FTV’s Robert Anderson and Kyle Griswold on Embedding Finance into Vertical Software to Generate Happier Customers

Over the last two decades, FTV has invested in numerous companies that drove the transition from cash to digital payments. More recently, we’ve witnessed how digital payments coupled with vertical software can turbocharge business growth, especially for small and mid-sized businesses (SMBs), which are a large driver of the U.S. economy representing 44% of domestic GDP.

This integration has helped millions of business owners across hundreds of sub-sectors – from salons and spas to hospitality and restaurants to nonprofits – manage their operations, enhance user experiences and collect payments faster and more efficiently all in one place.

Now, we see vertical software companies going a step further to integrate other financial products their clients need, like payroll, accounting, lending, insurance and banking.

As vertical software and embedded finance become more and more entwined, the companies that succeed at this integration share one common principle: they put their customers first. They don’t just embed financial products to generate new revenue; they also listen to their customers and seek to support them during every step of building their businesses.

Partners Robert Anderson and Kyle Griswold lead FTV’s vertical software and embedded finance practice, backing founders who seamlessly combine these two areas to drive growth. Here are their thoughts on this unique market opportunity.

#1 | What’s most exciting about investing in vertical software and embedded finance?

Robert: In the last five years, SMBs across almost every sector have embraced software to better run their businesses. But while we’re seeing rapid adoption of business management software, especially as it gets better and cheaper, there’s still a lot of pen and paper, Excel and manual processes out there. By bringing together software and embedded finance, companies are more effective in helping their end-customers successfully run, manage and grow their businesses.

This elegant and complementary pairing of vertical software and embedded finance rivals some of even the best duos – given the two just belong together and make each other better. Payments is often the natural place to start the embedded finance journey because all businesses need to accept payment for their services. But as SMBs grow, so do their needs for other embedded finance capabilities such as lending, payroll, banking and insurance. Businesses ideally want one integrated platform to not only manage all their day-to-day operational needs but also their financial solutions.

At FTV, we find the intersection of vertical software and embedded finance so compelling because it creates happier, stickier and more prosperous clients – and for the companies in which we invest it makes them that much more successful.

#2 | What is something founders and investors often overlook about this space?

Kyle: Sometimes technology founders and investors overlook the opportunity for integrated and embedded finance entirely, and we’ve gotten pretty good at mapping out various vertical markets to identify and assess where strong opportunities exist. Particularly when you find a mission-critical software application that is either the practice management solution or system of record, there is almost always an opportunity to embed a financial product that would enhance customer value. To ensure the ease of attachment and integration, it is important to embed that product into the flow of a transaction and close to the point of sale. You also need to think through the client value proposition. Does this lead to a better outcome for them and their end customers through better bundled pricing and/or a better integrated experience? Does it create a one-stop shop?

Once you’ve mapped everything out strategically, it takes expertise in both technology and financial services to successfully pull off the execution. While great entrepreneurs and technologists may intimately understand their vertical market and build elegant software, they don’t necessarily understand the ins-and-outs of working with financial products or financial institutions. This is something we know well given our relationships with leading financial services firms in FTV’s Global Partner Network and our 25 years of collective experience investing in financial technology, payments and software.

#3 | What are the characteristics of a great investment in this space?

Kyle: We tend to like large, fragmented vertical markets demonstrating steady adoption of business management software with an existing (although often underappreciated and underpenetrated) opportunity for digital payments and embedded finance. Many of these vertical markets are larger than they appear at first glance. We also look for experienced teams, strong product leadership and a deep understanding of specific end-market customer pain points. The best vertical software companies remain laser-focused on solving their customers’ day-to-day problems by thoughtfully targeting client profiles and exhibiting high time-to-value and ease of use in their products. This customer focus helps these software companies successfully integrate payments and embedded finance. Aligning the right targeted client expertise alongside a compelling product value-proposition is a winning combination and affords the opportunity to cross-sell additional payment, lending and insurance products.

#4 | What are your predictions for where this market will be in five years?

Robert: For SMBs around the world, verticalized business management software and digital payments are becoming increasingly ubiquitous. While still in the early innings, over time we expect the vast majority of vertical software companies that can offer payments will, which is the gateway to embedded finance. This means that vertical software and embedded finance will be used by most of the SMBs we interact with daily – our favorite restaurants, the music and sporting events we attend and the contractors and other service professionals we regularly do business with. But it won’t stop there.

In a similar fashion, we expect to see a growing adoption of vertical software and embedded finance addressing business-to-business (B2B) payments use-cases, bringing together data and workflow automation, while improving financial reconciliation and speed of payments between buyers and suppliers. The next five years are bright for vertical software and embedded finance as awareness and adoption continue to accelerate.