Embedded finance is already here - what comes next?

In the last few years, we've seen the number of Israeli fintech companies increase, resulting in giants like Melio, Pagaya, Payoneer, and Next Insurance; and with that success, the inevitable growing investor appetite. At the same time, traditional financial institutions are undergoing slow but ambitious digital transformation to keep pace with the proliferation of emerging new companies.

This fintech boom is not going unnoticed outside of high tech - e-commerce, restaurants, retail, even car dealerships are more aware that wherever there is a potential transaction, there is an opening for inventive and efficiency-driven fintech solutions.

Pavel Livshiz of Hetz Ventures.

We can say fintech is “eating the world”, with embedded finance poised to take center stage. According to some estimates, the value of the embedded finance market is expected to exceed $7 trillion in the next decade. The time is ripe for all parties involved in financial transactions - financial institutions, businesses and end-users - to embrace the combined benefits of embedded finance, including payments, lending, and other financial products and services.

Embedded finance is integrating a financial solution, like payments, lending or insurance, directly into a business’s infrastructure. It offers any type of financial product at any relevant point of sale, bypassing separate or traditional ones. Not only does this streamline processes for customers, but helps enterprises or institutions tap into additional revenue streams, already at their fingertips.

You’ve already used embedded payments when paying with your smartphone for Starbucks coffee or Uber rides. How about embedded insurance when buying a new car: Instead of calling an insurance broker to secure a policy before driving off the lot, it makes more sense for both buyer and car dealership to secure it at the point of sale (Tesla and other car manufacturers take this further with real-time insurance based on driving behavior).

There are major implications for B2B, as well. Take business loans: The rejection rate of a small business loan requested from a U.S. business owner’s existing bank is around 80%, according to the U.S. Federal Reserve. It’s hard enough to build a restaurant, e-commerce presence, or gig economy business - now these business owners have the headache of chasing bank after bank to find that eventual loan. That’s because the bank or entity may not know how to underwrite these types of businesses, the unit economics don’t work, or they just don’t provide that specific product.

But as an SMB, it’s most efficient to stay with your existing community bank. By offering more options for existing customers, banks create more opportunities for engagement, reduce churn, and avoid turning away customers towards standalone (and perhaps, unproven) fintech solutions. With embedded lending, there’s an incentive for all sides - legacy institutions, young fintech startups, end customers - to operate in a seamless process, in the same environment.

During the last couple years at Hetz Ventures, we’ve proactively sought investments in embedded payments and lending and are proud to work with founders on this. I’m a big believer in advancing these solutions, and it’s encouraging to meet the next embedded finance founders here in Israel. If you're one of them, reach out.

Pavel Livshiz is a General Partner at Hetz Ventures.