Joel van Arsdale, Managing Partner at Flagship Advisory Partners, recently sat down with Hemmo Bosscher, SVP, Global Head of Payments at Adyen and Vamshi Reddy, Head of Payments at Zenoti, to discuss how software platforms can effectively sell embedded payments and make them a key part of their growth strategy on Adyen's latest episode of Adyen Presents: Embedded Finance podcast.
The episode focuses on how software platforms can succeed with embedded payments and use them as a key strategic advantage. Topics covered include:
- Why embedded payments should be a core business focus
- The need for active distribution strategies over passive outreach
- How the embedded finance opportunity differs across regions and industries
- Using embedded payments to solve challenges like cash flow
- Key metrics to track success and adoption
Listen to the latest episode on the following platforms:
Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.
Transcript
[00:00:01] Hemmo Bosscher: Welcome to Adyen Presents: Embedded Finance, real talk for SaaS leaders on embedding payments and financial products. Software platforms today are no longer just about software. Winning platforms embed payments and financial products like business loans, accounts, and cards to become full service operating systems for customers, building loyalty and new revenue streams. Now the opportunity is clear, and we've heard much about it, but tactics are largely undefined still. And that's why we're launching this podcast to hear from the platforms and experts shaping the strategies. This episode explores selling embedded payments. I'm joined by Vamsi Reddy, GM payments at Zenoti, the leading cloud software for beauty, wellness, and fitness trusted by over 30,000 businesses in 50 countries, and Joel Van Arsdale, managing partner at Flagship Advisory with over twenty years of experience helping businesses shape their fintech strategies. First up, we have Joel.
[00:00:59] Hemmo Bosscher: Welcome back to Adyen Presents: Embedded Finance. Today, we're here with Joel Van Arsdale, managing director and I think founding partner of flagship advisory. Joel, can you please introduce yourself and your business and what you aim to do in the world?
[00:01:12] Joel Van Arsdale: Yeah. Hemmo, Thanks for having me. Look forward to the discussion. So I'm indeed the managing partner of strategy boutique called Flagship Advisory Partners, and Flagship focuses purely on fintech. We have 40 professionals located across Europe and US advising a variety of clients on development of growth strategies within the fintech industry. And so a lot of our clients are providers of fintech services. Many of our clients are also platforms that embed financial services, which is what we'll talk about today. And lastly, we work with a lot of investors that are either buying software companies or other forms of platforms or buying fintech companies. And so we advise all of those actors, and so I think it gives us a well rounded perspective on the ecosystem.
[00:01:53] Hemmo Bosscher: Thank you. Very happy to have you on. Could you maybe describe for our audience what a typical engagement looks like and then specifically as it pertains to embedded finance?
[00:02:00] Joel Van Arsdale: Yeah. So when we're working for platforms that are ingesting financial services, embedding financial services, we're generally helping them with their strategy road maps. So, for example, which products should we be prioritizing? What are the feature sets should be underpinning those products? How do we go build the right operating models, meaning find the right partners to power those products? And then how do we go to market and commercialize those products. And oftentimes, we're helping them also then globalize that strategy on the back of the road map.
[00:02:29] Hemmo Bosscher: Uh, thank you. That's very helpful. And for how long have you been doing this sort of work in a bit of finance?
[00:02:34] Joel Van Arsdale: Yes. I mean, I've focused on embedded finance really since the early days. So I've been an advisor focused on payments and fintech for about twenty five years, and I would say embedded finance has been a predominant theme in the work that I personally do for the last decade or so.
[00:02:49] Hemmo Bosscher: And how have you seen the space change? Have there been any accelerants? I think maybe for me personally, I saw COVID and sort of the low interest rates, we really took off there, but how have you sort of seen it develop?
[00:02:59] Joel Van Arsdale: It's just very constant, attractive rates of growth for anyone that's thriving in embedded finance, whether that be platforms that are really great at embedding products or whether that be providers of financial services that are great at working with platforms. I mean, the reality is that there are certain pockets of maturity, like US payment acceptance as a form of embedded finance is relatively mature, meaning the predominant force changing the competitive landscape. And fintech providers that are good at working with embedded finance, embedded payments specifically are thriving, and those that are not good at embedded payments are oftentimes now shrinking. And so it's been a predominant force in the merchant payment industry in US for more than a decade. But when you look at the rest of the world and when you look at the rest of financial services as a product spectrum, you know, you just don't see maturity. You see really a lack of maturity and therefore high rates of growth. And so we estimate the embedded finance opportunity globally at something like $2,000,000,000,000 of revenue. And the reality is we're scratching the surface with a few 100,000,000,000 of that being realized today. So there's just the growth of embedded finance will continue well past my career. That's for sure. That's really a multi decade evolutionary curve, and we're just in the early days of that curve.
[00:04:17] Hemmo Bosscher: And the sort of Darwinian mechanism in The US market you described, right, where it's survival of the fittest and those who better finance prosper and those that don't, do you expect that to happen, and do you see it happen also in other markets already?
[00:04:29] Joel Van Arsdale: So, for example, in The US merchant payment acceptance revenue pool specifically, so just one product, just one side of the equation, platforms have effectively captured about 30% of the revenue pool already. And then providers that are powering those platforms have captured another 10 to 15% in addition to that. And so that's kinda giving you a relative sense of maturity. Now that will continue, of course. A decade from now, it'll be 50%, and a decade thereafter, it'll be even higher. And so many financial services will follow similar evolutionary paths, although it definitely varies by product, it varies by geography, it varies by vertical. And so it's a very complex footprint when you look globally in terms of what trends first, uh, relative to what trends more later in the evolutionary cycle.
[00:05:15] Hemmo Bosscher: And is there for you in other geographies a reason to expect a different development, or would you expect to see the same just delayed? The same
[00:05:23] Joel Van Arsdale: general trends are playing out all around the world, meaning everyone benefits when you can embed payments oftentimes being the lead financial services product. But when you can embed financial services generally, it makes the lives of businesses better. It makes the lives consumers better and easier. And so there's just such intrinsic value creation that there's no reason why many of these financial services won't be embedded regardless of the geography. Although the software maturity varies very much around the world. So in The US, it's more mature, and The Nordics, it's more mature, and Southern Europe, less mature, and certainly in Latin America, much less mature, and etcetera, around the world. And so the software industry has to or other forms of platforms. Could be gig platforms. There are lots of different forms of platforms, but, you know, that's a precursor to the broader embedded finance opportunity is getting people first using that technology and then getting them to expand their use cases on top of that platform, including financial services. And so the reality is that the software industry is relatively immature in large parts of the world. Any of the more developing macroeconomies, right, tend to have low software penetration. And so it'll be decades before they fully catch up in the opportunity.
[00:06:37] Hemmo Bosscher: When you look at those really underdeveloped markets or margin pools, do you find it more plausible that, let's say, US logo or a more global player finds success locally, or is it usually a local hero that pops up and does some sort of copycat play and takes the market?
[00:06:51] Joel Van Arsdale: Well, you have to keep in mind, right, globally, the software industry is exceptionally fragmented. There are tens of thousands of software companies just in The US and Europe, for example. And so you see some globalization. For example, webshop software where you see Shopify, WooCommerce, etcetera, that's a relatively global part of the software market. But other software verticals are much more localized. And so it tends to be the case that I would say software services tend to be even more localized than fintech services, but it varies again by geography and vertical. But you have markets like India or Brazil that have their own trajectories that are relatively uninfluenced by what's happening in The US, for example, or what's happening in Europe. And, actually, in some ways, it's even more exciting because sometimes see a leapfrog effect where you have commerce that's fully digitized via mobile phones that never went through a phase of more traditional software adoption, for example.
[00:07:49] Hemmo Bosscher: Yeah. Yeah. What's the parallel with the something like Internet technology? Right? Like, skipping poles or landlines? I don't know. I've read it recently somewhere, but you can indeed sort of leapfrog the whole decades of innovation in The US and just go straight to what we have now.
[00:08:02] Joel Van Arsdale: Yeah. So one of the things you see in more mature software markets like The US or Northern Europe, for example, is actually you have a lot of more traditional platforms, traditional, quote, unquote, ISVs that are still reliant largely in having locally deployed Windows applications, Windows software. And, actually, what you can do on that kind of tech stack is much more limiting than what you can do on a tech stack that's built around cloud based mobile operating system technologies. And so, actually, you see some slowness as a function of that software maturity rather than speed, although it's also the case that a lot of those older tech stacks, of course, are being modernized and disrupted.
[00:08:38] Hemmo Bosscher: That's interesting. Oh, hey. On the topic of this episode today is selling embedded payments. I'm not asking you to give away the secret sauce, but, generically, what should a platform think about when going to market with embedded payments in what you've seen been successful in the past?
[00:08:52] Joel Van Arsdale: Yeah. I mean, firstly, you've gotta be fully strategically committed to owning the product. You can't just think of it as something I'm gonna refer off to my payments partner
[00:09:03] Hemmo Bosscher: to make a little bit of money on the side.
[00:09:05] Joel Van Arsdale: They can't be a side job. It's gotta be part of your core strategy and part of your core products. And so that means having people properly focused and committed to that product, and it means having real distribution investments behind the product. And so we see a huge difference between platforms, especially generally smaller software companies that are very passive in their embedded finance strategy and those that are strategic around embedded finance. And if you're passive, your performance tends to be unimpressive. And if you're strategically committed and aggressive, your performance tends to be much better. So I think that's the first driver of success. Right? It's just having the right strategic focus on investment and people driving the execution of the strategy. And then secondly is just being more aggressive in your distribution mindset, which is especially if you're serving smaller, medium sized businesses, which represent a large part of the market opportunity. I'm a small and medium sized business owner, for example, and I'm not actively seeking out new financial services, generally speaking. Right? Like, by nature, SMBs are more reactive, and so you've gotta be front and center directly in front of them, and sometimes not even really necessarily giving them the option. Successful distribution strategies are it's intel. It's just in there, and you don't have any real choice. But by the way, most of these small businesses don't necessarily want a choice when it comes to who's processing their card transactions because it's a relatively commoditized service.
[00:10:35] Hemmo Bosscher: Do you have any more thoughts on that? It's an interesting point you raised. And, I mean, I see both models. Some folks make it free and monetize elsewhere. Others leave it optional. At the end of spectrum, you can mandate it. You can also create fake optionality where you have it optional, but you so heavily penalize the other choice that you sort of mandate it. Like, what do you think is the most successful way to do it?
[00:10:55] Joel Van Arsdale: So I think, firstly, one of the reasons why embedded finance is so commercially powerful is because small and medium sized businesses, especially, are not generally focused on the cost of the financial services. So they tend to be less price sensitive to those financial services than they were independently shopping for those services on a stand alone basis. The the small and medium sized businesses are actually more focused on, for example, what the devices costs, what my register costs, or what my printers costs, or what the monthly subscription fees costs. And so, actually, what we tend to see is rather to treat those products more as loss leaders and to make up margin on financial services. It tends to be the more effective go to market strategy, although this will vary depending again on the vertical that and the kinds of use cases you're talking about. But for example, the restaurant vertical or point other point of sale oriented verticals, we oftentimes see discounting of the core hardware software in order to capture the basis points that comes along with the payment processing.
[00:11:54] Hemmo Bosscher: Right. And that's a good lead into another question I had for you, which is, let's stay with the restaurant space, for example. You also have, I think, for software platforms, this sort of thorn in their side is often these stand alone providers that can come in with really cheap pricing, really cheap devices. What would you say is for them the best way to sort of defend against that?
[00:12:13] Joel Van Arsdale: Yeah. So what we observe in The US market, which again is just a more mature embedded finance market, is that oftentimes our vertical SaaS clients are winning market share versus forms of horizontal payments, for example, where as a vertical software, you're covering a whole range of use cases. You're providing accounting services, and you're providing people management, and you're providing CRM, and you're providing billing. And so because you are the operating system of the business, it means that you just have a very good right to win versus other more bespoke use of services. For example, I might be using a stand alone web payments platform or a stand alone e invoicing platform or stand alone point of sale of some kind. And so what we observe is that the vertical the broader, more diversified feature sets that are vertically specialized tend to have strong right to win and tend to be winning market share versus more standalone horizontal payments. And the guy the go to market motion for those vertical platforms is combination of carrot and stick. It's rare that you would come right out of the gate kind of forcing all your customers to make changes in their physical environment, sort of physically have to do a lot of work to adopt what you're trying to sell them. But we tend to start up with carrots, meaning, hey. Here's a series of feature advantages as to why using our payment service is better than using that horizontal solution. So easier reconciliation, you have faster money realization, better customer experience when it comes to billing and notifications, all of these kind of features. And then the stick is still there oftentimes when maybe you stop supporting a horizontal payment solution that is integrated into the ERP system. That would be more of a stick tactic.
[00:13:52] Hemmo Bosscher: That's really interesting. Thank you for sharing that. I mean, you make a very eloquent argument for embedded payments, and, obviously, we can talk a lot about that on this podcast. Could you argue the other side? Is it sometimes strategic for a platform not to embed payments, or is this just such a prerequisite to success now We should stop having the conversation about it and just see it, hey. This is default, and let's talk about the stuff we build on top of payments.
[00:14:15] Joel Van Arsdale: Yeah. So as platforms think about embedded finance product strategy, what's most important is that you really remember the mindset of the customer, and you think through use cases where you're creating real utility by embedding financial services. And so there are certain use cases for payments that just maybe aren't compelling, that where your software, for example, is not creating a better user experience. So one of the reasons why embedded finance is powerful is because the software itself makes everything easier. It makes it easier to pay, it makes it easier to collect, it makes it easier to borrow money, etcetera. And if you don't have those natural use case feature advantages from the software out, then the embedded finance opportunity is less compelling. In other words, when it's just a cross sell of banking or lending or something and not an embedded use case, then it becomes somewhat less powerful. And so for example, certain verticals lend themselves to certain forms of embedded finance use cases and others do not. So for example, if I'm a vertical platform that is driving and managing procurement for my software client, for my medium sized business. My software is already powering the interfaces into all my suppliers, already helping me with order management, already helping me with accounts payable automation, then embedding the payouts into that other broader feature set has great utility, then it really creates this end to end digitized outcome that makes the life of that business owner much better. But if you're not involved in procurement or not involved in employee expenses, if you're only a commerce platform, for example, then your right to win by attaching payout related services is less powerful. Same thing with payroll is powerful when you're already managing employees, or lending is already powerful if you're helping the business manage its finances or cash flows. But you wanna see that kind of overlapping fit with what the core software is doing.
[00:16:16] Hemmo Bosscher: So what you're essentially saying is that perhaps I'm jumping to conclusions, but it sounds like maybe some founders or some operators assume too much, and they jump the gun and go, okay. We'll just solve everything for our customers, and we wanna do end payroll, end payouts, and this and that. And do you think that's premature where they should take a step back, focus first on their customers' needs, and then build towards that? That's a fair conclusion?
[00:16:40] Joel Van Arsdale: Uh, generally speaking, although you also have to consider, like, segment driven behaviors. So at the low end of the market where you see a Square and a Clover, for example, operating in The US market, selling mostly to truly small businesses, single location, oftentimes founder run, your right to cross sell financial services into a simple segment like that is quite broad because they just tend to be sort of underbanked in many cases, for example. Whereas if you're serving a more sophisticated mid market business, you will have a right to attach payment acceptance, for example, but maybe not necessarily other financial services. It depends a little bit on the profile of the segment you're serving. And then generally speaking, if you're a technology platform serving enterprise clients, your right to attach payment services is just generally less because enterprise clients exhibit more unbundled buying behaviors. And so when you put this complex bundle of multiple services in front of them, they will oftentimes find that less appealing than if I'm a small business because they're not solving for ease and convenience and lack of time. They're solving for sort of best of breed individual services. And so the segment you're going after defines some way your right to win across the broader product set.
[00:17:56] Hemmo Bosscher: Yeah. And then your customer portfolio also decides what products and features you bring to them and the sequencing of them. That's what I was trying to say, albeit inelegantly. So I I definitely got your point. When you think about all these meta financial products that are now flooding in the markets built on top of payments, is there any one of them that you feel is particularly suitable for this day and age and has a particularly large opportunity? Anything specific?
[00:18:21] Joel Van Arsdale: One of the exciting things within our broader work and embedded finances, we've just seen a real acceleration beyond payments. And so even five years ago, it was really mostly about pay ins, you know, to a lesser extent, other forms of banking services. But now we're seeing actual real scale and real growth coming out of a broad range of financial services. So payouts being quite big and rapidly growing in a variety of verticals and different forms of platforms. For example, marketplaces, gig platforms, you know, anything again involving spend management or procurement. We're also seeing high growth in real scale in in various forms of lending. So merchants, working capital lending, merchant cash advance being a real scale product driving significant revenue for the squares or the clovers as I described earlier. But, also, instant settlement is a form of lending or, for example, factoring and supply chain financing where we think there's huge market opportunity but a lot less maturity relative to, for example, merchant cash advances of lending products. At forms of digital banking, we're seeing some exciting stuff. I mean, especially if you're working with gig platforms where these gig workers are oftentimes underbanked, and so the platform itself has a strong right to win because it's such an integral part of that micro business' life. And so you see that with various forms of kinda gig platforms, and you see fintechs that are really good at digital banking or cross border payments that are relevant to those gig platforms being seeing a lot of growth. Again, embedded payroll in certain contexts with it being somewhat more interesting and lucrative in a market like The US where you have, like, earned wage access. For example, a waiter, waitress at a restaurant being able to get their tips same day, for example, is kind of a cool use case. I think embedded insurance, we're seeing high rates of growth. I spend a little bit time personally less in insurance than other banking services. But, actually, insurance is a massive revenue pool with a strong right to attach because independent distribution of insurance has very high customer acquisition costs. So if you can embed that insurance distribution into more of an in line use case, right, you create a lot of value. So what I do think hey, Moe. So huge opportunity across lots of products. The individual opportunity is definitely a function of what country you're sitting in and what vertical you're acting in as a platform, and you wanna make sure that you have the right prioritization. One of the mistakes we see working with platforms is when you're going after five products simultaneously, you tend to miss step on all of them because you just need to focus on the first priority first. Second priority second tends to be they're just a more effective way to be executing. I think, though, it's important to keep in mind that the opportunity for embedded finance is not limitless. We don't all need financial services from everyone we're conducting commerce with and same as a business owner that there's some of my banking services are well supplied by my bank. And so there are some limits to the opportunity, but certainly not any lack of growth opportunities over the coming decade.
[00:21:29] Hemmo Bosscher: And do you think that this hypothesis of software platform or your gig economy work, example, like an Uber completely disintermediating the traditional bank from that in over the next ten years? Do you think that's a feasible reality where you no longer need that banking relationship like you have now?
[00:21:43] Joel Van Arsdale: I think banks will always serve their part. I mean, in terms of where I wanna keep my money, where I wanna get a mortgage, where I wanna get a loan to start a business, Banks are just very, very effective and introduce incredible scale economies on all those kinds of products. But certainly, in certain financial services like payment processing, banks are slowly being disintermediated. When you look at the winners of who's applying those embedded finance services, it's rarely banks. And it has to do with the fact that banks are more challenged when it comes to working with technology companies, meaning having great integration technology and a great automation of service, being easy to work with. These are generally things that banks struggle with. And so it's not that banks will disappear. They certainly won't. But we will see a loss of share in certain products. Payment acceptance has been one example, but card issuing or factoring or other products will follow. Thank you.
[00:22:42] Hemmo Bosscher: I think we're on the same line of thinking. When going to market with embedded finance, Joel, are there any metrics that you think are particularly worth tracking that you would advise founders on?
[00:22:51] Joel Van Arsdale: Yeah. So the first thing we tend to look at is just what is the percent of revenue coming from financial services versus, for example, the core ARR revenue. And if we're working with software companies, there's a very big range. They can be less than 10%. It could be more than 60%. Although, generally speaking, depending on the vertical, that opportunity tends to be thirty, forty, 50%. And so that's the first place to start. It's just how much money are you making from financial services, and then what's the relative growth rate of that financial services revenue relative to the core software ARR revenue, for example. It's not unusual for us to work with software companies where the financial services growth is two to three x the growth of the core software revenue because maybe the software vertical is is already relatively penetrated. Winning the next software client is actually quite hard work, whereas penetrating the back book with the nature services is just easier way to drive growth. We then tend to look at kind of a series of operating metrics. And if we focus just on payments for simplicity, those operating metrics tend to be, for example, attach rate. So how many what percent of your clients are using your payment service? And, oftentimes, we'll stratify that looking at the front book different from the back book because attaching any financial services product at the time of the core software sale tends to be easier than cross selling into the back book. That's a more discreet effort with higher acquisition cost, for example. The second thing we would tend to look at is the payment volume penetration rate. So you might have, for example, in a vertical like government, where you might have them attached using the product for one use case like tax collection, but maybe not using the product for other forms of use cases, for example, recreation fees or utility fees. And so you want to not only be attaching the service for one use case, but also broadening use cases that you're penetrating on the volume that's going through the platform itself. The next thing we look at is just, like, the revenue take rates, not take rate. Essentially, the revenue realization rate. So what revenue you're generating on the back of attaching and penetrating those volumes. And so, actually, it's a relatively simple set of PPIs, but that oftentimes tend to give you a good picture of higher performance.
[00:25:02] Hemmo Bosscher: Oh, that's very helpful. Thank you for sharing that. I do have a follow-up, though. I think selling to what you call the back book or the sort of existing portfolio is a very common issue. Have you seen any successful tactics in in seizing that?
[00:25:14] Joel Van Arsdale: The best tactics are just more aggressive outbound selling. What I mean by that is not assuming that the small business will click on a promotion on the portal, for example.
[00:25:25] Hemmo Bosscher: No email campaigns. You just gotta call them or visit them.
[00:25:28] Joel Van Arsdale: You need to call or visit them with a very dedicated Salesforce. So the other thing you can't generally do is rely on a software salesperson to be selling loans into the back book, for example, or payments into the back book. You really do need a dedicated inside team that's focused on only that one financial service, and you need compensation that's lucrative and attractive to them so that they're performance driven. These tend to be the best practices rather than being more passive about how you go about it.
[00:25:58] Hemmo Bosscher: Thank you. We've talked a fair bit about vertical SaaS today. Are there any particular verticals you're seeing now spring up or accelerate far ahead of all the others that you're excited about?
[00:26:07] Joel Van Arsdale: Yeah. So one of the things I love about embedded finance is that I'm personally just constantly learning new verticals. And so, again, in a more mature embedded finance market like The US, there are literally dozens of verticals, all of which are achieving really exciting results when it comes to embedded payments and then other forms of financial services thereafter. And so it's not vertical specific. It applies to just so many different verticals. I think in The US, where I get particularly excited about the growth opportunity is generally the nontraditional commerce verticals. In other words, again, we talk about web shop software, that being a more mature vertical, restaurant software, that being a more mature vertical in The US. And so that means it's really big and attractive, but it means the growth rates are gonna start to slow down as a function of just maturity and penetration. But in The US, for example, forms of, uh, nonrecurring bill payment, for example, to me tend to be very attractive growth tailwind. So for example, education or government or field services, boutique fitness, All of these verticals involve some form of sort of billing requests, payment requests, and those tend to be less mature. So oftentimes have lots of paper out there in the ecosystem, lots of checks still in the ecosystem in The US. And so the power of digitizing all of that is really compelling. Even when you have actually a very high cost of cards in The US, it can still be a compelling outcome for both the business and the consumer to digitize what used to be paper and checks because the business gets their money much faster. The customer can pay with much less friction. I don't need to go to the post office. And so there's lots of verticals that fit that kind of tailwind, but those are the verticals that, to me, are really interesting just given the ongoing prevalence of paper and check. It's also the case that in The US, we're seeing a lot of acceleration and high rates of growth in various forms of b to b particles or horizontals. And, actually, in b to b, it's oftentimes the horizontals like accounting software or various forms of CFO software that are capturing that opportunity, but we're also seeing vertical software accelerating in terms of their ability to capture. When you look around rest of world outside The US, US, it's somewhat of a different complexion. So for example, in Europe, we're really excited about point of sale software, which while being more mature in The US, is less mature in most of Europe. And so retail, restaurant, other forms of point of sale actually are very under embedded payments, and so high rates of growth. And, also, what's compelling about point of sale verticals in Europe is that the playbook is clear, and the precedent is clear. The monetization vehicles are clear. Now sometimes local debit and things like this is less lucrative than maybe credit cards, but still, all of that playbook is very clear if you're a software company. But for example, in forms of bill payment that I was describing that are really high rates of growth and monetization in The US may not be quite as easily captured in Europe because you've got better banking infrastructure, more traditional behaviors around web based payouts to those kinds of vendors. So we still think embedded finance will penetrate those verticals like field services, professional services, but the commercial models, the ways in which you make money by embedding finance are less mature in certain cases.
[00:29:29] Hemmo Bosscher: Thank you for that. That's really enlightening. Better reflect on that a bit myself, actually.
[00:29:33] Joel Van Arsdale: What's amazing to me when I work at all of these different verticals, though, is they're all somewhat unique. The use cases, the way in which you embed financial services, the way in which you apply convenience fees, or these kinds of things are all somewhat different. And so it means, for example, as a supplier of fintech services as Adyen is, you've got to adapt somewhat the feature set to those relevant verticals because the use cases just tend to be somewhat different. Absolutely.
[00:30:00] Hemmo Bosscher: Thank you. My last question for you. You spoke earlier today about these platforms being the operating systems for small business owners. I think you're seeing in the market that both the vertical and the horizontal players are essentially trying to do the same thing in the long term where the idea is that the business owner runs their business entirely through their platform. And you're phrasing a right to win. Who do you think has a better right to win there? The vertical player or the horizontal one?
[00:30:23] Joel Van Arsdale: Yeah. And, again, it's not an easy black and white answer. I would say, generally, vertical platforms are really well positioned. But, again, in certain verticals and segments, horizontal platforms are really well positioned as well. So if you look at Intuit in The US, incredible financial services business because they're just so ubiquitous across small businesses generally in The US.
[00:30:44] Hemmo Bosscher: Let me ask my question differently. Would Intuit only win where there isn't a dominant vertical player, or will Intuit be win a customer that might also be addressed by a vertical player?
[00:30:54] Joel Van Arsdale: Sometimes you see both winning. Although I would say it depends a little bit on which financial service you're also talking about. So I think in restaurants, for example, I don't think Intuit is well positioned to win payment acceptance because it's too associated with the physical hardware and software products, and it's relatively disassociated from accounting and financial management. On the other hand, something like a working capital loan or payroll services, I would argue into its very well position. And I think the vertical platform has more competition from the horizontal CFO software in that case.
[00:31:29] Hemmo Bosscher: Interesting take. We love the diversity of opinions here on this podcast, Joel, so thank you for sharing that.
[00:31:34] Joel Van Arsdale: And so looking at both forms of platforms have a strong right to win. It's just, again, being focused on where there's more naturally fit demand and potentially less competition on the supply side.
[00:31:44] Hemmo Bosscher: Absolutely. Thank you very much for sharing all your wisdom. It's very much appreciated.
[00:31:49] Joel Van Arsdale: Yeah. Pleasure to join the discussion, Hemmo, and thanks for inviting me.
[00:31:52] Hemmo Bosscher: Thank you.
[00:31:53] Hemmo Bosscher: With the big picture in mind, let's shift to the platform perspective.
[00:31:59] Hemmo Bosscher: Hello, and welcome back to the podcast. We are here
today with Vamshi Reddy from Zenoti. Vamshi, could you please introduce yourself for the audience and tell us a bit perhaps about what it is that Zenoti does and what it was built to do?
[00:32:12] Vamshidhar Reddy: Sure. Thanks, Hemal. Glad to be on the call. So I actually run the payments business for Zenoti. It's a big part of our overall product to our customer base. Zenoti, as such, actually build software, an all in one software for salons and wellness businesses and health fitness spas. We play in a wide space. We are in multiple countries around the world. And financial services, when people do the services and they have to pay for it, That's what our product integrates into its whole suite of features and makes it easy for our customers to do our their business.
[00:32:52] Hemmo Bosscher: Understood. So if we can double click on that a little bit, let's say I start my own barbershop, what type of problems does Zenoti solve for me?
[00:32:59] Vamshidhar Reddy: Yeah. So everything that the business needs, like I said, we bill ourselves as all in one. So managing the incoming appointments, the bookings, managing the employees, the employee schedule, who does what services, what each employee has to receive as their commissions, paycheck. We keep track of all of that. We keep track of all of the accounting. We keep track of all of their inventory. We even keep track of their customer database and make sure the customers are coming back month after month, just basically the a to z of the business. We think that we should be the only software that they need. Our customer base is not tech savvy. They can pick best products, like the best inventory management, best marketing, best appointment book, and then bring them together. They rely on us to do that for them. And then they could just focus fully on their core business. You take care of the rest. That's right. They can focus on their customers. Like, we joke that we can pick up the scissors, but we can take care of everything else.
[00:33:59] Hemmo Bosscher: That's a nice line. And then in that relationship over the years, how do you monetize that, and has that changed over the course of Zenoti's history?
[00:34:07] Vamshidhar Reddy: Yeah. I think we've done a lot of things. When we first launched, we were doing the software bit, but did not intimately manage the communications. But these days, we actually manage their text communications, manage their phone communications. We've always done marketing. We've always done inventory. We are billing integrations with product vendors so that buying products is much easier, managing products is much easier. We've always done credit card processing. It's an optional thing where they can buy credit card integrated credit card processing through us or use an external. But over time, they all kind of see the benefits of having an integrated system and just use our system.
[00:34:50] Hemmo Bosscher: So you got a transaction based next to the monthly SaaS fee?
[00:34:53] Vamshidhar Reddy: That's right. And not everything we build is necessary for every business, so they pick and choose what they want from our product base.
[00:35:01] Hemmo Bosscher: So, Vamsi, if you think about the needs of hairdressers or barbers, are they very similar to others in the beauty and wellness space, like a massage therapist or an acupuncturist?
[00:35:09] Vamshidhar Reddy: Yeah. I think there's a huge set of needs that are all common. They all basically offer services for a particular period of time, and they charge for it. So in fact, it's actually that common attribute extends beyond just the health and wellness beauty of it. But if you think about it, even a plumber is giving you some time and charging you for it, except they are going from place to place. Whereas for a retail business that we address like a barber or health and beauty, people are coming to that place. But other than that, managing the customers, taking payment from them, marketing back to them, getting them to come back for more services later on, A lot of them have product inventory. All of those services are needs are pretty much the same. If they employ people, they all have to pay. So it's very, very similar. The nuance comes from the nail salons operating slightly differently from the barber salons. Right? Just in very, very small ways. And addressing those needs and differentiating for that is what sets us apart. Nail salons, for example, or hair salons, more importantly, a single provider can do or attend to multiple people. While somebody's hair is drying, they can go start cutting somebody's hair. That typically does not happen in other places. You know, if you're getting a massage, you're getting a massage for that entire time, and then you're done. So what we do is account for all the commonality and also the differences between each of these vertical businesses.
[00:36:44] Hemmo Bosscher: Understood. And then looking at that, so there's some commonality in need. So, ostensibly, you could just expand to many more different verticals, but you're saying the limiting factor is there are some niches that you need to nail to really get that business. So how does the Notee look at that? Do you think anything adjacent to beauty and wellness is sort of fair play for you?
[00:37:01] Vamshidhar Reddy: Yeah. Actually, anything adjacent is fair play. We actually started with spas, then we went to salons. Now med spas are pretty big. We're going after fitness business and gyms. But previously, we have looked at pet spas, car repair shops. These are all pretty adjacent. Most often, people will call us and say they've evaluated our software. It works perfectly, but it's not something that we sell to or focus on or service. And so we have to actually almost sometimes say that, no. We are not gonna sell to you.
[00:37:34] Hemmo Bosscher: So, Vamsi, looking at your whole book of business, is it are there major differences in how consumers like to pay at all these locations or sort of similar for you?
[00:37:42] Vamshidhar Reddy: Yeah. It's interesting. I think the consumer preferences are more differentiated by country and region more than by business. For example, in The US, we see 90% of the people paying with credit card, whereas in a place like India where we also operate, that's probably only around 60%. If you go to Canada, there are a lot more debit card transactions, 60% plus. So it kinda varies in places like Australia and so on. The pay later financing is great. There's a lot of businesses that make choices from the business side. They wanna take ACH debits. They don't wanna use credit card because it's more expensive as a percentage of the transaction that they're processing. So it's mostly based on the country and the business preference end customer preference. What we find with the end customers is
[00:38:32] Joel Van Arsdale: they
[00:38:33] Vamshidhar Reddy: just want it to be easy and fast. That's the one common thing everywhere.
[00:38:38] Hemmo Bosscher: Understood. Do you take an active role in advising payment methods also to salon? So for example, let's say I'm a salon owner and say, uh, I don't really want credit cards because it's too expensive. Would you then say, well, that's gonna really cut into your addressable market customer wise because people do like to pay for things using credit cards?
[00:38:53] Vamshidhar Reddy: Yes. We do advise them. We tend to provide all the payment methods. We make it easy for them to collect the payment. We make it easy for them to do various things with their credit card with their payments, especially doing monthly installments, taking tips on cards, supporting the latest payment methods like Tap to Pay or Apple Pay, Google Pay. What we tend to do is just have the full support. Let our customers pick and choose based on their business or locality. Lot of businesses, if they're just totally membership based businesses, they encourage their customers to put their card on file and almost 90% of their transactions are with the card on file. They just try to move along with the process. We have salons where they just don't wanna take a card on file. They just want everything to be swiped or tapped with the terminal upfront. So we have a gamut. We try to be flexible and the business picks. We've seen businesses do make changes where they say, oh, paying from their customer's own phone or going to the kiosk and paying is much easier, takes less of my guest service time, front desk time. So I'm just gonna do that, and we completely see them changing their business process to account for that.
[00:40:10] Hemmo Bosscher: That's pretty cool to see so many differences. And Just a quick pivot. When you first launched Zenoti, so you would have just a software fee. Right? Payments came later. What was that journey like of starting to embed payments and go into your already existing customers who had payments providers themselves? You had your own offering. How did that go, that whole process?
[00:40:28] Vamshidhar Reddy: That's a interesting journey we did. When we realized that everybody needed credit card processing, we looked at our customer base and saw who was servicing them. We tried to partner with them, and that kind of filled a hole. It was great for our customers. It was good for us. But as we started innovating, we realized that we wanted to do much more. When customers wanted to do refund or actually had a question about their daily payouts or monthly balancing, we realized we did not have all the data to give those answers. So then we started looking for solutions where we could tell them what they would have in their bank tomorrow because we know exactly how much business they did. And so we started looking for providers and we found, you know, Arjun where we could actually get all this data, you know, work to improve our system in a way. We also wanted to do things like if there are charge backs or disputes, our customers could look at it and respond right in our software and not have to go offline to do that. And so for various reasons including doing these monthly charges, keeping the cards on file consistent as cards are reissued. A lot of our customers turned out to be enterprise customers, so they have multiple locations. So if I, as a customer, go to one location and go to the second one, the business should be familiar. I've already put my card on file. I don't mind it being used at the second location. These days, it's kind of taken for granted, but when we started seven, eight years ago, it was unheard of. So as we looked in and start we had a vision of where we wanted to go, and then we partner with Arjun. And we slowly have been adding features, including doing things like pay later financing or adding more payment methods. We rely on our partners to kinda do that, but we have actually a very specific profile on how to go after it. And now we find that any business that does memberships, who charge their members on a monthly basis are the fastest growing businesses. So it's kind of changing the nature of business. I don't think there were many businesses even I didn't know of many salons that were doing memberships. It was common for massage businesses to do memberships, but now even salons have started to do memberships.
[00:42:51] Hemmo Bosscher: Well, it's good that you're on very flexible infrastructure. You can account for that. Vamsi, if you had to do this embedded payments journey all over again, what would you do differently this time around?
[00:43:00] Vamshidhar Reddy: I think we focused a lot on the technology of providing the features to do the payments, various payment methods, bringing it all into our system, but we never realized the key challenge our customers have. Cash flow management is the toughest part for a small business, and the beauty and wellness businesses are pretty complex. They are paying their employees every fourteen days, not even twice a month. They have their rents due. They have payments due for various vendors, various bills coming due at various times of the month. They make a different amount of money every day. Even during the week, the weekends are kind of a windfall compared to a Monday or a Tuesday. And everybody is paid different. They really don't know what they are netting on every transaction, so to speak. So just managing that flow is really hard. And when I think about a SaaS business, if we could do something to actually manage their cash flow, just tell them when their bills are due and how to manage their cash. And if we could loan them just enough to kind of make their payments and be whole, we would actually take a big burden out of their daily life. We have just started to roll out our payroll service. And what I heard when we rolled that out is that a lot of these small businesses on occasion, every few times they do a payroll, which happens every two weeks, they run out of money, and they're actually transferring money from their personal accounts. It could be anywhere from $300 to $3,000 to actually make that payroll. And in The US, at least, you never wanna miss a payroll. And so we never provided any help. We didn't have a full view of their financial picture. We just said, hey. We'll help you book these appointments and take payments for it. But I think if I had a choice, I would say, yes. I will manage your credit card payments. But not only that, I'm gonna actually eliminate that financial management from you. And I think if we did that, it would actually help us because it would give a whole three sixty picture of the business. It would actually tell us much more about what the business struggles with, what else we could add into our software, how else we could manage their business, and really fulfill our all in one promise much better than what we did. We ran after features. We said, okay. Well, let's do pay later financing. All of that helped. I mean, obviously, that brings in more revenue, but it doesn't ease the day to day management of the business, which is what we should be really doing focusing on.
[00:45:36] Hemmo Bosscher: And that is what you're doing now, right,
[00:45:38] Vamshidhar Reddy: for the record? That's what we're doing.
[00:45:40] Hemmo Bosscher: You just wish you'd done it sooner?
[00:45:41] Vamshidhar Reddy: Yeah. We should've done it sooner. We would have been much stickier. It was a huge value prop. As we built these features, all our competition caught up to us. And so now we are having to distinguish and differentiate ourselves. Whereas I think once somebody knows that we are managing their business, making their daily life, we just get sticky and it's hard to move away from us, which is what every SaaS business wants.
[00:46:05] Hemmo Bosscher: If we consider then this box checked, what's the next big problem you wanna solve for your customers? Can you tell us anything about what's coming up?
[00:46:11] Vamshidhar Reddy: We are kind of completing the picture in terms of doing vendor management and so on. It's some things that we have announced, but we have not really rolled out. When one of these health and wellness businesses buys product from other vendors, just managing that entire process, making the placing the order easy, receiving it, paying for it, figuring out what's selling well, and then reordering it, helping them find better selling products, cheaper products or products that are higher margin. All these are pretty big. It's a big part of the equation. It's a big part of the ecosystem where kind of the money flows, so to speak.
[00:46:50] Hemmo Bosscher: Yeah. Thank you very much for your time with us today. Any last statements you'd wanna make? Questions I didn't ask?
[00:46:55] Vamshidhar Reddy: No. This is great. Thank you for the opportunity, and it's been great to kinda share our journey. Some of the questions are actually interesting. You don't kinda think about it. You just live day to day. But I haven't had to reflect what happened from last nine years, but it's a good learning.
[00:47:10] Hemmo Bosscher: Appreciate your time. Thank you.
[00:47:13] Hemmo Bosscher: Thank you to our guests for sharing their insights. There's lots to digest from today's conversations, but if you take away one thing, let it be this. Tailor your products and your pitch to address customer pain points and emphasize the total value of your solution rather than competing on price. Thank you for listening.
