Embedding FinTech Into Your Products To Increase Revenue with Immad Akhund, Mercury & Jon Fry, Lendflow

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When you're thinking about, like, what can I add that brings value to our customers? Increases arpu, increases retention. Embedding fintech starts to make a lot more sense, but only once you have some scale. Like, you're not going to do it from day zero.

I need some traction. You need some traction.

Let's get some traction.

Hey, what's up, innovators, entrepreneurs, visionaries and disruptors. This is your Traction podcast host, Lloyd Lobo. We're a community of over 100,000 people just like yourself, on a mission to help you get the methods, the money and the madness to explode your business growth. Featuring stories and tactical advice straight from those who've done it before, like Shopify, Twilio, Asana, and many more.

I think maybe where we should start is have both of you describe the companies you're representing here, because we're going to dig pretty deep into the adoption of fintech. But I think based upon what you both do, there's this kind of embedded fintech as a service movement that's happening. So I want to maybe have you guys describe what your company's doing. We'll go from there. John, you want to start?

Yeah, sounds good. So I'm a founder of Linflow. What we do is provide infrastructure, the technology for software companies to embed credit services into their products.

Hey everyone. I'm the CEO of Mercury. Mercury is a bank. We focus on providing banking services to startups. Unfortunately, only in the US right now, hopefully in Canada at some point. Apart from that, I'm also a prolific seed investor. I've invested in 250 companies, at least four or five that would be considered embedded fintech, including Landflow and Lithic and Tint and other people. So I'll try to give it from both a perspective of an investor as well as a user of embedded fintech at Mercury.

Yeah, important disclosure, but I think good to know. And then I think we should also disclose that you've already been pitched twice to bring Mercury to Canada, like on the way from the speaker room to the stage. So maybe stay tuned. I don't know, which is a good way to maybe try and tick off this idea of fintech adoption. I've been on various other stages across Canada talking about the idea that at Some point every SaaS company will become a fintech company. I think we've seen a movement towards that in the last year and a half. But I want to know what the compulsion is and I guess depending from your perspective, you can also talk about your customers and you're selling into and why they're looking to adopt. This is it just would be really cool taking 5% of payment processing fees from, from our customers. Is that fundamentally what it is or is there a broader narrative or motivation for that? Maybe John, start with you?

Yeah, sure. I don't think that's where you start. If that's what the goal is. I think you start elsewhere. You start with providing value to your customers to like improving your product, differentiating it, and you start there and you start with solving real problems that are happening, like reducing friction. It adds overall value to the product that you have and then what flows from that is that you, you're going to be able to earn revenue from that, but you start with a great experience and that drives the revenue, not the other way around.

For we've seen, yeah, I think the movement comes from the tools. Making it easier has a login to their B2B SaaS thing and then over time because of Stripe and other people, you are able to add subscriptions. There's like a stack of things that you can use as the tools to build a B2B SaaS company. And in the last like three to five years, embedding fintech has become way easier. So whether that's all of these people can now have a wallet on there or they can have a card or they can have lending services, the tools have enabled it. So now it's much, much easier to do it. It doesn't mean everyone should do it, but it does. When you're thinking about, okay, what can I add that brings value to this to our customers? Increases arpu, increases retention. Embedding fintech makes starts to make a lot more sense, but only once you have some scale. Right. Like you're not going to do it from day zero, probably.

Yeah.

And I think when we're going to talk a little bit about trust as a component of fintech, which I think most people tracking, particularly the Canadian fintech space, because we live in a oligopoly and it is very difficult for tech startups to combat the trust of our banking overloads and masters here. But I want to push back because this is traction and we like, to get like, really tactical with this. And I think if John came to you at the next board meeting was like, you know what, we're just making a better experience for our customers. This is really what we're about. I think you'd be like, show me the numbers. How much? Like, how are you increasing ltv, lowering cac? So is it, I guess, what is the pivot point for the decision? First, we can launch a new revenue line. If we add this feature. We, we have a customer base that's looking for this and will be a little bit stickier with them. How does this actually, like, function to lower cost of customer acquisition?

Yeah, I would say if you launch something and no one wanted it, then no one will use it. So you just wasted a lot of time on there. So you have to think about what percentage of your users will convert into this embedded fintech product idea that you have. And like, at the end of the day, you have to make something that people want, otherwise no one will use it. So I think it does hit all the points, right? Like, it will increase your retention. If people are using your product in a broader set of ways you're monetized, you will presumably convert more users to use you over competitors. So I think, like, from a very high level, like, it sounds good, but it also just needs to have a high enough conversion rate and actually be useful to your users for it to like, actually be a useful product to build. Which is, I think what, what John was talking about when he talks about build something that people actually want. I also think you can't just attach these things. Just, you can't just be, oh, people use this thing. Now there's a bank account attached to it and therefore I've succeeded. It has to be actually work really nicely with what your users need and how it works for them.

Let's dig into that specifically with Mercury, because if you go to the Mercury site, you will see you are not only listing out the kind of services provided, but like the partners that you are working with to provide that. It's a swath of logos. How much of that is the trust component of creating that? I know when we were doing our prep call, we were talking about the transitive property of trust and like how many more people are trusting your company because the people that you're working with.

Yeah, trust is like crucial to fintech. Right? Like, Mercury gives people bank accounts and when we first launched it in 2019, it would have been crazy for someone to put like their whole startup, like $10 million into a Mercury bank account. Now people do it all the time, thankfully, but it took a while to build up that trust. And yeah, some of it we get because we work with an FDIC insured bank and you get like some trust from that. So some of it we get because we have investors that like everyone respects. Some of it we get because we have other customers that people know and respect. So I think you have to build up that trust. What we were also talking about yesterday is that it's hard to launch a fintech service unless you've done that work to build up that trust as a SaaS company. People really use you all the time then and trust you. Then adding a new service, that's okay, you know, now I already use this thing all day long. I'm a dentist or something.

Or I'm happy to be more locked into this ecosystem because they're giving me value. Okay, John, is that how you see it? Because I know like when we were talking previously, I'm not like saying that like the trust is really a component of the CAC consideration, but you were telling me yesterday that you see it a slightly different way. Is that because of this space that you play in terms of lending or just your approach to customers or you just believe more strongly in the value of trust, perhaps?

I think the difference is, it's just the difference in the approach if you're embedding versus if you're just going direct to your customer. Because if you're providing an embedded solution, there's two layers of trust. Now with a bank, I think, also like trusting a bank, it's pretty well understood, like what a bank should do. It's pretty standard what is expected of a bank.

And the trust is almost like divorced from enjoyment of the service. We trust this to be terrible, but to still work kind of thing.

Yeah, exactly. It's pretty standard, like, all right, I'm going to put my money there and it's not going to walk away. That's the bar. And it may be hard to reach the level of trust and get those investors and get FDIC insured. When you do that though, like, you check the box and now you got it. And again, it's well understood with lending and embedded lending in particular, there's two layers of trust. You have to first go to a software company like Mercury and say, hey, you should offer lending and here's why, it's going to benefit your customers. And then your customers actually have to trust it as well. And I think lending is a little bit less well Understood. Especially SMB lending because people anchor off of things that are familiar to them. And most people haven't had as much experience with commercial finance. Maybe they had a mortgage like okay, well 3% over 30 years, that maybe that's what I'm used to getting. And the expectations for like what maybe the SMBs should be approved for are going to be maybe far off that. And so trust is built by on something that they may not understand because they may just tie it to the rates that their S&BS can receive and they may not be familiar with what those rates actually should be out on the real market of what SMBs are getting. So it's, it's just a couple more layers that makes it a little bit more complex to get there.

Yeah, I guess like fundamentally we should acknowledge here that talking about an industry that we're most of the product here so function quite well by obfuscating like what the fine print actually means to their consumers. How much of that are you. I think on the back end of this conversation we're going to talk about like for founders and companies looking to maybe adopt fintech, what they need to be thinking about in terms of some of the hidden speed bumps. But how much do you have to, given your customer base, look, look to educate them, be upfront with them, build trust through transparency.

Yeah, I think it's super important. That's how our platform is built. Just with the transparency. A lot of times these embedded lending programs, you don't know exactly what's going on and what your customers are going through. So foundationally we made sure that all that information was very easily accessible. Making sure that the rates and terms, not only what they are and what they're receiving, but also the why behind it. Because when you can really break it down in that way, then they can start to, it's like an education. Right. They can start to really understand that more deeply and understand the why.

And a differentiator. Right?

Yeah, that's right, of course, that too.

So I want to also just parse out this idea because I think we're going to really be talking mostly about embedded fintech, not only because of what you can both do, but when we were talking about breaking this conversation out, we were talking about like, okay, there's a decision about whether or not these companies should be looking to adopt fintech services. And once you decide to do that, it's like a build or buy component, which I think most startups in any sector. Are we going to outsource this? Are we going to White label it. Are we going to go deep to the Rails and build our own capabilities? Maud, you were like that can't really happen in fintech right now. Do you want to talk us through why buying or those partnerships are just a requirement right now?

Yeah, I was just saying that if you are not a fintech company and you're a B2B SaaS company or like whatever you are, it's very hard in fintech to go all the way to the Rails. You can think about if you want to provide a fintech service to your customers. There's four pieces to it. There's the, there's licensing piece, like what is the regulatory framework for it. There's the actual like compliance and regulatory software, things like that. There's a user facing component to it and then there's the actual like managing how this is going to work internally. And all four of those are things. And yeah, no one is building all four of those internally unless you're like stripe or something like that like at scale and you're fintech, you'll go build those for all end to end. But yeah, even all the banks in the US at least like they're not even building all this stuff themselves. They're yeah sure they have the license but almost everything else is outsourced to like other software companies. So I think most of the time you are, you are buying something to, to service all of this need. And one of the actual innovations that like Glenn Flow and other embedded fintech companies aboard is that they've packaged all four things into one service provider. So you can go to banking as a service provider or lending as a service provider and you don't need to go buy five different pieces of software and build your own team to do all of this stuff which has been like one of the big kind of disruptions.

Yeah. And again I got to note like the Canadian focus for this, it's actually like functionally impossible to get to the stripe level in Canada because we are still waiting on like real time Rails access or any, I don't know, functional open banking system that would allow just a straight up disruptor to come in and provide these services. We've seen tons of Canadian fintechs that are being majority acquired or partnering with the incumbents because they have no access to the services or there's a customer acquisition issue for the reason that we talked about. But what you were just describing when I was looking to break this out, when we talk about the FinTech stack, there's two components to this. There's the product stack, what actual services are being offered and. And then there was what I was trying to label and I'm probably wrong. So check me on this. The infrastructure track, which is like the back end of like how you actually facilitate these things. You noted that no startup is looking to build all these. Where are they looking to start? Like, where's the sweet spot? Where if we're going to get into this, it's do we want to be regulatory responsible or do we want to be more on the compliance side? Are we starting with a killer UX or a killer backend management system? Like when you're tracking this space, what would you recommend for companies here if they're looking to start? Maybe the, if not the path of least resistance, that kind of like MVP MVE thing to get some sort of traction. Oh, I just did a pun there accidentally.

I think it just ties into what is the unique value proposition you're bringing to the user. If the. If you're doing something unique and interesting in, I don't know how these people are approved, like you're serving some underserved segment, then you'll have to do a bunch of work around the underwriting and maybe some of the regulatory piece. A lot of innovation, at least recently has been on the UX layer. So like you'll do a bunch of work on the actual user experience and the product integration there and you'll outsource everything else. But especially when you're first starting out and it's not about maximizing margins and other things, it's just about is this even worth doing? You want to pick what is your thing that you're going to be uniquely providing and then innovate there and try to get someone else to do everything else? Probably.

Is there an expectation from an investment lens that the company that kind of starts there will eventually, over time, maybe 18 months or longer, then start building those other components and start to replace kind of their vendors with in house.

Yeah, where it makes sense. Like Shopify Pay still uses Stripe and they have some crazy scale so you would think they would replace them. They've kept using them. I think at the end of the day it probably ties to the experience you're delivering to users. Sometimes you can deliver a much better experience if you do it yourself. Sometimes if there's a good enough provider, you just keep using it.

Yeah. It's interesting you mentioned Shopify because like we just covered recently on Beta Kit, they just made a $100 million investment in Klaviyo, which means I Guess it's still maybe a preferred partner, a little bit of a second party component. But that is not on the infrastructure side. That's a little bit more on the product side, which I think where we can get John in. Because when we were breaking this down yesterday, like the product stack is probably first payments, like the last 10 years it's been a payments provider battle. Then there's cards. Cards are really big in Canada right now. If you're talking about like Float or Jeeves or any of the people that are just trying to provide small businesses, entrepreneurs with banking that they would expect in 2022. And then there's the traditional banking services, insurance. But John, you guys are in lending and there's a reason for that. I guess maybe two reasons. You want to talk about why you chose that as a sweet spot? Because I think it'd be revelatory to the people here. So like how you called the spot that you wanted to play in that space?

Yeah, for sure. I think it really comes down to that's where I had just more deep expertise. Right. That's the industry that I came from. And when you're in the industry deeply for many years, then you see ways that it can be done better. And I think that was particularly true of lending. I think over the past 10 years, especially the beginning of last decade, there was so much like hope and promise of bringing all this data and like online distribution, how it was going to totally disrupt and that happened. The unfortunate part is there wasn't a lot of barrier to entry and then a lot of the dreams of that, you leveraging that technology and all of this new data, a lot of that didn't really was, didn't. Wasn't able to happen.

You know, it's why Beta Gateway never got off the ground.

We just didn't have the train, it was not fully automated. It was really a big room of people processing those completely manually. Although the dream was cool and it like can be seen through and now that all these data APIs and all these new tech is becoming, it's been making all this data accessible so that you can really use it now there's the real opportunity to see that all the way through and like distribution channels that actually have a barrier to entry and actually have this data which is all these great new vertical SaaS, companies that are coming out and now's the time and now the tech is there and being in the space for so long, you see the opportunity and see all those angles. So that's where it stems from.

I Want to put a pin in the data thing for a minute and come back to it because it was definitely something I missed and maybe like them. But just digging into, like, when you talk about deep experience in the space, are you like, I know the players, I can hire a great staff and team. I can poach people from, like the lending side and come work at my crazy startup idea. Is it. I know the pricing hierarchy. Like, I know, like, how everyone's getting their nut on that. So I know where to price myself and put it in. Is it understanding the compliance relationship? Is it all of it or. Because I want to make sure that if there are companies here considering this stuff, they're not walking blind into an iceberg.

Yeah, it's easiest to do that. Maybe there's other easier areas, but it's particularly easy to do that in lending because it seems pretty straightforward, especially like SMB.

Easy to walk into an iceberg is what you're saying.

Yeah, exactly. It's easy to do that because it's like, easy to, like, convince yourself that, you know, it's pretty straightforward and easy to do. I think it's not. There's some of, a little bit of the three things that you mentioned, I would say more so just like knowing in depth, like all the final 20% of actually what goes in to issuing credit and all the road, all the roadblocks, all the blockers, all the other icebergs, like, as a lender that you can run into and when you see that through many different cycles and now we're in a cycle now those pitfalls and you compare for them all that hard work that you have to make easy. There's a lot of little things that go into issuing credit that are so important and all that add up. And if you're in there deeply, all of those things and you can, you can you, through technology, truly build it the right way.

Backstage we were talking about this work missing. We're not really talking about the customer here. And I want to surface it up. Would you say that you knew your target customer before you had customers in the space because of your history, because of that deep experience? You guys weren't guessing to find product market fit. You were just like, we got to go build this. Because I know we can serve these people because I worked in this space for a while and I just want to give them a better offering.

Yeah, we work closely with lenders, I think, because there's really two Personas that we work with, like financial services companies, lenders, and then software companies and so we work very closely with lenders and then we understood how much value could be provided if you could take those products and embed them in workflows, embed them in products where you have the data and you have the timing. Not only you know more about the company to assess whether they're credit worthy, but you also know when they need a product and like exactly what product would be the most useful for them. And having those insights, working with lenders and knowing about that timing issue which raises cost of acquisition and how that, how much that could be driven down and all the needs they had on the data side and how that could be solved through software, the data was generated there, I think was the insight.

I love that you said that because it's almost like you're reading my notes because that's a nice transition back to the data question. And I know if you're talking about increasing the ltv, lowering the cost of acquisition and things like that, particularly for companies that like have a customer base and they're looking to bolt on some financial services to, to capture that value, how much of the, how much of that is just like what we like. The money is good, the customer retention is good. But like having that data of our current customers and knowing them better is a component like I know to compare this. In contrast, I'm not sure how much Apple cares about actually being a credit card processor or like secretly becoming a bank and TV station and all of those other things, but they love having consumer purchasing data for their target demographic of like affluent people who are willing to spend fourteen hundred dollars on a phone. Is that something that, is that the motivator or is that the liquidity? I guess in terms of executing on this, I guess. Ahmad, if you could speak to that.

Yeah, I don't think it makes sense to embed fintech just to get a little bit more data on your customers. You can actually get that fairly well from something like plaid or from the existing thing. So I. People would think like financial data is super powerful and super hard to get, but it's not like that hard anymore. I think it would make much more sense for this to make a lot of sense for your product and business, et cetera. And the data is just a nice side effect that maybe you could build something on. Obviously if you're Apple, maybe you have slightly different considerations, but I think for most companies you want the primary driver for the primary driver to make sense. And if you do get better data on your customers and you can utilize that. So like probably a Nice to have.

Okay, let's go to those where those icebergs are at and I'm just going to say just to save on time because we've got about seven minutes. I am committed to getting you guys out of here to enjoy whatever networking and adult beverages you would like to enjoy. The regulatory thing, it matters in fintech. I will say this twice. For all the crypto companies here or in the United States, the regulatory component matters that out of the way. Let's go to some of those icebergs when it comes to costs because a lot of this can be not, hey, we didn't know that we were violating sec blah blah, blah, blah. It's more just we thought we could make a profit on this and then we've discovered that this is a huge cost vector to us. Ahmad, what are the two kind of, most obvious kind of hidden costs that like any company looking to bed, these fintech services should be looking out for?

Yeah, Mercury was my first fintech company before they had software companies. And software companies are a lot easier than fintech companies. A, you really have to provide much better support as a fintech company. Support. So if you have a B2B SaaS company and someone sends you an email, you respond in a couple of days, it's probably fine.

SaaS companies are proud if they like respond in a day that's like a.

Or even if you like ship something that's broken, yeah, you'll just fix it and it'll be fine. With FinTech the burden is like much higher. Like you need to respond quickly if someone's lost their money. Like you need to be on top of that. And people get really stressed about it on the other side as well. So there's a much higher expectation on support. And the other side is depending on what type of fintech there is, there's always going to be some fraud. So as soon as you're giving people money, holding money, taking money, letting them spend money, all of the money things, people will find a way to cheat it and steal money. And generally speaking, actually as the provider of the fintech service, it's normally on you. So you know, you integrate the fintech, that's sometimes the easy part. Like you still need to build out this kind of infrastructure for like fraud and there'll be a loss rate with that fraud.

So yes, if you chose to start on being responsible for the compliance side and then your like fraud detection isn't up to par, you might be running into trouble.

It's not, you'll just literally Lose money. Right. It's very easy to provide fintech services and like suddenly have a massive loss. So you. Yeah, it's, it does add up really quickly. You really need to factor that into that decision.

John, let's go to you because you had noted you have deep experience in the lending space and that gave you confidence to build out products in that area. But you've also noted before in conversation that there's more hidden complexity there than people might understand. Do you want to kind of walk through. Let's use you as a case study for companies looking to maybe jump into the space. What go from just walk through every. The workflow of your business in terms of what you need to know to run an effective company to provide this offering.

Yeah, I think you just need to know SMBs pretty deeply the risk factors with them. Obviously fraud being one of those, you have to pull in a lot of data. If you're doing a consumer loan, you're just looking at an individual and you're doing a fraud, a kyc, a FICO check. You do that for a business. Now you have multiple individuals that you need to do that for. You have all the entities those like individuals are related to. You also have the business itself made the cash flow of that business. They have one bank account, they probably have multiple bank accounts. Then you have their accounting data as well. So depending on the deal size, you may incorporate as. As well into it. Then you have any other. For some products, other affiliated companies with that business it comes. It's just a larger web of entities that you need to account for. And like Ahmad said it's, you know, your risk of loss is actually greater from fraud than it is for. From default. And I think little understandings like that when people go in they get really excited about the underwriting models and the credit and that's. It's important, it's important component but it's also the timing of delivering the right product and it's also the fraud risk as well. We've seen a lot come in and really focus on that one kind of more exciting part using all this new data and underwriting miss these other pieces and. And lose because of that. So those are a few areas.

I agree with that. I want to just take a step back and just when you're talking about the data, there's also a need to like partition the data you're collecting and not misappropriate. We just had Twitter I think settle because they. It was revealed that they were using consumer information, phone numbers, email addresses that are used to verify your identity, to run ad campaigns against, which is like a big whoopsie. But when you say I guess obviously fraud is a bigger risk factor. We've seen tons of companies in the US particularly and this is again a little bit more on the crypto lending side where the default component or if you want to do like real estate or I'm not going to name the companies but you probably all read about them where like the default component or their understanding of their margin or how versatile their customer was based upon maybe a very optimistic 2020 projection and hasn't proven true in the last two years. Can you walk through a little bit of the math of like what you need to backstop against to be viable?

Yeah.

The costs in the space are driven down just by companies like, like ours and like others in this space who are just like taking all that complexity and making it simple for them. So I think that's one thing you can do. That's how the costs are driven down and that's why more companies are able to do this. So partnering with someone who has the expertise is like a really great step that you can take to do that. So you can shortcut a lot of those things. You don't have to learn the hard ways. There's entire industries and like companies built around like defrauding, for example, there's. I could tell 10 different stories of how that's done. And so if you partner someone who's been there, then you get to shortcut a lot of that cost and you don't have to take do that and that what you're sacrificing there is going to the kind of the four pillars that Ahmad mentioned is you're sacrificing maybe some of the like you had mentioned before, if you go in and try something and partner with someone and it's working, you can just choose the components from there that's going to give you the same econs that you want. Right. And so like you don't. It's not one or the other. You can have it all, you just have to approach it in the right way. And if I think finding the right partner is a big part of that, it's not really a big incentive from the econ perspective. Like what other incentives are there for you? And you mentioned compliance and things like this. But again I think a partner solves that and then you can customize from there to still get what you really want, which is the best user experience and kind of the best econs on the other side as well.

So to me, to summarize, like what I'm hearing is like the move fast, break things, build as you go just doesn't work in this framework because if you don't have the end to end mapped out, you are going to be surprised at a very bad time.

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