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1、uncommon senseTMOpportunities for ERP and payroll SaaS providersEmbedded Finance02|OC&C Embedded FinanceEMBEDDED FINANCE IS A MATERIAL OPPORTUNITY FOR SAAS ERP AND PAYROLL PROVIDERS.OC&CS RESEARCH SUGGESTS THAT AN EBITDA UPLIFT OF 20-30%COULD BE ACCESSIBLE ON A 2-3 YEAR TIMESCALE,WITH A MUCH LARGER

2、OPPORTUNITY AVAILABLE IN THE LONGER TERM.We believe that a new generation of specialist embedded finance providers can offer rapid time-to-value and a proposition that allows you to keep full control of the customer relationship and workflow.Wed encourage you to take this opportunity seriously.In th

3、is paper,we aim to provide a short briefing on the opportunity.We will outline:1.How the Embedded Finance value chain works in ERP and Payroll and in particular how it now enables ERP and payroll software players to offer valuable financial services to customers with very low friction and no regulat

4、ory exposure.2.An overview of embedded finance products with most traction today.3.A worked example showing how a 20-30%EBITDA uplift is available on a 2-3 year time frame and an illustrative view of how transformational EBITDA uplift might be achievable over time something that has already been ach

5、ieved by some vertical software players(e.g.Toast in US Hospitality).4.Your potential options to move ahead and capture the opportunity.OC&C Embedded Finance|03EXHIBIT 1:EMBEDDED FINANCE VALUE CHAIN IN B2B SAAS The Embedded Finance value chainTHE VALUE CHAIN FOR EMBEDDED FINANCE IS TYPICALLY COMPOSE

6、D OF THREE STEPS,FROM THE END CUSTOMER(SUCH AS AN SME)TO A FULLY REGULATED FINANCIAL ENTITY,TYPICALLY VIA A SOFTWARE PLATFORM(E.G.ERP SOFTWARE)AND A FINANCIAL SERVICES ENABLER.We note that more financial services enablers are moving towards getting full banking licenses(e.g.Swan.io in France)and ban

7、ks are launching own Banking as a Service(BaaS)platforms to provide embedded finance experiences(e.g.NatWest bank launching Boxed).The implication for SaaS providers is that provision of financial products is becoming increasingly straightforward and does not require building in-house fintech capabi

8、lities.End User/CustomerSMEs Users of SaaS application e.g.ERP and potential buyers of financial products.Fragmentede.g.shops,restaurantsSoftware PlatformB2B SaaS VendorsCloud-enabled SaaS provider and owner of customer relationship and customer journey.We are focusing on ERP and payroll software pr

9、oviders in this paper.Financial Services EnablerMix of Regulated and Unregulated EntitiesVaried eco-system of providers enabling the integration of financial products into non-financial customer workflows.Mix of regulated and unregulated entities,with the former able to issue financial products dire

10、ctly(e.g.via own banking license).Includes multiple activities such as onboarding of customers,compliance services,provision of technology layer and issuing of licensed financial products.Embeddable SolutionsAPI-enabled Banking04|OC&C Embedded FinanceEmerging Embedded Finance productsFINANCIAL PRODU

11、CTS CAN BE EMBEDDED THROUGHOUT ERP AND PAYROLL SOFTWARE WORKFLOWS.ERP:we see several touchpoints for embedded finance in the typical ERP software workflow,starting from the automation of domestic and international payments for accounts payable and accounts receivable(e.g.via a Pay Now button),the is

12、suing of company cards to track and monitor expenses(e.g.for international travel)and providing access to financing opportunities via loans(e.g.pre-approved business loans)and invoice factoring.EXHIBIT 2:EMBEDDED FINANCE IN ERP AND PAYROLL WORKFLOWS Payroll:the typical payroll software workflow also

13、 presents several opportunities for embedded finance,particularly around the processing of international payments(e.g.via localised bank accounts or facilitated international transfers),earned wage access,payment of temporary and hourly workers and management of employees perks and benefits(e.g.via

14、prepaid cards).ERP Software WorkflowsPayroll Software WorkflowsPayments Processing&Monitoring Accounts payable automation Accounts receivable automation (e.g.Pay Now button)Subscription payments International transfers/paymentsFinancing Business loans Invoice factoring Working capital loansExpense T

15、racking Company expenses cards(e.g.for travel)Online marketing spend(via ad-hoc cards)Workforce Management Payroll payments automation Earned wage access Paying unbanked/temporary/seasonal workers Localised bank accounts International transfers/paymentsEmployee Benefits&Rewards Employee perks(e.g.vi

16、a pre-paid cards)Automated reward schemesOC&C Embedded Finance|05Whilst there are likely many other financial products with the potential to be embedded into software workflows(e.g.business insurance),we decided to focus on company cards,business loans and international transfers automation for our

17、modelling.These products are currently seeing more traction,with multiple examples of successful deployments.The typical set-up and economics for the products listed above are as follow:Company Cards:typically three sources of revenue which are shared by the members of the value chain(SaaS vendor,fi

18、nancial service enabler,financial institutions):Monthly flat fee per card user (e.g.10/month)Revenue generated on interchange rate(which is not capped in UK and EEA for business cards)Interest generated on funds deposited on the card(for debit cards only)Business Loans:revenue share on the interest

19、fee charged to the end user which is then shared between the BaaS provider and the SaaS vendor International Transfers:revenue per transaction,with margin shared by the members of the value chain(SaaS vendor,financial service enabler and international payment enablers e.g.Mastercard)Cost to play:The

20、 costs to a SaaS provider to offer embedded financial products mainly revolve around three areas:Recurring fee paid to financial services enabler typically in the 1000-3000 range/year Technical integration upfront development costs during launch phase to embed the financial products in the user expe

21、rience (but limited ongoing development after)Customer service/training to provide first line support to end customers who purchase financial products(e.g.if a card payment is declined)Our research suggests cost to play is c.30%of incremental revenue generated through embedded finance products.These

22、 costs are mostly fixed or semi-fixed and therefore likely to benefit from scale,as the customer attachment rate increases.Our research suggests cost to play is c.30%of incremental revenue generated through embedded finance products.06|OC&C Embedded FinanceWE BELIEVE THE SIZE OF THE OPPORTUNITY TO B

23、E MATERIAL,POTENTIALLY LEADING TO A 20-30%EBITDA UPLIFT FOR AN EMBEDDED FINANCE PROPOSITION DEPLOYED AT SCALE.Estimating EBITDA uplift for selected Embedded Finance ProductsOC&C Embedded Finance|07Below is an illustration of the potential EBITDA impact on a hypothetical scale B2B SaaS company,with s

24、ome conservative assumptions on revenue share distribution,attachment rate and cost to play.We used an illustrative B2B SaaS provider with assumed revenue of 100m,30-40%EBITDA margin and Average Spend/Customer of 2000/Year.Our calculations suggest a potential 20-30%EBITDA uplift for an embedded fina

25、nce proposition deployed at scale taking average annual spend values for UK SMEs on Company Cards,Business Loans,and International Transfers,with conservative assumptions on revenue share,attachment rate and cost to operate.Our estimate is likely conservative as it does not include benefits from oth

26、er factors such as increased customer retention from providing more mission critical services(e.g.financing).It is possible to obtain a significantly larger EBITDA uplift with a larger number of embedded financial products,a higher attachment rate among end customers or a higher revenue share for th

27、e B2B SaaS provider.The sensitivity table below shows EBITDA uplift with varying belief conditions on revenue share distribution and attachment rate.An EBITDA uplift of 50-55%is possible with 70%revenue share in favour of the SaaS provider and a customer attachment rate of c.15%.EXHIBIT 3:EBITDA IMP

28、ACT ILLUSTRATION BASE CASEEBITDA Opportunity by Embedded Finance Product,(m)Example B2B SaaS CompanyEBITDACompanyCardsBusinessLoansInternational TransfersEmbedded Finance EBITDA Uplift30-403-4c.22-340-50+20-30%Our estimate is likely conservative as it does not include benefits from other factors suc

29、h as increased customer retention from providing more mission critical services.Key Assumptions for Illustrative B2B SaaS ProviderCompany CardsBusiness LoansIntl TransfersRevenue()100mEBITDA%30-40%#of Customers50kAverage Spend/Size6k/card/year25k75kAverage Interchange Rate/Interest/Fee1-2%4-6%1-3%Re

30、venue Share for SaaS Provider50%50%50%Attachment Rate10%10%10%Cost to Play(%of Revenue Share)30%30%30%Source:Expert Interviews,CapIQ,OC&C analysis.08|OC&C Embedded FinanceEXHIBIT 4:EBITDA IMPACT ILLUSTRATION SENSITIVITY TABLEThere are examples of SaaS businesses(mainly in vertical software)achieving

31、 material incremental revenue and profit through financial products.For instance,Toast a US provider of PoS software and systems for restaurants generated c.80%of FY22 revenue and gross profit through finance technology solutions,including payments processing and business loans.In addition to bottom

32、 line impact,we believe there are other reasons for which ERP and payroll providers should be interested in embedded finance(though these have not been explored in detail for the purpose of this paper):1.Increased customer retention as enabling the delivery of financing and banking services widens t

33、he set of mission critical services offered by SaaS providers.2.Potential to add value to value chain participants with proprietary data as ERP and payroll providers have often access to unique insights about their customers which could be used to create tailored financial products.3.Ability to capt

34、ure even more data as typical embedded finance customers journeys remain captive within the SaaS application.Revenue Share for SaaS Provider30%40%50%60%70%Customer Attachment Rate5%7%9%12%14%16%10%14%19%23%28%33%15%21%28%35%42%49%20%28%37%47%56%66%25%35%47%59%70%82%30%42%56%70%84%98%OC&C Base CaseOC

35、&C Embedded Finance|09Accessing the Embedded Finance opportunityIT IS POSSIBLE TO GET GOING RAPIDLY TO TACKLE THIS OPPORTUNITY,WITH PARTNERSHIPS PRESENTING AN ATTRACTIVE ALTERNATIVE TO BUILDING CAPABILITIES IN-HOUSE.We note several scale B2B SaaS providers are taking action and building embedded fin

36、ance capabilities organically and inorganically:Xero,the Australia-based accounting software provider,enables customer to embed a Pay Now button in their invoices which is linked to international payment providers(e.g.Stripe)and supports mobile payments(e.g.Apple Pay).CloudPay,a rapidly growing inte

37、rnational payroll provider,is enabling temporary and hourly workers to access their earned wage earlier through its NOW service;access to CloudPay NOW is also offered as an employee perk in partnership with Perkbox.International HCM&payroll provider IRIS Software Group is partnering with fintech pro

38、vider UNIPaaS to offer embedded B2B payments to its customers.10|OC&C Embedded FinanceEXHIBIT 5:EMBEDDED FINANCE LANDSCAPE IN UK&EEA Partnerships with Financial Services Enablers present an attractive alternative for scale B2B SaaS providers to get going rapidly,with a few important advantages inclu

39、ding:No need to acquire/build a business with a fundamentally different business model(e.g.a lending provider).No balance sheet risk.No need to build pipes into banks and other financial institutions.Regulatory hurdle taken care of(e.g.banking license).For instance,Xero cited differences in business

40、 model as one of the reasons for selling lending platform Waddle to Commonwealth Bank of Australia in 2023.However,several potential endgames are available,each likely to require a tailored strategic approach.For example,a major ERP software provider for SMEs could aim to provide fully embedded bank

41、ing to its customers together with a regulated entity/bank Sage and Tide appear to be moving in this direction with their partnership.If partnering with an external provider is the preferred approach,then multiple options are available across the UK and EEA.The competitive landscape for BaaS/embedde

42、d finance providers is still relatively fragmented,and rapidly evolving.We see players distinguishing along two main dimensions:1.Build-your-own solution vs ready-made solutions.2.Customer ownership with customer owned by either the SaaS provider or the financial institution(with SaaS platform provi

43、ding referrals).We note players exist in each of the resulting boxes,with the picture below showing examples of players active in UK and EEA.Build-Your-Own Financial SolutionReady Made Financial SolutionsSaaS platform owns the customerJourney is fully embedded in SaaS workflowBanking-as-a-ServiceFul

44、ly Embeddable Financial SolutionsPartner owns the customer(e.g.BaaP)SaaS partner provides referralsBanking-as-a-PlatformAPI-enabled Standalone Finance SolutionsOC&C Embedded Finance|11CASE STUDYWEAVR IS ONE OF FEW PLAYERS PROVIDING READY-MADE EMBEDDED FINANCE SOLUTIONS LICENSED FOR BOTH THE UK AND T

45、HE EEA.OC&Cs friends at Weavr provide white-label ready-made embedded finance products for SaaS providers to integrate into their ERP or Payroll interfaces.The business primarily partners with horizontal and vertical software providers,with 100+current SaaS customers.Weavrs proposition is centred ar

46、ound Financial Plug-ins designed for specific embedded finance use cases such as Accounts Payable,Expense Management,Employee Benefits and Earned Wage Access.Key characteristics include:Operates with financial partners licensed in the UK and in the EEA.Required banking capabilities are included with

47、 each Plug-in,preventing the need for additional contracts between the SaaS provider and financial institutions.Bundled compliance services,pre-empting the need for specialist compliance technology(e.g.data security,financial crime).Availability of non-financial add-ons tools to enhance Financial Pl

48、ug-ins including go-live activation,customer support tools and data insights.1.The B Corp certification does not extend to our alliance with Advisia OC&C Strategy Consultants in Brazil.OC&C Strategy Consultants 2024.Trademarks and logos,including Uncommon Sense,are registered trademarks of OC&C Stra

49、tegy Consultants and its licensors.OFFICESBelo Horizonte1BostonHong KongLondonMelbourneMilanMunichNew YorkParisRotterdamSo Paulo1ShanghaiSydneyWarsaw uncommon senseTMOC&C can help you navigate key strategic questions on this topicAt OC&C,we are passionate about the rapidly evolving world of B2B SaaS

50、 having worked with many of the leading players in Europe.We love helping our clients to be at the forefront of commercial opportunities enabled by disruptive technological change.There are multiple ways in which we could support you at different stages of your journey with embedded finance,includin

51、g:Determining a structured process for experimentation,evaluation and prioritisation of the opportunity Building on your initial success to think about scaling:defining an ambitious or transformational plan Assessing potential partners or M&A targetsPlease get in touch to share your experience or continue the discussion:James McGibney,Partner Justin Walters,Partner Andrea Delconti,Associate Partner