Cross-border payments are overdue for improvements, according to the big California venture capital firm Andreessen Horowitz. 

“Though money predates software by 50 centuries, it is still much more difficult than software to move it around the globe,” the venture capital firm said in a report released Sept. 21. The Menlo Park, California-based firm headlined the report with an article asking the provocative question, “Software Transcends Borders—Why Not Money?”

The problem has multiple root causes, according to the article. Different countries have different payment preferences, payment rails and payment regulations. The problem requires a multi-pronged solution, the firm said.

That would include creating multi-country payment rails and expanding embedded payments infrastructure to more countries. Enabling businesses to open accounts in multiple countries; letting software handle “know your customer” and “know your business” in different countries; and fighting artificial intelligence-wielding fraudsters with cross-border payment security are also necessary, the firm said.

And the venture firm has a stake in the outcome. Andreessen Horowitz’s portfolio includes U.K.-based money transfer service Wise, global mobile-payment network provider Boku and Berlin-based global payments software startup Payrails. It also includes the digital payments firm Stripe, with headquarters in the U.S. and Ireland, and Dutch buy now, pay later provider Affirm.

Andreessen Horowitz, which also goes by the name a16z, has about $35 billion under management, according to the firm's website.

The venture capital firm is the latest organization to call for improvements in moving money around the world. The Society for Worldwide Interbank Financial Telecommunication; the international payments player ACI Worldwide; the Bank for International Settlements and the International Monetary Fund have also advocated for ways to improve cross-border payments.

Dive Brief:

• Marqeta, an Oakland, California-based fintech that provides virtual credit card services to commercial clients, has lined up Giftbit, Vivian and Whistle as customers of its embedded finance services, according to a Thursday press release.
• Giftbit, which allows businesses to offer incentives and rewards to customers and employees, will use Marqeta to provide “faster, more flexible, disbursement solutions to their growing international customer base,” the release said. Vivian Health, a healthcare jobs marketplace, will use Marqeta to issue cash rewards cards to participants in its VIP program. And employee loyalty platform Whistle will use “a digital, rewards wallet powered by Marqeta,” the release said.
• With the new ties, Marqeta will seek to “develop innovative payments offerings with embedded finance,” Marqeta Chief Revenue Officer Todd Pollack said in the press release.

Dive Insight:

Since taking over as CEO in January, Marqeta CEO Simon Khalaf has been pushing the company to move into embedded payment services.

“Embedded finance is very powerful because it gives companies extra revenue,” Khalaf told Payments Dive in a January interview. Khalaf aimed to provide clients with additional revenue during a year of economic uncertainty. Marqeta could do that by offering its clients a slice of the interchange fees that accompany transactions

More than half of new bookings for the first half of the year were embedded finance customers, a Marqeta spokesperson said by email. Marqeta’s Q2 bookings grew 60% over Q1, with embedded finance accounting for two-thirds of its bookings, the spokesperson said.

In the months since, the company has been on a turbulent path, acquiring Power Finance, cutting its workforce, closing and opening international operations and renewing a vital contract with Block.

Now that the Block contract is secured for four years, Khalaf can continue growing the embedded finance portion of the business. The spokesperson declined to provide details for the deals announced on Thursday.

“We continue to see tremendous opportunity for non-financial companies to embed payment and financial services into their solutions,” the spokesperson said in an email.

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By Payrix

The emergence of innovative financial tools and services in recent years has created a new age of embedded finance — a far-reaching movement that is shaping the future of digital commerce and creating new opportunities for revenue generation.

Embedded finance is the integration of financial services into other non-financial services or products. It’s not a new concept — in fact, it’s been around for decades in forms such as retail-branded credit cards, insurance coverage on travel plans, and financing services offered through auto dealers. The current generation of Embedded finance, however, offers the integration of financial services into the digital platforms we use daily. These now include services such as payroll solutions, lending services, insurance, and investing solutions.

Embedded payments create new value and revenue streams for software companies

One of the fastest-growing forms of embedded finance — for software companies especially — is embedded payments. Embedding payments refers to the integration of payment processing into existing software. For SaaS providers, it enables them to offer a more comprehensive experience supported by an all-in-one solution, removing the need for users to navigate through multiple systems to accept and reconcile payments. Instead, business users can manage payments all in one place. Software companies prioritizing their payments strategy have the benefit of unlocking new revenue streams, but can also elevate their value as a solution provider by offering a better user experience.

Within the next decade, embedded finance is expected to reach a global value of $7 trillion. According to PYMNTS, this is in part because “grasping the embedded finance opportunity promises to give businesses a competitive edge in engaging and retaining today’s digital-first customers.”

Thanks to the proliferation and accessibility of APIs, real-time communication makes it possible to integrate financial services with non-financial services seamlessly. According to an article from The Paypers, “That foundational API infrastructure has paved the way for rapid partnerships and lower-cost integration.”

Vertical SaaS providers are embedding payments to deliver more complete user experiences

Embedded payments have the power to transform software platforms into more complete operating systems that their users depend on to run just about every part of their business. As a result, an elevated user experience is one of the most notable benefits of embedding payments. And that’s why today, beyond using them as a strategic move to drive greater revenue, software companies are leveraging payments to assume greater control over the checkout experience and overall customer journey.

That level of control is particularly appealing to vertical SaaS companies that are focused on creating an ecosystem of solutions designed to address the unique needs within a particular industry. Rather than sending customers to third-party payment pages — where the user experience is largely no longer in the hands of the software provider — everything is kept within the interface they’re already using. This promises a more seamless experience that reduces friction at checkout, offers brand continuity, and increases engagement. 

Connecting to the partnership ecosystem delivers key growth opportunities

Embedding payments is all part of a growing trend among software companies to lean further into the partnership ecosystem. As vertical SaaS providers continue to engineer their offerings to more accurately and comprehensively address the industry-specific needs of their customers, they’ll further explore the opportunities for strategic partnerships with other SaaS or financial service providers. 

And as the partnership ecosystem expands and becomes more connected, Embedded payments will become the cornerstone of market differentiation in the coming years. Software companies with a clear vision for growth will continue to seek and build advantageous relationships with industry-leading embedded payments providers to add more value for their customers, create ideal user experiences, and ultimately drive greater acquisition.

Dive Brief:

• Recently appointed Stax CEO Paulette Rowe said the payments processing company aims to push further into the realm of embedded payments.
• Through the company’s payment facilitation offering, Stax sells its services to software companies that support specific verticals. While that offering was introduced three years ago, “that’s where we’re going to be putting even more emphasis than has been in the past,” Rowe said during an interview last week.
• Stax is adding 10 or more independent software vendor customers each year, Rowe said, without providing more specific numbers, and those ISVs present broader opportunity. “With each new partner, they’re bringing thousands and thousands of sub-merchants themselves,” Rowe said.

Dive Insight:

Rowe called the quiet January departure of co-CEOs and founders Suneera Madhani and Sal Rehmetullah a “mutual” decision between them and control investor Greater Sum Ventures. John Kristel, an operating partner at GSV, was named interim CEO before Rowe was appointed.

“The fact that [Suneera and Sal] went to the effort of welcoming me to Stax … indicates that there is no bad blood between the founders and GSV,” Rowe said.

Now, Rowe is pivoting to a new strategy. Payment facilitation services have become an increasingly attractive option for verticalized software companies looking to monetize payments by embedding that service into the software they sell to merchants. 

It’s an area of payments that legacy processors have recently jumped into to remain competitive with digital payments entrants such as Stripe and Adyen. Earlier this year, processor Global Payments launched a payment facilitation service geared toward independent software vendors. 

A number of payments companies have realized “that unless they make that step, there is that risk of disintermediation, particularly in the smaller end of the market,” said Rowe, who was named Orlando-based Stax’s new CEO on Aug. 1. She was previously CEO of the integrated and e-commerce solutions division at London-based Paysafe, which offers digital payments internationally.

“Larger companies are probably always going to want to source their payments support directly, but if you’re a smaller company, you don’t necessarily have the time or want to take the time to really understand the complications of the payments world,” she said.

In addition to its payment facilitator service, Stax offers payment processing for merchants, selling it directly to small and medium-sized businesses via a subscription model for processing. About 30,000 businesses globally use the company’s payment technology. 

To fuel success in the embedded payments endeavor, Rowe is betting on Stax’s collective software experience and GSV’s understanding of the independent software market. Rowe seeks to strengthen the company’s expertise in ISV payments and hone ideas about how to address the embedded payments market.

“Whilst there are more and more companies looking into this space, it’s still not, in my view, being done consistently very well,” Rowe said. Stax has “a real opportunity” because “we’ve got the backing of people that really understand this part of the market.”

Stax raised $245 million in investments last year, leading to its $1 billion-plus valuation. The company is profitable and aims to continue on a path of profitable growth, Rowe said. A spokesperson for the company didn’t immediately comment on payments volume or revenue last year. 

Since taking over as CEO, Rowe has appointed a chief commercial officer and a chief marketing officer, whom the company declined to name. Rowe said she’s considering making additional changes to the company’s organizational structure and plans to invest further in the company’s sales team. The company didn’t immediately comment on what that investment might look like. 

“We think we could potentially add more headcount on the West Coast versus continuing to expand our sales presence on the East Coast,” she said. Stax currently has about 300 employees.

Dive Brief:

• Bill-pay software provider Bill will try to scoop up more business directly and through other channels after financial software company Intuit called off a six-year co-marketing and embedded bill-pay partnership between the companies. Bill provides services for small and medium-sized business payments.
• “Intuit has decided to compete on payments rather than partner,” Bill founder and CEO Rene Lacerte told analysts during Thursday’s fiscal fourth-quarter earnings conference call. The tie ended in June and Bill’s executives expect their company to lose some clients as a result.
• Of Bill’s 400,000 customers, about 12,000 used its embedded feature in Intuit’s bill pay solution. “While we expect the majority of these micro businesses to churn over the next two quarters, we expect some of the larger businesses to become Bill direct customers,” Bill CFO John Rettig said during the call.

Dive Insight:

For six years, San Jose, California-based Bill had provided Intuit with an embedded bill-pay service within QuickBooks Online. In March, Intuit began offering a white-label bill pay service for QuickBooks powered by Bill rival Melio. 

Customers served through the agreement between Bill and Intuit made up less than 1% of revenue in Bill’s fiscal 2023, Lacerte said. As the market matures, more competitors are entering the space, but Bill aims to lead rather than follow, he said. 

“We believe there’s a much stronger opportunity for Bill to serve micro small business directly and through our strategic partner ecosystem with banks and accountants,” offering those customers more capabilities on Bill’s platform, Lacerte said during Thursday’s call.

 

Intuit will eventually discontinue Bill's embedded bill-pay service within QuickBooks, and QuickBooks is informing impacted customers about other options, an Intuit spokesperson said by email. Specifically, Intuit is starting to invite some customers to its own new QuickBooks bill-pay offering, with broader availability expected in “coming months,” the Intuit spokesperson said.

“Intuit QuickBooks is dedicated to expanding its platform and delivering new capabilities that support end-to-end money movement for our customers," the Intuit spokesperson said in the Friday email.

The latest news could be troublesome for Bill. “Given concerns from some investors around the potential for Intuit to launch a B2B payments offering and take share from BILL, there could be some headline risk from the announcement,” Goldman Sachs Analyst Will Nance wrote in an Aug. 4 note to investor clients. 

However, if affected customers stick with Bill, “there could be potential for BILL to earn greater economics from these customers, as there would no longer be a revenue sharing arrangement taking away some of the economics,” Nance noted.

Bill also said it expanded agreements with JPMorgan Chase and Bank of America. Bill reported a quarterly loss of $15.9 million, according to a news release. Revenue climbed 48% year-over-year, to $296 million.

In other recent news related to Intuit in the payments arena, PayPal’s incoming CEO, Alex Chriss, comes from that software provider. At Intuit, Chriss currently serves as the executive vice president and general manager of Intuit’s small business and self-employed group. He’s led parts of the business that included thousands of Intuit workers and millions of Quickbooks and Mailchimp customers, PayPal said.

Innovation in payments will charge ahead in 2023, though not in the same way it has in the past few years. With venture capital firms tightening purse strings and startups floundering, legacy players are likely to pick off some industry small fry.

Meanwhile, other fintechs may close down amid challenging economic conditions, including rising borrowing costs and the threat of a recession.

One new payments area primed to advance in any case is embedded finance, and specifically embedded payments — the practice of bundling payments with a service or product in a seamless sort of way. Companies across the spectrum are considering ways they can employ such tools and they’re likely to move beyond consumer uses to corporate applications as well.

The arrival of FedNow, the Federal Reserve’s real-time payments system, is also expected to spur not only more efficient payments, but also new rails for developing services and inspiring more startups in the industry.

While buy now-pay later mania has cooled since the COVID-19 pandemic fueled online use, it will continue to be a hot theme in the industry as it adjusts to in-store use and new regulations in the offing for 2023.

Meanwhile, regulators won’t be the only ones keeping an eye on consumer safety. Lawmakers and payments companies alike will join in a campaign to beef up cybersecurity in the arena amid the rise of digital payments.

FedNow on the way

There are high expectations for FedNow’s launch, which could come as early as May, with industry participants wagering it will super-charge the use of faster payments in the U.S. and spur innovations.

The new national system allowing payments of up to $500,000 to be made in seconds on any day and at any time may also allow the U.S. to catch up with other countries already speeding ahead with the technology.

The system will build on an existing private sector real-time payments network, RTP, begun by bank-owned The Clearing House in 2017. While RTP roped its big bank owners into the real-time fold, FedNow is aimed at luring more small- and mid-sized banks.

“In 2023, in the U.S., real-time payments will start becoming real,” said Sanjay Gupta, who heads the biller segment at payments company ACI Worldwide. Instant payments have been transformational in other countries, he explained. Now, U.S. companies, including ACI, are ready to make use of real-time payments too, Gupta said in an interview last week. 

More banks using real-time systems will mean more U.S. businesses have access to those services through their financial institutions and can increase the efficiency of their payments. 

As more companies adopt real-time payments, it will allow them to upgrade other aspects of their payments and finance infrastructure, Modern Treasury CEO Dimitri Dadiomov said in an interview this week.

While the service might seem pricey relative to automated, or ACH, payments, it’s less expensive than wire transfers and more efficient than check-writing, Dadiomov noted. Plus, over time as FedNow, The Clearing House and banks compete for real-time customers, the prices will move lower.

“All in all, I think it's going to be a pretty significant, if not the dominant type [of payment], in a couple of years,” he said of real-time payments. “I don't really think of cost as a big obstacle.”

Eventually, digital requests for payment are likely be a bigger part of the real-time realm too, Dadiomov said. RTP has “been kind of like a send-only way of using it,” Dadiomov said.

Needless to say, the rise of digital payments is also likely to boost business-to-business payments as companies realize the benefits of faster payments, especially in a high-interest-rate environment that increases the importance of holding money, Dadiomov said. Instant payments can also increase cost savings.

“Given the market environment, the main priority for people is efficiency,” Dadiomov said. Payments and operations in the office of the chief financial officer are key places where they can increase those efficiencies, he explained. 

Eventually, real-time payments will also improve cross-border payments, but that won’t happen this year, according to Dadiomov. 

Funding challenges won’t slow competition

Startup competition is unlikely to let up, even as funding becomes harder to secure. It will favor some areas over others though, with more interest in business-to-business (B2B) or infrastructure concepts, and less in consumer or cryptocurrency, payments players said.

Fintech infrastructure companies “will be in vogue,” said Sunil Singh, CEO and founder of card issuance fintech Tallied. “There’s still a lot of different parts of the economy that can benefit from, sort of, a technology upgrade.” 

Embedded finance and cross-border e-commerce hold promise this year, said Rob Anderson, a partner with San Francisco-based venture firm FTV Capital.

Startups have become more accepting of current valuations and a tougher economic climate, he said. “I think you’re starting to see that now flow through in people’s mindsets for 2023,” he said. 

Money is still there for early-stage fintechs, said Jordan McKee, a principal research analyst with 451 Research, part of S&P Global Market Intelligence. “The challenge is for those fintechs that are more mature,” and looking for significant funding, around $100 million-plus, McKee said. That’s where investors have become more skeptical, in terms of plans for profitability and scale.

Given venture capitalists’ pullback, collaboration between fintech startups and larger companies may accelerate in 2023, said Tom Zschach, the chief innovation officer at international financial message firm Swift.

After a period of so much capital and too many competing ideas, some startups will drop off too, he said. “But it also makes the survivors a lot stronger, and more focused, and they're going to have to create value faster,” he added.

Embedded payments on the rise

Consulting firm Bain & Company has projected the transaction value of embedded finance will reach $7 trillion by 2026. “We are seeing a big focus on embedded finance” this year, said Jodie Kelley, CEO of trade group the Electronic Transactions Association, in an email.  

A host of fintechs are pouncing on the opportunity to sell embedded financial services to software companies that haven’t monetized payments, said Maast CEO Tom Bell. Maast is a subsidiary of Synovus Bank, which sells banking and payments services to software providers. 

Investors have been attracted to embedded finance even as capital has become less plentiful. That’s because such businesses are able to scale without the capital a consumer-focused fintech might need, McKee said. 

“It's not about acquiring users one by one by one,” McKee said. “It's about selling into a large platform or a large technology company in accessing all of their customers through one relationship.”

Increasingly, the business-to-business realm is being drawn into the trend. Embedded payments has focused mainly on bundling products and services with payments for consumer use, but will move into a 2.0 stage where it picks up speed with respect to back-office business payments, said Extend CEO Andrew Jamison.

The next iteration of embedded payments is going to start to permeate business use of software like Intuit's Quickbooks and German software provider SAP payments, Jamison predicted.

BNPL matures under new pressures

Buy now-pay later will experience growing pains this year, as the industry faces shopping shifts, debt-saddled consumers and potential regulation. 

The installment payment providers, such as San Francisco-based Affirm, Sweden’s Klarna, Block-owned Afterpay, Australian Zip and Minneapolis-based Sezzle, are tightening underwriting as inflation bears down on consumers. 

They’re also grappling with investors pressing for profits over growth, and bracing for regulation following last year’s Consumer Financial Protection Bureau report on the industry.

Regulators are “behind the eight ball” when it comes to BNPL, said Capco Managing Principal Daniela Hawkins, but it’s under scrutiny now, as they realize consumers who struggle with debt management may overextend themselves.

Hawkins said she’s watching to see when interest rates and rising debt levels prompt consumers to cut spending, and how that will affect products like BNPL. “Will they fall out of favor, because the amount of consumer debt has become challenging?” she said.

Additionally, BNPL companies that benefited from the e-commerce surge are scrambling to beef up their brick-and-mortar usability with the return to in-person shopping.

“These players are going to have to figure out how to be easy to use in physical locations, otherwise they’ll find themselves stuck in digital channels,” said Jason Barro, founder of Bain & Company’s NPS Prism, a customer experience benchmarking service.  

BNPL’s quick maturity suggests it filled a need in the marketplace, but Aite-Novarica strategic adviser Thad Peterson and other payments consultants expect 2023 will bring attrition among BNPL providers. That’s likely to lead to consolidation in the industry, with some companies bought by others.

Deal-making revs up

Acquisitions are widely expected to increase in the payments industry this year as difficult economic conditions and less available venture capital lead to lower, more attractive price tags for businesses. 

In the first 10 days of 2023, one acquisition has already been announced with the Canadian company Nuvei saying it will purchase Atlanta-based payments integrator Paya for $1.3 billion. 

Also, Florida-based payments software company ACI Worldwide is reportedly considering a sale, according to news outlet Bloomberg.

Deals are likely to crop up across the payments landscape, among big and small players alike, and won’t necessarily lead to consolidation because some large companies may be on the cusp of divestitures too.

Investors owning shares in the mega payments processors Fidelity National Information Services and Fiserv are pressuring those companies to consider divestitures that could lead them to break off chunks of their businesses. The companies have declined to comment on those possibilities.

Large incumbents and private equity firms still have plenty of capital for acquisitions, even if smaller fintechs don’t, and that will drive an increase in deal-making this year, said Jamison, whose company sells virtual card and expense management software services. 

“Opportunities will arise for M&A to actually accelerate because there's still plenty of money out there in the ecosystem,” Jamison said. ”There's going to be some good technology out there available to purchase because a lot of fintechs will start to run out of capital,”

Young fintechs that find it difficult to raise their next round of capital may suddenly find themselves thinking about a sale, with larger peers waiting in the wings to snap up talent, technology and intellectual property. 

Jack Henry & Associates CEO David Foss has said his company is eager to make acquisitions once prices come down. Digital payments behemoth PayPal may also become acquisitive as activist investors push the company to jump-start financial results, Truist Securities analysts suggested in a report last week.

Beating back bad actors

With digital payments on the rise across all sorts of rails, from real-time to B2B to peer-to-peer, fraudsters and other criminals follow the money trail.

That’s why cybersecurity is likely to be an important trend this year too, as payments companies seek to prevent fraud and protect their customers. It’s not just companies taking up defenses. Regulators and lawmakers are seeking to increase safeguards too, especially in light of the FTX crypto exchange collapse.

“Cybersecurity is the area where people are going to continue to double down,” Jamison said.

There has been a proliferation of companies selling software and services for payments protection, from digital identity verification companies, such as Socure, and chargeback fraud prevention firms, including Chargebacks911.

The industry’s efforts to combat fraud have paid off, with card fraud declining for instance, but cybercriminals are evolving too.

“The people who are nefarious actors are becoming more and more sophisticated, using phishing, social phishing, a variety of things, taking over accounts,” Gupta said. “The area of security is an important theme, but I think it's becoming even more important this year.” 

Some payments players and software companies, including tech giant Google, have been advocating a move away from passwords to biometrics for years as a way to fight back. Nonetheless, biometrics as a payments method appears to be one would-be trend that won’t take off this year.