindrances that can be solved using both the former. As I discussed in my recent post, Fintech is evolving and it is pointing in this direction and also gave a nod to some opportunities such internet of things, APIs and customised infrastructure which enable embedded finance.
However, we only see solutions and visions of embedded finance in the market through fintech goggles i.e. companies in fintech who have brought a specific set of solutions to market.
In this issue, I want to discuss what embedded finance looks like through a vertical viewpoint and not just fintech goggles. This gives me 5 things to think about when I look at the future of embedded finance.
Let's consider:
📰 Also, news and updates including:
⦿ E-Farm in Europe raise $$ but what do they do?
⦿ Nori announce change and funding
⦿ Major U.S. Banks share their thoughts on how they use tech in Agriculture Finance in an American Banker article
⦿ Some first principle insights from iProcure, on digitising the ag retail trade in East Africa.
⦿ Plus - don't snooze on this newsletter 👀
Embedded Finance
Firstly, what is embedded finance?
The best way to think of it is like John Deere Financial but for everything. John Deere is the host company and JDF, their captive finance company, offer finance (credit) at the point of transaction. 'Big deal!' I hear you gasp!
When you start to digitise workflows, many more transactions require finance to close out those jobs - not just equipment procurement - and so having finance 'embedded' in that workflow can get the job done quicker, arguably with better information using adjacent data.
Embedded finance is the sweetspot where digital workflows and digital finance go hand in hand, but the key thing is understanding those digital workflows first, understanding any financial friction (or other friction such as data, human capacity, trust, connectivity, controls etc) and finally what financial service could help resolve the financial friction and complete the 'jobs to be done'. 🤝
Embedded finance refers to embedded payments, embedded credit, embedded savings, embedded insurance or even embedded investments.
This overview from Bain is a 'go-to' resource and the figure below neatly sets out the value chain and actors.
Fintech Echo chamber
Act 1, Scene 1: Fintech Conference
Niall: Hey, so what do you do exactly?
Fintech co: We build embedded finance products for companies so they can build financial products for their industry context
Niall: Like what exactly?
Fintech: We can make card issuing and payments really simple for companies to use with their clients for their own context.
Niall: How would that work in Food and Agriculture say?
Fintech co: Well, we would speak to the company in that sector and then give them some card issuing and payments APIs for their context. Have this free pen. Goodbye.
Of course, 'Fintech co' here could be any company as this offering, while interesting and potentially relevant, has become crowded and undifferentiated.
A lot of the companies in this sector - specifically embedded payments - have developed fantastic rails to develop digital financial services and I don't doubt that their technology is amazing for payment API's or cards (physical or virtual).
However, finance at an industry level is more complicated and nuanced and banks are typically divided into specialist teams. I suspect working in Fintech, it is difficult to see what those sector specialists need.... so far.
This is one of the reasons I started writing about Agrifintech. So... even if your not an Agrifintech die hard, I think there are some fascinating insights into Embedded Finance from some of the propositions we've already seen.
Agrifintech propositions so far
In 2022, 52% of all funds raised for agrifintech were directly for embedded finance propositions with $788m invested into companies developing propositions, from a grand total of $1.5bn. Note: Propositions not infrastructure.
Embedded Credit is a major use case, both directly and indirectly via financing marketplaces. Risk management and market access have all featured heavily. Here are some examples:
⦿ Farmers Business Network (U.S.) have developed a growing empire of digitised business in agriculture retail, developed their own IP, have taken part in venture investing (e.g. Greeneye Technology) and have developed a captive finance company to go along side it. Credit and Insurance are two key financial products that they offer to enable their own ecosystem.
⦿ Sayurbox is a B2C food logistics platform serving 1m consumers across Indonesia and using 10,000 farmers to supply them. Their main offering to those growers is reliable market information (data) and market access (managing market risk through my own fintech goggles 🥽 ). The data insights these platforms can offer to lenders, buyers and sellers make them great resources for financial decision making.
⦿ As I discussed in this piece on Bushel and their Wallet product, payments are still important and definitely ripe for further exploration.
These are great examples and demonstrate a range of embedded services.
What really makes this interesting to me is how embedded finance starts to take shape and I think having a vertical viewpoint (versus Fintech goggles) raises some fascinating questions.
Vertical view point
As fintech starts to develop vertical propositions, these are some considerations.
🌀 Product design - Who will design a superior embedded finance product? Will it be sector specialists or fintech? Maybe a bit of both?
🔑 Industry bits and bobs - Context is key, so let's start to wrap our heads around it. I think the low hanging fruit of embedding with digital only businesses has already being plucked. The real world is tricky 😬. Which brings me to....
💡 Financial IP - this is an idea I want to develop further. Embedded finance is both transactional and strategic and somewhere on that continuum there is real intellectual property up for grabs, especially as we get further into the real world of bits and bobs.
💸 Investors - Industries are nuanced, including both Financial Services, Technology and Food & Agriculture. Where does embedded finance investment come from? We've all seen dud projects that don't work get funded by a different set of investors every few years. Also, there are great projects that don't get funded because they meander outside of core sector competencies.
🤝 Brands - are these aligned and how do partnerships work for both parties that don't leave brands exposed ? This thought was prompted by this post on LinkedIn from an industry veteran, which is well worth a look.
I certainly don't have all the answers here but these feel like a good starting point. Maybe you see other considerations? If you do, I hope you email me with your thoughts. 😀
I'll dive into these points in my next issue.
News
⦿ E-Farm, based in Hamburg, Germany, raise €11m Series B from investors including Claas to expand their agricultural equipment e-commerce platform.
E-Farm offer an actual buyer and seller led marketplace for equipment in Europe and two months ago crossed the €100m GMV mark (i.e. total transactions). This differs from TractorZoom, for example, who gather market data on auctions and dealership sales.
Providing payments and security for these types of payments has been essential to growing the business. Their largest transaction was for €485k! This impresses me as getting buyers, or buyer banks to part with numbers like that requires trust in their system and process.
⦿ Nori, raised some additional funding and the departure of their CEO (into Chief Product Officer, not from the company entirely).
Carbon is complicated. Marketplaces are complicated. Agriculture is complicated . So... although this round may not be a blockbuster we've seen from other marketplaces at $6.25m, kudos to Nori for grasping the hard pieces and for Paul deciding to step aside as CEO in the company he founded.
⦿ Last month, the American Banker covered an article on Why agri-focused fintech is sprouting, which had unmissable insight from some of the U.S. Banks. (You can view it for free but may need to register).
For example, Bremer Bank outlined how they are already customising some internal technology for ag customers. First National Bank of Omaha (FNBO) are fintech force in the U.S. and they seen a different opportunity: using social media as customer acquisition. This was interesting.
Finally, banking technology provider Nymbus is also working on Prospr, which is aimed at younger (under 35) and beginner farmers.
However, there is one line which I think we all agree on:
⦿ iProcure, which connects Ag suppliers with Ag Retail in East Africa, document the first principles nature of Ag Retail in East Africa.
⦿ I am envious of writers who can take topics and make them crystal clear.
One of my absolute favourite newsletters at the minute is Prairie Routes Research from Brenda Tjaden. It is absolute gold if you want an informed, no BS, practical view on valuing food and ecosystems.
That is everything for this week. I hope you have enjoyed this thought piece and do reach out with your own thoughts.
Please don't forget to subscribe and share.
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