How Payments Were Won: An Inside Look At Fintech’s Original Embedded Service

Starbucks, ServiceTitan, Etsy, and Uber - highlighting early movers in fintech innovation by non-fintechs (Part I)

Just over a decade ago, the notion that every company was becoming a software company was a provocative thought; now, it’s conventional wisdom. More recently, prevailing wisdom has held that, if every company is a tech company — we’re also rapidly moving to a space where every company is a fintech company. 

This is why we’ve advocated for a broader definition of fintech (we define fintech as any technology or business model that enhances delivery of financial services.) We also did a deep dive into what the embedded lending movement is about to better understand how and why financial services are being infused into technology more broadly.

Why? Because embedding financial services enables companies to improve the customer experience, cross sell additional products, and retain customers for longer by making the platform more sticky. All of this ultimately drives larger LTVs (lifetime values).

As we previously discussed, while banking as a service and other fintech infrastructure platforms have made embedded fintech much more accessible, it still may not make sense for many companies. To drive LTV, improve stickiness, and fulfill customer needs, successful approaches seem to have a couple of characteristics in common. For one, they often already have a built-in customer base that is inclined to this upsell. This most importantly stems from customer loyalty and trust. In addition, the product has to address a real need. (More of our previous work on how to evaluate whether embedding fintech is right for you here.) 

In this series, we’re going to unpack fintech innovation by non-fintechs. We’re starting with payments, and then we’ll tackle lending and banking in future posts.

In the piece we’ll cover four examples — two b2c and two b2b. These offer a lens into:

• How payments can be profitable but even more powerful when it lowers the friction to conversion

• Why embedding payments also enables companies to leverage data on the platform to reduce time to checkout with contextual autocomplete 

• Why creating dynamics for repetition of the purchase, made invisible to the user, is key. Ask for the info once and then "set it and forget it,” with saved cards, auto reload, etc.

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Starbucks and the deceptively simple mobile gift card

Back in 2008, Starbucks announced a new rewards program that required people to load and use a physical gift card to earn. This let Starbucks get cash upfront — while avoiding interchange fees imposed by credit card companies — when the card was loaded. A year later, Starbucks launched its Card Mobile app. 

Today, that app is used by more than 30 million Americans — making it the second most used mobile payment app for point-of-sale transactions (yes, Apple caught up). But consider that scale for a moment: More than 85 percent of retailers in the United States accept Apple Pay. Starbucks, of course, is the only place that uses Starbucks mobile payments. In addition to the scale which is massive, this program accounts for a significant amount of Starbucks’ topline and net revenue: Some 53% of spend in our stores, and amounting to ~$2B in float for the company.

Takeaway: Starbucks was able to launch a stored balance and payments product because it had a highly engaged user base and product with high purchase frequency. It also nailed the incentive strategy, which layered on benefits to drive consumer adoption. Combined, this lowered the bar to prefund a card. 

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Uber and the advent of the invisible payment

When Uber hit the roads, it was naturally heralded for simplifying the ride hailing process and laying the groundwork for a swell of P2P logistics. But we can’t leave out that a big part of Uber’s magic was its frictionless payments, which captured payment information up front to ensure that payment happened instantly — and as an afterthought to the rider. For Uber, it actually wasn’t a mere finishing touch: It was core to the overall customer experience. 

Decoupling its service from the friction of paying for it helped drive adoption by lowering the psychological barrier of the cost of taking the ride. (Studies since have shown the psychological ramifications of this phenomenon, which advantage the service provider; people tend to spend more when the payment process is more seamless.) For that reason, taking an Uber for the first time was truly a magical experience.

Takeaway: Embedding payments as part of a larger flow can not only reduce friction but also enhance the customer experience by making it almost invisible and therefore more “magical.” In this way, eliminating a point of friction can be an opportunity to delight the customer.

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ServiceTitan and vertical fintech

The past decade has seen the rise of vertical SaaS, which is often a suite of digital tools that enables SMBs to be more efficient with software that is tailor-made for their specific industry needs. At the same time, the line between vertical SaaS and fintech has become fuzzy, as vertical SaaS leverages its unique customer insights and trust to drive financial services through the channel. 

Back in 2012, most home services businesses ran on pen and paper and literal carbon copies. ServiceTitan quickly streamlined operations for their home services contractor customers. It started out handling — and digitizing — the operational parts of the business that were still being run on pen and paper. Its initial suite spanned a CRM, dispatching, reporting, mobile connectivity for field techs, and integration with Quickbooks — an OS that was essential to running the business. By the time it embedded payments in 2017, it was already the platform of choice in the space. 

By that time, it had earned trust and had insight into the payments problem. It knew that improving how customers got paid would help them make more money — and that ServiceTitan would, too. And because of the embedded approach, everything was integrated, creating a seamless and simple customer experience enhanced by leveraging platform data available to ServiceTitan — kicking off a flywheel that continues to become more valuable to the multi-billion-dollar business.

Takeaway: Embedding payments to tie a bow around a suite of verticalized services tends to be an elegant addition that is natural to push through the channel. It’s a win-win, letting the platform take a slice of the transaction revenue but also empowering customers to get paid — and grow — faster. 

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Etsy’s marketplace

In some ways, eBay’s blueprint laid the ground for the millennial’s answer to the marketplace, Etsy. While the marketplace concept hinges on bringing together buyers and sellers, the key to success is getting them to transact. So making that transaction seamless is a strategic priority. 

When Etsy was founded, it helped spur the entrepreneurial ambitions of a generation of makers, by enabling them to build an online presence, a storefront, and provide exposure to global consumers. However these sellers were initially limited by the payment types and currencies they could accept. Etsy became a payfac and built its Direct Checkout platform (now called Etsy Payments) to solve this problem, which ultimately drove significant growth for sellers and the platform. In fact, Etsy generates revenue primarily from marketplace fees, charging sellers 6.5% plus payment processing plus 2.5% currency conversion.

More interesting is how the elegance of Etsy’s payment solution created a flywheel. It let buyers use the payment method of choice, reducing friction in the buying process. It also enabled Etsy to operate its own payment account, a store of value that could be transferred to the bank account, or not. Finally, it created interoperability and visibility across the value chain that in turn unlocked other key value-added services like fraud and seller protection that helped underscore key values of the platform, like trust.

Takeaway: Etsy recognized that the key to its marketplace was bringing buyer and seller together and making it as easy as possible to transact. It enabled a diverse set of buyers and sellers to seamlessly transact without having to think about payment type, location, fraud, etc. These small businesses perhaps also would not have been accepted by other merchants but Etsy took on the risk of underwriting them.

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I expect we’ll continue to see more companies innovate in payments — which also tends to act as a gateway to other fintech. This is similar to the advances that, say, Amazon has made with one-click shopping; so easy that it’s hard to resist. And with good reason: Tweaking the knobs on how a business gets paid not only can drive additional topline revenue but can also unlock better margins. There’s a reason payments is the original embedded fintech service.