(2023-07-31) Brown The Iron Triangle Of Embedded Fintech

Matt Brown: The iron triangle of embedded fintech. In the 2010s the biggest fintechs were product innovators... Chime’s branchless bank, Robinhood’s fun fee-free trading, innovative consumer credit products like Earnin’s earned-wage-access or Afterpay’s buy-now-pay-later.

With that gap closed, the edge is now in distribution. That doesn’t mean product innovation is unimportant. It’s just a necessary rather than sufficient condition.

The great distribution edge will be found in embedded fintech: the distribution of financial products through non-financial companies

bringing products to where users already are.

Think Toast.com offering payment processing to its restaurants, Uber offering financing to its drivers, etc

Every financial product, from payroll to insurance to mortgages and beyond, will be embedded.

Embedded fintech is so powerful because it’s so positive-sum if done right. Each player in this complex value chain ends up better off.

The next big fintechs will win with novel distribution, not novel products.

Even if “embedded fintech” is the obvious and positive sum trend, it’s not obvious how to execute it. The challenge is not just technical or regulatory, but primarily one of incentives.

Platforms must make trade offs between three factors when choosing an embedded fintech provider:

• Ease of ownership — Is it easy for the platform to implement and maintain the embedded fintech product?
• Good unit economics — How will the embedded product change the platform’s unit economics?
• High acceptance rate

These factors are in tension with one another. You can’t change one without it affecting the others. This is what I call the “iron triangle of embedded fintech”: you can only optimize two factors at most at a time, and improving one necessarily degrades a third.

How embedded fintechs can use this model to win

First, recognize that you can’t optimize for all three factors at once

Second, aim to build an embedded product that supports multiple triangles

Third, figure out how to escape the iron triangle constraint and optimize for all three at once.

Conclusion

Just because something is obvious doesn’t mean it’s easy.