Report: The New Frontier of Fintech-Enabled Marketplaces

In our first report earlier this year, we shared how marketplaces are outpacing the wider tech market on a macro level, delivering outsized returns to founders and investors alike. Diving a little deeper in this edition, we will explore what we believe to be one of the next frontiers:  Fintech-enabled marketplaces.  

Being extremely bullish on all things network effects, we have observed that there seems to be a blurring of lines between marketplaces and traditional fintech companies. The merging of these two worlds is proving to be an attractive proposition with a number of founders exploring this approach and subsequently yielding compelling results for themselves and their investors.

In the report, we outline the product stack, business model and competitive advantages of this new “marketplace stack,” as well as how founders can leverage fintech capabilities to enhance their value proposition to customers and create even stronger moats around their business.

Key Takeaway 1: Embedding financial services enables marketplaces to unlock new opportunities for growth and increase their take rate   

A marketplace’s take rate directly depends on the value it can deliver to its participants. As a rule of thumb, the higher the added value of the platform to its participants, the higher the value it can extract from the transaction it enables. By offering integrated financial products which provide additional value beyond the platform’s core offering, marketplaces are able to increase their take rate and hence their revenues above initial forecasts.

Take Shopify as an example, though its core product is an eCommerce tool platform for SMEs, it launched a payment solutions product in 2013 and within 18 months had grown its ARR from $50m to $150m.

In 2017, despite making up similar proportions of revenue, there is a significant diversion between subscription and “merchant solutions” (i.e. payments) revenue in the years up to 2020. Over the period, subscriptions revenue grew by 2.9x while payments grew 5.8x, the latter making up 70% of the company's 2020 revenues.

By advancing cash and granting loans to merchants on its platform, Shopify successfully grew its revenues  year-on-year by adding new income streams, with its subscription business contributing an increasingly lower percentage of its topline.

Key Takeaway 2: The product stack for embedded finance is complex but nailing it strengthens defensibility

From lending and payments to insurance and banking, founders can easily get overwhelmed by the plethora of options for embedding finance in marketplaces. This combined with a myriad of regulations, licenses and product infrastructure complexities can deter even the most ambitious founders from pursuing this product strategy. However, those that do - and are successful - further extend the gap between themselves and their competition. 

Our portfolio company YardLink, a B2B platform for construction equipment, provides embedded insurance (through a third-party provider) to businesses who lease construction equipment for projects. This alliance enables it to also provide credit to qualified buyers, enabling them to settle invoices between 30-60 days after the transaction has taken place. 

By leveraging proprietary data from its customers’ transactions, YardLink is able to assess their creditworthiness and underwrite risk to them as required to lock them into the platform. Offering an integrated solution to both its customers’ construction needs and financing requirements, the company is further fortified against potential competitors.

Key Takeaway 3: Fintech-enabled marketplaces remove friction, increase trust and extend customer lifetime value 

In the last few years, we have seen the proliferation of buy now, pay later (BNPL) startups, including Klarna, Affirm and Afterpay. Online marketplaces have used this trend as an acquisition strategy to lure customers to their platform.

On the B2B front, the leading marketplace for bulk material, Schüttflix, flips this theory on its head with a “supply now, paid now” product, where suppliers are paid the minute an order is fulfilled, a first for the construction industry! 

As a result the company has gained significant trust which has not only strengthened its relationship with existing suppliers but has also attracted new suppliers to its platform and hence helped them to quickly break into an antiquated industry. By removing the friction present in traditional construction transactions through instant payments, Schüttflix has provided a richer experience to its customers which in turn has improved platform liquidity and enabled a faster go-to-market.

Within B2C, Klarna saw its number of US retail partners grow 163% year on year as of May 2020, adding more than 4,200 in the period. The company has now reached a record 7.85m US customers and 1m+ monthly active users, demonstrating consumers’ appetite for a more seamless customer experience than the previous status quo.

Like what you read, see you at the MPC 2021...

To hear more about different marketplace models, trending topics and how to scale a network effects company from zero to infinity, you do not want to miss our 2021 Marketplace Conference on the 16th and 17th of November. Embedded Finance is one of our focus themes and we’ve got an amazing lineup including:

• Bremner Morris, CEO Rally.io 
• Sukhinder Singh Cassidy, ex-President StubHub
• Eric Demuth, CEO Bitpanda
• Laura Wu Behrens, CEO Shippo
• Felix Ohswald, CEO GoStudent
• Elmar Broscheit CFO Gorillas 
• VCs from Battery Ventures, Bessemer, Lightspeed, NFX and more...

At Speedinvest, we see almost 2,000 investment opportunities every year in marketplaces alone. We, the Marketplaces & Consumer team, are constantly impressed by the high degree of innovation that resourceful, driven founders continue to bring to the marketplace ecosystem. We continue to be extremely excited about the future of marketplaces and believe that the best is yet to come. 

Please get in touch if you’re a Pre-Seed or Seed stage founder building a marketplace or platform business.

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