Start Here: Getting Real About Your Business Model With VC Emily Man

Episode Transcript

Ahon Sarkar:
Hey there, welcome to the Embedded Finance Blueprint, where we get past the noise to help you navigate the landscape, unravel the hype, and actually build a sustainable embedded finance business.

Today, there's no debate anybody can build these products, but who should? And if you should, how do you do it correctly? That's what this series is about.

I'm Ahon Sarkar, general manager of Helix by Q2, and I'll introduce you to a few friends, who will share their real-world lessons for success and help you avoid the potholes along the way. In just six expert conversations, you'll learn everything you need to get past getting to market, and get to growing your business.

So, let's dive in.

For this first episode, we're going to dive into the first decision you're going to have to make: How do you build a compelling business model? The mistake lots of people make is deciding they want to launch everything to everyone, and in so, launch nothing to anyone.

If you're looking to be successful, the first thing you have to figure out is how you are going to succeed. What is the real problem you're going to solve? And how does all this financially make sense?

On today's episode, to help us learn a lot more about this, is none other than my friend, Emily Man. Emily is an investor at Red Point Ventures, a Bay Area venture firm with about $6 billion under management, backing companies like Snowflake, Stripe, Twilio, Looker, among others.

Red Point is pretty active in the fintech space, with a portfolio that includes companies like NewBank, Ramp, and Wealthsimple. Emily and I met when she was at Point72 Ventures, where she helped set up its early-stage fintech growth fund.

And so, suffice to say, Emily knows quite a bit about the business models that work well and the ones that don't. That’s why we thought it would be awesome to have her come on the podcast and share with us what she's seeing in the space, and the advice she would give companies to start building a compelling business.

Thanks for hopping on, Emily.

Emily Man:
Thank you for having me.

Ahon Sarkar:
I'm excited to take the chats we have on a monthly basis and put them into this format.

Emily Man:
‍Love it. Let's do it. Let's get spicy.

Ahon Sarkar:
‍Okay. Well, speaking of getting spicy, why don't we start by disagreeing with a lot of people out there in the space?

This is a question we ask all our guests because we tend to find that folks who understand the space might see it a little bit differently.

So, Emily, I'll ask you the question: What's the one embedded finance myth you want to debunk immediately?

Emily Man:
I think the biggest myth of this space is that it's easy—that there’s this magic little extra-revenue pill where you just plug and play a couple of APIs, and, boom, embedded finance.

I feel like in the hype of the embedded finance or “everything-is-fintech” craze, people got the idea that embedded finance was like, I don't know, the MSG of banking or something. It’s like if you have poor unit economics, or maybe you're a consumer business that's struggling with retention, or you’re TAM-constrained, you sprinkle some on and, boom, you've got something that's ready to go public.

And then the way that it was being talked about was there are all these fintech infrastructure players and API companies that you just plug and play, and there you go, debit card; There you go, loans. Now, I don't completely blame them because in many other parts of tech, that's how it works.

So even in payments, for example, Stripe made it very easy for any developers with a few lines of code to have a way to accept payments for their businesses. Twilio did the same thing for SMS, right?

The difference is that these are primarily features or services that support the core business. Twilio makes it easy for customer communications. Stripe makes it easy to get paid. Auth0 makes it easy to offer authentication.

But, ultimately, these are cost centers in the P&L, whereas embedded finance is really much more about a totally new product area and new revenue generation. And so, the truth of the matter is not every brand can nor should be doing embedded finance, and it requires a pretty significant amount of capital and energy investment.

Ahon Sarkar:
Right. And it's one of those things where if you are one of the companies that should do it, and if you are prepared to invest in it, you can get a wild amount of return out of it.

But if you're kind of expecting to push a button and product pops out, it's not even that it's impossible to do that. If you go out into the space, there will be vendors that say, "We'll give you the standard front end. We'll simplify the operations." And that will feel really appealing, until you ask the question, "Wait a minute, if in order to launch in three to four months I have to make something that is effectively the exact same as everything else out there, and I still have to spend money and resources—at a time when I don't have a lot of resources—then what?” Why would your customer use that over something else that is exactly the same? The answer is, they won't. Right?

And I think what we've both seen is the companies that tend to succeed are the ones that weave this into their DNA and solve a real problem. They grow their whole business, not just this business.

Understand that doing this correctly is like weaving this into the tapestry that is your business. And if, instead, you're just hoping you can duct tape a string on top and call it a day, it's probably not going to work.

So, I guess my next question for you is, as an investor, what's a viable, sustainable business model look like for companies launching this, and what are some of the initial considerations that you'd recommend making before you even get that far?

Emily Man:
Yeah, so I'd say first you’ve got to ask yourself, how ready are you to commit to this?

So, if you look at successful, scaled, non-FI fintech companies that have done a really good job with incorporating financial products, all of them have teams dedicated to this. Shopify, Mindbody, for example, have VP-level execs who are in charge of this side of the business. That's the level of dedication you need to bring.

It's a real investment. And so, oftentimes, sitting on the investor side of the table, I hear a lot from early-stage vertical software or consumer companies that are like, "Oh yeah, we're going to give away our software for free and then monetize through payments or loans or banking in the next quarter." Then they come back in six or nine months, and they still haven't made progress on that front.

And I think that this is no fault of their own. I think a lot of it is because of the narrative that's out there about just how easy this is to do, which, at the end of the day, is not the case.  

When you're at that early stage of business, there's so much wood to chop on the core product, the core business, the core value proposition to your customers that this just doesn't end up as the top priority for the CEO. So, I think, tactically, before you jump in, you have to ask and answer these questions for your organization:

First, is your core business stable enough to do this right now? Are you at a comfortable enough place bringing value to your customers in your core business that you're ready to start extending or thinking about what embedded finance will look like? The second is, do your customers need this, and have you earned the right to offer it? The third is, will this catalyze something in your core business besides revenue that warrants an investment here?

If you're just looking to layer in another line item on your top line, I can guarantee you're not thinking about this from a customer-centric approach—which is going to be critical to the success of a business like this—and you'll end up disappointed.

And then the fourth is related to the last two. Do you have a structural advantage? Why do you have a right to win the business beyond that this is a captive customer you've acquired some other way? And why is your offering better than what they could get from going to one of the many financial services providers out there, whether it's a fintech or a traditional institution?

Ahon Sarkar:
Yeah. And one of the interesting things that I feel underlies all those questions is this idea that context is king. A bunch of these products in a completely standalone context, separate in an app that has nothing to do with the others, is kind of worthless. I hate to say it.

If you are starting a brand-new neobank today with the goal of targeting every American, I hate to burst your bubble, but you're probably five years too late. The reality is those folks already have a competitive advantage over you. They already have some kind of scale. They've already bought that trust with their customers over a series of interactions over time. You haven't.

So, where is this opportunity? This opportunity is with those companies that have some kind of context—where adding banking either makes your life a lot easier or lets you do more stuff with them. As an example, let's say you are a POS terminal for some type of business. You could launch a standalone savings account in a separate application and go to all the businesses that use your service and say, "Hey, would you like to go download this separate savings app?" And I bet they're going to say “no,” right?

Or, you can do what someone like Square Financial Services did and just add it as one line under your cash position, inside the Square app. Suddenly, when you're thinking, “Okay, do I save or not save?” it's right there on the same page. The previous workflow was I had to go into a totally different application, make a funds transfer, go back and forth, manage that on a daily basis, and it was just a giant pain. Now, it just does it for me.

That's value. That's useful. And that also drives value for the business. In this case, the value is that when people keep money with you, you're either benefiting them, which drives loyalty, or you're monetizing. Ideally, it also increases engagement across your core portfolio.

So, to your point, some of those questions, like, "Does this grow your core business?” are really important. If embedded finance doesn't profitably grow your business, then to your point from earlier, it probably isn't going to be a priority. You're probably not going to focus on it, and doing this right does require some degree of focus.

I love those comments. I guess before we get into what good looks like, maybe we spend a couple of minutes on what bad looks like. For leaders who are listening to this podcast, what type of businesses would you say shouldn’t pursue embedded finance?  

Emily Man:
First of all, if you don't say yes to all of those questions, you probably should not be building a banking product right now.

I think the types of businesses that have seen a ton of success tend to be ones that have a high active user base. If you are, say, an insurance company that interacts with your customers probably once a year at most when they're renewing their policies, you probably don't have as much right to offer something with a higher frequency of usage like a bank account or a debit card. Now, there are other types of embedded finance that might make sense for you along that value chain.

Ahon Sarkar:
Yes, that's exactly what I was going to say.

Emily Man:
If there's a fundamental mismatch between your presence in your customers’ lives now versus what you are hoping for it to be, then it's going to be really challenging. It's an uphill battle.

Ahon Sarkar:
For sure. And I think on that one, it doesn't mean you can't do it. It just means you should launch a product that fits into what you are for them. I remember, I won't call the name out, we were speaking with a very large mutual fund, and initially we were talking about maybe doing a debit card or something to that effect. And, ultimately, they said, "Look, Ahon, the thing that you don't understand is we are a set-it-and-forget-it business. I want our customers to keep their assets here and then come back 15 years later when they need it. And I don't really want to talk to them in between. So, I might be interested in your savings account, but I'm not really looking to do anything with more engagement than that."

Or, if you look at the insurance business, you probably don't want to take the tack of replacing your customers' primary accounts. But if you could make claim disbursements happen instantly and monetize them instead of paying for them, there's a lot of value. So, it’s about figuring out, based on the type of relationships you have, what type of product fits into that relationship.

Emily Man:
Absolutely. 100%. I think that insurance example goes right back to what we were saying before, right? That complements the core business. It makes the core offering, which is your insurance product, better and improves the experience and has the opportunity to drive retention as that policyholder makes a decision around who they work with next.

Now, am I going to go get a loan from GEICO? Probably not. Bank account, yeah, I'll pass. As long as you have an understanding of how the finance product then complements or works with your core offering, then I think you have a viable path.

Ahon Sarkar:
So, what I'm hearing is, start by figuring out the problem you're going to solve for the person who is using it. If you do not solve a problem that is not already solved today, stop here. The second thing I heard is obviously make sure you understand the type of relationship you have with that customer and make sure that the problem that you're solving fits into the type of relationship you've established with that customer. And the third thing is figure out the metrics that matter in your core business, and if solving this problem helps address those metrics. Because otherwise, eventually it won't be a priority for you.

Is that a fair summary?

Emily Man:
Yes, absolutely. And maybe to get a little extra tactical, something you should look for is a strong attach rate. What percentage of your customers would have an interest in using a product like this before you launch it?

I mean, look, as investors we always talk about product-market fit. This is a very easy way for you to gauge if there would be product-market fit with your financial offering.

Ahon Sarkar:
I will mostly agree and slightly disagree, and here's why: I think getting a sense of whether your customers would use it by understanding their problems, etc. is really important and something you should definitely do before you go through this. But I've also seen companies fail by asking their customers if they would use something that they've never seen or can't imagine. To quote Ford, "If I asked my customers what they wanted, they would have asked me for a faster horse."

And we've seen potential clients go to their customers and say, "Hey, would you want a bank account and a debit card?" If you're that person, you probably say, "No, I don't need another bank account or a debit card." If you, instead asked—let's take that POS terminal example—"Would you want to earn interest on the dollars you're already holding inside my ecosystem?" that’s a very different question than, "Would you want a separate savings account?"  

I think how you go about gathering that information from your clients is a really important part of making sure that you're getting signal and not noise.

Emily Man:
Absolutely. I mean, look, I don't think we're disagreeing here. I think it's about, once again, homing in on the customer value and not the products.

I think a big problem across financial services as a whole, setting aside embedded finance, is that people think of it in terms of products—like a bank account, a loan, insurance product, whatever, rather than thinking, "What does this actually do for me or solve for me in terms of a problem that I have in my day-to-day life?"

Ahon Sarkar:
100%.

Emily Man:
Embedded finance is not an account. It is about: “I would like a place to store my money and be able to transact whenever I want.”

Ahon Sarkar:
And the interesting thing is, and I think we both learned this spending a lot of time digging into these problems, that there are jobs to be done. There's actually the Jobs to be Done framework. Every product should do a job for you.

The job isn't just holding money, the job is bigger than that. But to understand the bigger job, you have to understand the context, which I think comes back to that idea of context being king.

I’d like to dive into that and maybe talk a little bit about companies—whether we associate them with embedded finance or not—that are successfully doing this. The ones that have figured out what the problem is, have built a product that is getting usage, and one that is also catalyzing the core business. Maybe you could start with one, and then we'll kind of go from there.

Emily Man:
There are a couple of OG embedded finance examples from before it was even called that.

My favorite one I found as I was doing research for this talk is the financing arms that were part of a lot of the major automakers. So, GMAC, which GM stood up in 1919, funnily enough is now what we know as Ally Bank. You probably didn't know that piece of history.

Ahon Sarkar:
No.  

Emily Man:
Basically, what happened is that automobiles were really expensive when they came out and there wasn't a way for people to finance them properly other than just paying it all upfront. And so, the idea of the auto loan that is offered by the automaker and bundled into the sale process not only drives up your revenue as an automaker, but it creates this sticky relationship on the backend. Even in the U.S. today, "captive loans," loans that are offered by the auto producers themselves, roughly account for 44% market share.

Ahon Sarkar:
Wow. Yeah, it's also wild because we're starting to see on our side, the next-gen wave of that approach, which we refer to as Save Now, Buy Later. I think with Buy Now, Pay Later and everything that happened in 2022, people are a little hesitant to take on debt. But this problem that car manufacturers have is not a unique problem.

If you sell a high-ticket item, whether that's home improvement or airline travel or luxury goods or mortgage loans, your big problem is that people show up and leave because they don't have enough money to buy your thing. And the question is, how do you help them get there? One way is you give them debt that can potentially hurt their credit, but another way is you help them save faster than anybody else.

And the nice thing about that auto manufacturing example is that they can afford to give you a better rate because they're going to blend the margin across the car purchase transaction. So as a customer, I get a better rate with you than I would elsewhere. And the same is true for Save Now, Buy Later.

It's interesting to see these examples where the problem is not that my customer needs a bank account. The problem is this person wants to purchase something and needs help getting there. So, you have to ask, “What do I have to make that easier?"

I feel like another interesting example of this that people don't really think about is Starbucks, right?

Because with Starbucks, the Starbucks app is literally the only way you can order early. Basically, what I do on my phone is I'll order it on my Starbucks app, I'll just walk in, pick it up and leave. The problem to be solved is I don't want to wait in line, and I want to earn my rewards without having to carry a card with me. But by solving that problem, they've decreased their total queue time. They've figured out they have literally hundreds of millions of dollars they're monetizing through their treasury operations. They're lowering the interchange fees that they're paying on these types of transactions by doing preloads.

So, what a beautiful product, right? Because that's solving a real problem for me. I hate waiting in line. And it's solving a real problem for them. That is success.

Emily Man:
Absolutely. I mean, Starbucks is an incredible example, right? They have somehow convinced their users to give them $1.6 billion in interest-free cash.

Ahon Sarkar:
It's unbelievable, only to earn stars, which they've now changed up on me.  

I know we're coming up on time here. I do want to ask you one last question. Not to put you on the spot, but today we talked a little bit about where this goes wrong, the big things to focus on, and what types of companies are doing this well. So, my last question for you is, if you could give one piece of advice to someone trying to figure this whole thing out, what would that be?

Emily Man:
Look, to tie it all together, I’d say start by writing down a crisp hypothesis of what you're trying to achieve. And if it doesn't solve, one, a customer problem and, two, one of your problems in your core business, then don't prioritize it.

Ahon Sarkar:
I totally agree. Yeah, I think that it's wild how many people will spend months and months of time without ever answering that question. We've had retail brands with tens of millions of users come to us asking to go and build them banking products, but with no clear understanding of why they would do it—other than because others are doing it. And others doing it is not a good enough reason.

Emily Man:
Absolutely. Yeah, don't get dragged in by the hype and by the crowd. If you cannot articulate very clearly what the vision and the purpose is, it's probably not right for you.

Ahon Sarkar:
The thing that's exciting to us, and what we're seeing with our current clients and the ones coming to us, is there's a lot of opportunity in the overlap between financial services and what other businesses do if they think about that overlap and not about launching banking as some standalone product.

So, over the coming years, I think those that take the right tact on this business model piece have a lot of greenfield ahead of them as long as they're focused and not trying to be everything to everyone.

Emily Man:
Absolutely. I 100% agree. I think there's an incredible opportunity here and there's still a ton of untapped potential.

Ahon Sarkar:
For sure.

Emily Man:
But there have also been thousands of hours and millions of dollars wasted trying to go after something that isn't really there.

Ahon Sarkar:
Yes, 100%.

Well, Emily, thank you so much for being our inaugural episode guest. There's no one I would have rather done this with, and I really appreciate your unique perspectives and willingness to dive into the nitty gritty. I feel like those of us who build these products appreciate when people are willing to get in the thick of it, as opposed to giving some grandiose, overarching statements that kind of mean nothing.

If this got you thinking about how to build your business model, what kind of business you want to build, and what kind of problems you want to solve, and now you're wondering, "Well, how do I design a product that does that?" That's what we’ve got the next episode for.

On the next episode, we'll be talking to Mike at MetaLab, whose built some of the most amazing financial products for banks and fintechs. We'll talk about how you actually build a focused and delightful product based on what Emily just said: What is the problem that you're solving for the customer? What is the problem you're solving for yourself? And how does that holistically become sustainable?

So, looking forward to seeing you on the next podcast episode, and talk to you soon. Appreciate it.