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In 2019, my colleague Matt Harris coined the term “embedded fintech” to describe how virtually all software-driven companies will soon embed financial services into their applications, from sending and receiving payments to enabling lending, insurance and banking services, an idea that quickly spread within the fintech community.
Vertical apps such as Toast for restaurants, Squire for barbershops and Shopmonkey for car repair shops will deliver financial services to businesses in the future rather than traditional, stodgy financial institutions.
The embedded fintech movement has just begun, but there is already a sister concept percolating: embedded procurement. In this next wave, businesses will buy things they need through vertical B2B apps, rather than through sales reps, distributors or an individual merchant’s website.
If you own a coffee shop, wouldn’t it be convenient to schedule recurring orders for beans and milk from the same software portal where you process payments, manage accounting and handle payroll? The companies that figured out how to monetize financial services via embedded fintech are well positioned to monetize through procurement, too.
Embedded procurement is the natural evolution of embedded fintech. The salon software company Fresha is a typical embedded fintech story. Fresha’s platform is an online and mobile platform specially designed for spas and salons, encompassing appointment scheduling, reporting and analytics, marketing promotions, and point-of-sale capabilities. The software is free for salons; Fresha monetizes through payment processing.
In the future, Fresha will undoubtedly turn to embedded procurement, becoming a logical place for business owners to order and manage inventory like shampoo, scissors, brushes and other supplies. In turn, Fresha can aggregate demand from thousands of spas to place orders with its suppliers, leveraging its scale to negotiate more favorable pricing on behalf of its customers. Borrowing a concept from the healthcare world, vertical software companies will become group purchasing organizations in every sector.
Point-of-sale systems are a natural foundation for embedded procurement. Lightspeed, a publicly traded point-of-sale (POS) company, announced the launch of Lightspeed Supplier Market in January, becoming the first POS platform to connect small and medium-sized businesses (SMBs) directly to suppliers. Several vertical payments platforms are rapidly growing in their respective domains: Toast for restaurants, Squire for barbershops, Slice for pizza shops and many more.
The embedded procurement opportunity significantly expands these companies’ addressable markets far beyond their initial payments revenue models. Embedded procurement may represent an even larger revenue opportunity: Inventory is the largest business expense after labor for most SMBs.
There are several reasons why it makes sense for businesses to procure their supplies through software: centralization and efficiency of using a single platform, price transparency, customization predicated on past order history and access to negotiated price discounts.
Beyond those advantages, a more subtle yet powerful benefit is in the synergy between embedded fintech and procurement. Clearbanc, a lender to e-commerce merchants, pioneered the concept of use-case-specific financing; a business deserves a different financing rate if the lender knows how the capital will be spent. Capital spent on acquisition marketing, for example, should be financed on more favorable terms than, say, capital spent on restocking the artisanal beer in the company fridge.
More broadly, if a software company knows the purchasing behavior of its customer — what, when and how they buy — that information can and should inform its financial services offerings. As an insurer, would you offer the same insurance rate to a medical practice that ordered state-of-the-art equipment versus one that ordered secondhand equipment? As a lender, would you extend a larger loan to a business if you knew the capital would be spent on popular inventory that always sells out instead of experimental new products?
Financing decisions are clearly enhanced by analyzing a company’s granular cash flows. Embedded procurement completes the circle: Software platforms with embedded procurement can see not only incoming payments from customers, but also detailed outgoing payments to suppliers (who, for what and when). Over the last couple of years, it became obvious that software and financial services are converging. Now it is clear that procurement is the third leg of the stool.
As this idea takes hold, a repeatable playbook is emerging for founders to execute: build user-friendly vertical business software and make it affordable to use; drive efficient distribution to become the core operating system for a large number of businesses; monetize through payments and other embedded financial services. But what’s missing? Embed a marketplace to allow aggregated buyers to order from and interact with their suppliers.
However, embedded procurement need not be the last component of a software platform. It could be the first. Some companies launch as marketplaces and work backward into business software or financial services.
Material Bank, a B2B marketplace for materials samples, is a good example. After establishing itself as the go-to destination for building materials samples, Material Bank built a new product called Material Desk with workflow and collaboration tools for architects and interior designers that is fully integrated with its material sampling service. Paris-based Ankorstore is building an online wholesale marketplace for European brands and retailers to transact, similar to Faire in the U.S. The keys to Ankorstore’s rapid rise are the business management and financing tools built into the marketplace experience.
Innovative startups and large enterprises alike are implementing embedded procurement. In the latter case, third parties are emerging to help large institutions “turn on” marketplaces.
France-based Mirakl helps distributors, wholesalers and B2C retailers to seamlessly embed third-party marketplaces on their websites, opening up a long tail of inventory. Aper, a Miami-based startup, flips embedded fintech on its head. Starting in Latin America, Aper enables financial institutions to sell general merchandise from an established network of suppliers.
Last year, a16z partner Angela Strange popularized the notion that “every company will be a fintech company.” In the next evolution of vertical software, perhaps every company will be a marketplace, too.
Bain Capital Ventures has invested in Mirakl and Material Bank.
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