Embedded Finance Unlocks Value for Underserved Small Business Sectors

We’re expecting $400,000,000,000 of fraud acts in the next ten years. I think that’s incredible. That’s it. There’s a lot of bad actors on the world. It’s our job to help protect the companies that I see for consumers and specifically data breaches is one area that’s really passionate for me. Hello, everyone, Adam Gray, Chief Transformation Officer at DAX to joining me, and I’m Hal Levy at payment.com. We are discussing today what to watch for in payment processing, which is under transformation. So, we’re going to talk a little bit about what emerging sectors there are that are paving the way and maybe lighting a bit of a roadmap for what payment processing can be in terms of innovation. Welcome, Ed. Nice to have you. Well, thanks for having me, Hal. I really appreciate the time we’re going have today together. I love the question about what verticals are coming up, because as an industry, we’re always trying to serve new markets. And I think for embedded payments, there are some historically underserved markets that we’re seeing a lot of growth in. And that’s grown from these ISVs meeting their needs. And some specific ones are specialized health care, so things like chiropractic, veterinary, and practice management that have very specialized needs. So these software companies are able to come in and meet their needs. But also the payment industry, we have to be able to meet them where they’re at and serve that market. Some others that meet that same kind of bill are legal and financial services, accounting firms, lawyers, logistics companies, nonprofits. These aren’t your retail, e commerce. I feel like we did a great job as an industry on those ten years ago, we’re meeting the new needs and seeing the biggest growth in those new sectors. There was actually a study by McKinsey that the TAM expansion for this space has been over 50% in just the last couple of years for vertically tailored software. So the ISVs are booming here to meet their needs in other ways. I think the payment industry has to follow behind that and provide the revenue and the services to be that one stop shop. When we sort of dial down into what these needs are, as you’re saying, as you mentioned, e commerce has seen a fairly good evolution here. What are the read across that we could see that when you talk about the need? What is the need that’s been changing if there’s a common thread through all these verticals taking a cue from e commerce? What changed and what has been lacking? Yeah, I think it’s first embracing software and technology. So I think just in general, they are using technology more and they are looking to consolidate vendors. I think there’s this pressure for operating margins for these SMB shops that are very specialized to lower their overhead costs, get back to their specialty. They are very good at what they do. If you think about a lawyer, a doctor, especially medical practice, even a field service contractor that comes out and knows HVAC well, they don’t want to spend time on technology, on payments. They want to spend their time on what they’ve built their career around. Think we’re just following the lead of these ISVs that are meeting those needs. And so some specific things, if you think about legal services, trust and operating accounts. That is a very complicated thing for payments to address. Historically, we’ve kind of fit them into the box of how we do split payments, but really understanding how they need to meet this. Our real estate professionals need to meet that need of funding multiple accounts, presenting that information and reporting on it. That’s where we’re seeing interesting growth in higher adoption. With higher adoption, actually, and I think ease of use here, embedded payment is coming to the forefront. And in this economic environment, I think embedded payments certainly might lead to better business flow, right, obviously. Let’s talk about it. Yeah, let’s talk about embedded payments in the service firm. Specifically, also, let’s talk about nonprofit because everybody’s budget is constrained for donating and things like that. Embedded payments can make the difference. Subscription models can make a difference. What are you seeing? Yeah, I think especially in nonprofits, that’s a great call out. Vendor consolidation is important. Overhead, operating cost, they have to keep their operating margins very tight. Razor thin profits for those or operating budgets for those sectors put pressure on them to find the most efficient way to deliver the services to their customers. So I think embedding payments directly, creating that revenue stream to offset some of their operating costs to meet those needs really help them deliver the service they set out to do, whatever nonprofit segment they’re in. Can you give me an optimal embedded payment experience, what it looks like? We’ll take it from two angles. One is the end user, you or me, that we’re going to go and click and make the payment. And the optimal experience would be on the other side of it, actually getting it embedded right into scenario for these businesses that want to do it. What needs to be optimized on their end? Yeah, I think getting it closest to the consumer where they want to make the transactions first, the most important thing. We’ve seen it over and over through omnichannel. So whether that’s you’re collecting payments in the field or at the fundraiser event, you want to be able to do it right there where you’re at, not have to go somewhere else, navigate to another page to do it. So I think the more seamless of embedded is about bringing it as close to the transaction and giving that experience where they don’t realize they’re moving platforms. So I think about the ideal consumer’s experience, when I go to make the payment, I don’t realize I’ve left a platform or I’m using a different piece of software. It should all feel like one unified experience. And that’s why it’s really important to understand how these ISVs are making their software and meeting those needs, because then we can make the payments match that flow that they’ve created, understanding how that consumer wants to interact. So as a consumer, I just want to give you my payment information to meet the service or need, but not realize that I’m having to think about it, to lower that. And some specific ways I think are exciting are tokens are increasing, and we can talk more about that. That stores your information. One, it gives better protection to the consumer and to the ISV, but also, two, it makes a higher authorization rate, quicker transaction, which is ultimate goal here. You should touch on security, which is what I want to discuss as well. So, obviously, security is top of mind. When you are interacting in any business relationship, the first thing is going to be obviously, I’m going to make this payment. I want to make sure that things are kosher. And so, what are we seeing? And I’d like to get from your own vantage point. What are the key security concerns when we are talking about embedded payments and subscription models, too? What are the key concerns that are different and how are you addressing them? Yeah, I think security and fraud prevention have to be top of mind for everybody in interaction with consumers today. And I think there’s a few ways to unpack that. First, fraud prevention. McKinsey, back to a report they put out recently, we’re expecting $400,000,000,000 of fraud acts in the next ten years. I think that’s incredible. There’s a lot of bad actors out in the world. It’s our job to help protect the companies, the ISVs, the consumers. And specifically, data breaches is one area that’s really passionate for me. So data breaches is happening all the time. Over a billion people had a data breach. I don’t know if they even realize it today. In the last year, per a Visa report that was very interesting. So for us, this is woven through everything we’re doing. You can’t think about it as a separate unit anymore. It’s about getting the data and tying everything together so that we can put the fraud controls, the data protection controls at the right place in the chain, whether that’s the ISV software, the gateway, the authentication, the settlement clearing. And then when you do it right, you orchestrate them across all of them. So that is what we are doing. We are both looking to consolidate data in a place that we can leverage new tools. So AI and machine learning are unlocking some amazing efficiencies in fraud prevention. It all starts with data quality and data availability. So for us, we’re making big investments in that space to both provide it for our ICs, but also for us to be able to leverage it to get that efficiency. We can’t just keep scaling with more human intervention or some of the tools that historically have been there. And then the other one I just mentioned was tokens. Mean, tokens are growing at such a rapid rate. Six in 10 businesses use tokenization today per Visa. That’s mainly driven from higher author rates, if we’re being honest, but there’s a lot of security protection there. I think it’s especially important for subscription model businesses, where you’re storing a lot of personal information. When you’re able to move and use tokens in many ways, that’s another layer of security that protects you in today’s world. With the partnership model, the idea of cementing a vertical payments or experience, there need to be the ability to tailor the embedded payment toward not just where people want to be met, but the payments they want to make, or at least the payment modality they choose. What about that? Tell me a little bit about maybe how different verticals might have different preferences that are coming to light. Yeah. I think, again, tokens is one where there’s a lot of types of tokens. So different types of payment methods, whether that’s e checkout, tap to pay, field services, those are very big, like wanting to be able to collect on a mobile device or tap to pay. The tokens don’t have to be siloed. So we want to use those both the subscription model, where you’re engaging in one type of transaction with them, and then also in the field. So I’ll give you a real world example. Your HVAC team. Today, they’ve moved to subscription models. They might sell you on a subscription where they come maintenance your unit twice a year and you’re paying a subscription. You’re going to want to pay and set up that token through a website or through another method. But then when they come out for that I live in Austin, Texas when the air breaks down, I’m calling them, I’m not waiting on that. Going want to make a payment right there in the field. So I think blending those experiences and bringing the payment methods together so we can leverage a more seamless experience for the consumer. I want to zoom out and I want to make sure that we address sort of a macro 10,000 foot view. When we’re talking about the verticalization of these models, and we’re talking about the way it’s evolved, take me a little bit through, if you could, what it actually entails and what does a vertical payment experience look like ideally? Yeah, so for us, the payment lifecycle flowso I don’t think most people realize outside of our industry, of course, that there are many technology and pieces that touch that transaction from the time of capture all the way through the settlement and funding. So verticalization for us is bringing those in house so that the data can be shared across them. Kind of going back to I think fraud is an easy one to tie this together. Card spending. It’s been something we’re really good as an industry to prevent, try and protect. We need to keep protecting it. All that transaction through, there’s card spending controls at the place of capture, which is where you’re making your transaction at the gateway, which moves the transaction out to the processing rail so we can help clear and settle that. There’s card spending protections and fraud monitoring on the clearing and settling, which is where we actually move the money between the bank accounts and the card brands. Well, vertical integration is bringing all those together. If one player can help you provide those services in the same place, you’re not just setting three separate dials. You’re orchestrating how they all work together. You’re not double layering controls you don’t need, and you’re putting these controls at the right settings so you have efficient transactions through the whole flow. Is there anything else you’d like to leave us with as we close out this conversation? Yeah, I think it’s an exciting time in the industry. I’m excited what Stacks is doing. I think 2026 is going to be a big chapter of innovation for us and for the industry. Embedded payments, ISVs, they’ve been growing at such a rapid rate. As an industry, we’ve been catching up. I think the ability to verticalize, bring all these tools together, is going lead to new ways to innovate. I can’t even talk about all the ways yet that we’re doing that, but it’s going to be a game changer to see what you can do now as you connect more dots, get more technology together, and tailor it for the specific needs of these verticals. So I think we’re all going to live in an exciting time. I know we talk a lot about AI as an exciting time. I think that’s going to be a layer of it. But I think our industry is going to build on that. And I’m excited about Stacks is doing and what the industry is going to do. All right. Well, thanks. I look forward to seeing what does develop. And as you mentioned, this is every changing. It doesn’t stay in one place. So I know our next conversation might be looking at some new innovations that we haven’t even thought about previously. So thanks very much. Yeah, I really appreciate your time today, Hal, and love talking about these things. Likewise, nice to have you. Thanks.