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Three years ago, a vertical SaaS company adding a payments feature was a novelty. Today it’s table stakes. The embedded finance wave has moved past hype into something more consequential: real companies processing real revenue through financial products that didn’t exist in their category three years ago.
We’ve watched this from a front-row seat. Several companies in our portfolio are infrastructure providers — the pipes that make embedded finance possible. And the demand they’re seeing from software companies wanting to embed financial products has grown faster than most of their original models projected.
Two things converged. First, the Banking-as-a-Service layer matured. Compliance complexity, sponsor bank relationships, and card program infrastructure that used to require 18 months and a team of specialists can now be accessed through an API. Second, software companies realized that financial products are sticky in ways that software subscriptions are not. A customer who runs payroll through your platform, or whose employees spend on your issued card, churns at a fraction of the rate of a pure SaaS customer.
The unit economics case is strong. In our experience, companies that add even a single embedded financial product — a card program, a lending feature, an insurance offering at checkout — see average revenue per account increase by 2x to 4x. That kind of lift on existing distribution is rare. When we see it, we pay attention.
It’s not just the obvious candidates. Yes, gig economy platforms embedding instant payout have been at this for years. But we’re now seeing:
The common thread is distribution. These companies already have the customer relationship, the data, and the trust. The financial product is an extension of an existing workflow, not a cold acquisition play. That matters enormously for underwriting and for conversion.
None of this happens without a reliable middleware layer. Card issuance, bank account opening, ACH, real-time payments, KYC, lending origination, insurance placement — each of these is a regulated activity that used to require direct bank relationships and compliance infrastructure. The BaaS platforms that emerged over the last five years commoditized that access.
But “commoditized” is the wrong word. The differentiation has moved up the stack. The technical API is table stakes. What software companies actually need is a partner with deep enough regulatory expertise to navigate sponsor bank requirements, help structure programs that pass OCC scrutiny, and support the compliance function as the product scales. That’s where the real moat sits now.
The software company that embeds a card program isn’t becoming a bank. It’s becoming a distribution channel for a bank. The distinction matters for how regulators see it, how liability flows, and how you structure the economics.
Regulatory risk is real and underappreciated. The CFPB has been clear that embedding financial products doesn’t transfer regulatory responsibility away from the software company. If your platform offers credit, your customers have TILA rights. If you hold customer funds, even briefly, BSA/AML applies. Many software companies moving into this space are still operating on the assumption that their BaaS partner handles all of this. They don’t.
We’ve seen deals die in due diligence because a promising embedded finance revenue line was sitting on a compliance framework that wouldn’t survive regulatory scrutiny. The companies that are building this correctly are investing in compliance infrastructure early — not treating it as a cost center to minimize, but as a competitive advantage that protects the revenue they’re building.
Three dynamics we’re tracking closely as this market develops:
First, bank sponsor concentration. A meaningful portion of BaaS-enabled products in the US run through a very small number of bank sponsors. That concentration creates systemic risk. When one sponsor bank tightens its program criteria or exits the market entirely, it creates a scramble. We want to back companies with diversified sponsor relationships or those building the infrastructure to make sponsor diversification easier.
Second, vertical specificity. Generic embedded finance platforms are facing margin pressure. The opportunity is in vertical-specific programs where the data advantages from an existing software relationship translate into better underwriting, lower loss rates, and pricing power. A fleet management company offering credit has information no traditional lender can access.
Third, international expansion. Embedded finance infrastructure in the US is several years ahead of Europe and dramatically ahead of Latin America and Southeast Asia. The cross-border opportunity — and the complexity — is substantial.
The embedded finance category is still in early innings. The software companies that move thoughtfully — with real compliance infrastructure, real bank partnerships, and real data advantages — are building something durable. The ones treating financial products as a quick revenue add-on are creating problems they haven’t accounted for yet.
Building embedded finance infrastructure? We’d like to hear from you.
