Embedded Finance: The Story Behind The Numbers with SumUp & BCG

[00:00:00] 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 unpacks the embedded finance opportunity for SaaS platforms. I'm joined by a major leader in financial technology for small businesses, SumUp, and Max Zevin, partner at Boston Consulting Group, driving their embedded finance initiatives for North America. up, Max. Max, welcome. Can you tell us a few words about yourself to start off?

[00:00:58] Max Zevin:  Yeah. Thanks for having me. So as mentioned, I'm a partner at the Boston Consulting Group. For those of you that don't know BCG, we're one of the world's leading consulting firms across a whole bunch of different industries, and I selfishly think we have the leading payments practice globally, although I'm sure other consultants would say that as well. I've been in consulting for almost a decade now and also spent some time working in payments and industry as well at Bank of America. And I really work across the value chain, so I work with acquirers. I work with software players, fintechs. I work with payments networks, so you name it, across the payments universe, you'll find me in and around the topic. And, of course, for this specific topic, embedded finance is is a massive massive discussion topic, a massive investable theme in The US and Europe, and so it's something that certainly a lot of our clients are paying a lot of attention to right now.

[00:01:49] Hemmo Bosscher:  Absolutely. And can you tell us a little bit about BCG's relationship to embedded finance? Like, what's the type of work you guys have done in this space?

[00:01:56] Max Zevin:  It's a great question. So embedded finance is is in its early days. Certainly, we've seen it move from emerging to the sort of growing trend. But a lot of our clients are still trying to figure out the sort of what is this, like, how should I think about it, what's my reaction function, whether they're an investor or whether they're a fintech or a corporate or a software player. And so what we've been doing a lot of is actually helping them figure that out. So what's the market landscape? Where do they fit? What's the so what for them strategically? And then we help them often set up, like, what's their operating model. So do they partner? Do they build? What pieces of it? What does this look like in five years and why? What capabilities to roll out, etcetera?

[00:02:38] Hemmo Bosscher:  And is there a common denominator in the so what? Or do you find that every outcome is sort of unique?

[00:02:43] Max Zevin:  It's a really good question. I think there's a common denominator in the archetype of the player that we work with in the so what. So for banks, like, we've had a number of banks that we've worked with that have thought about, looked at either building or partnering embedded finance capabilities in the back end. And so, like, there's a very clear sort of so what archetype there. For SaaS platforms, there's another type of so what archetype, which is, like, this thing is here, embedded finances. It's a durable trend. It's not going away. And so often the question is how, not if. And then for networks, there's another one, which is, like, how do I facilitate this, be a part of different flows potentially, etcetera, etcetera.

[00:03:21] Hemmo Bosscher:  And who do you think should be most afraid with the rise of embedded finance?

[00:03:26] Max Zevin:  It's a great question. So I think it's easy to say banks because banks have traditionally owned the products that we think about. The marginal impact on the banking industry, I think, is reasonably small in the near term because of the relative scale of embedded finance versus small and mid sized banking. So similar to, like, what we've seen in buy now pay later on the consumer side. Like, it's a major durable trend, but banks aren't running scared buy now pay later players because they're only three or 4% of consumer spending. So the same thing is playing out. It's the pace of embedded finance that matters there and the long game. In the near term, though, I think that the traditional sort of, like, what I'll call an air quotes legacy merchant acquirers are the ones that should be running scared. Because if you think about payments acceptance and merchant acquiring, fifteen years ago, it was enough to accept payments. And now it's not. Now accepting payments is commoditized, and it's what are the value added services, like, all the basics that are now fraud, APM acceptance, multi country, etcetera, debit routing. Like, all those things are table stakes, and now it's what's the next set of VAS that you can offer that really differentiates. And I think this falls in that category.

[00:04:34] Hemmo Bosscher:  Yeah. Of course, we've seen lately in the industry a rundown on cost almost to zero, and there's not much more you can go below that. You're just subsidizing.

[00:04:43] Max Zevin:  It's exactly right. And so then where you earn the marginal dollars, you earn it on stuff like this, and you earn it on expanding your VATs in every which way, frankly. And this is a huge piece of it. Super sticky revenue. It's

[00:04:54] Hemmo Bosscher:  really interesting. Hey. We published a joint report not so many moons ago, and we said the market right now is worth a 185,000,000,000 US dollars, which is, of course, a fantastically large number. Can you help us unpack that a bit and how we think about it?

[00:05:09] Max Zevin:  Yeah. So it's a large number. It's also helpful to note that, like, we published a report a couple more moons ago. I think it was 2022. We published the version of this. And then the market was actually I think we said a 110,000,000,000. So it's actually grown by, call it, two thirds in the past two years, which is a pretty fantastic growth rate. The reason for that, I think, is because if you think about the core components of embedded finance, so you think payments acceptance is like the cornerstone, merchant cash advance or embedded lending, deposit and savings products, and then cards and issuing, each of those today, globally, has absolutely massive TAMs. Like, when you add them up there in the I would argue probably the trillions of dollars globally. And so the share of that that embedded finance can address, frankly, just continues to get larger and larger, both as the capabilities around it get more institutionalized and, frankly, as more small and medium sized businesses go towards SaaS and software providers either horizontal or vertical. So I think we we'll see it continue to grow even beyond what it is now.

[00:06:11] Hemmo Bosscher:  Yeah. And we've seen also, of course, since SaaS popped up that these margin pools, they quite naturally consolidate, right, because one offering just becomes more differentiated than another. And if we were to open a barbershop together, that'd be like a de facto software, maybe two or three options, but definitely not 30, right, at maturity. Do you think embedded financial products will add be, like, an additional accelerant to that process? That's a

[00:06:34] Max Zevin:  really interesting question. On your point, like, it's really interesting as you see this kinda consolidation in the margin pools of SaaS, because you start to see, like, 70% of a vertical owned by, like, three to five players, and the other 30% is this long tail of a 100. And so I think in embedded finance, you're gonna see the same trend on the provider side because some of these products are getting pretty institutionalized in their scale. Like, some of the lending portfolios out there are in the low billions now, which by big bank standards is pretty small. But if you think about a billion dollars of loans, that's a lot of small businesses or medium sized enterprises every year that take 50 or a $100,000 loans. And so that implies the need to have, like, industrial strength scale behind these products. That implies the need of capital and investment and smart software dev, good risk management, blah blah blah. Right? All this stuff. And that stuff means that you're gonna basically have a couple of scale players, I think, dominate the provider landscape. I think from an actual product offering perspective though, I think what we're gonna see is more specificity. Like, we'll have these sort of generalized products. You've got payments as a no brainer. I think working capital lending, we've seen take off like wildfire in a space, and I actually wonder what the growth path will be of that because there's a ton of runway. So ton of runway, but lending businesses always have their own elements of risk. And then cards and deposits, same as accounts, we've seen adoption in patches, and I think there's more to come. But I think what will be the unlock is as players start to verticalize those offerings either in the marketing and the packaging or the actual product specs. So, like, where is an installment loan better than a merchant cash advance supply? Where can you start to embed, like, equipment or leasing or something like that so that you actually start to get, like, real vertical differentiation in the products? And that's when if you're a small business. If we started a coffee shop, it's one thing for us to get an embedded loan because it's convenient, it's easy, and we have no cash flow history. So, like, great. Those all make sense for us to go buy a bunch of espresso machines. It's another to get a secured loan where we actually finance some of that really, really expensive equipment where it's lower risk at lower cost to us, and it's a lower risk to the actual providers.

[00:08:47] Hemmo Bosscher:  Yeah. And it lowers the barrier to entry. Exactly. That's the magical bit. That's interesting. Do you have any personal convictions on what you think the next likely financial product that is embedded will be? Because I think we're familiar with cards, bank accounts, lending, MCAs. Is there anything on the rise that you think that's especially logical?

[00:09:06] Max Zevin:  That's a really interesting one. I think it depends. Is this blurry line between what do you call an embedded financial product and what do you call an embedded payment product or another value added service? Like, that's a really blurry line, and I think it depends on how you think about that line. So, like, payroll. Is payroll a value added service that lives over here, or is payroll embedded financial product?

[00:09:28] Hemmo Bosscher:  That's something every small business owner has to think about.

[00:09:30] Max Zevin:  Exactly. And same with, like, ARAP or, like, b to b payments. Again, taking our coffee shop example further, like, we have to buy beans. Like, we're getting invoiced for that, and we're paying someone for that. And today, ISVs and SaaS players are providing that service. And so do you wrap ARAP reconciliation and other types of payments in there, and then you do virtual cards to that.

[00:09:51] Hemmo Bosscher:  Yeah. Talking about that, that's a really interesting dynamic, I think, that will happen over the next ten years with these where the horizontal players and the vertical players meet. Because this example you just mentioned, you could argue that a verse vertical player just includes it in their own offering, and a horizontal is trying to go, who do you think will win in the end?

[00:10:08] Max Zevin:  I think that horizontal players face a choice right now, and I think we've seen, at least in The US and parts of Europe and The UK, this play out. You have a set of what I would call, like, horizontal players that I would argue have already won. Like, whether or not everybody knows they've won or not, like, they've won. Stripe, I think you guys are in there. Square, Clover, like, these are some horizontal ISVs, PayPaks, and Acquires that I think I've just already won. But and here's the interesting nuance. All of those players are verticalizing. Again, like, do you guys can't effectively serve an industry by just saying, like, oh, we're gonna do card acceptance. Like, enterprise merchant services is way too complicated. Same with Stripe. At this point, Stripe is a reasonably verticalized thing built on some amazing horizontals. So, ultimately, I don't think there's a choice.

[00:10:58] Hemmo Bosscher:  I'm thinking more about, in the end, a player like a QuickBooks or like a Lightspeed, they're both trying to be the command center and where we run our coffee business. And they can both do ostensibly what the other can. Who wins there? That to me is an interesting movement.

[00:11:15] Max Zevin:  I think it's the vertical players.

[00:11:17] Hemmo Bosscher:  I think so too. That's a short conversation then.

[00:11:20] Max Zevin:  Yeah. Yeah. Yeah. It's a 100%.

[00:11:23] Hemmo Bosscher:  Why? Convince us. Why the vertical players?

[00:11:26] Max Zevin:  Preach to the choir. You got it. Look. I mean, it comes down to, like, the vertical player can be the operating system for a set of businesses, and that's incredibly, incredibly tailored. Like, the horizontal player provides a use case and is trying to expand out from that use case. So it's a question of, like, are you the OS on which you build a bunch of use cases, which is super tailored to one thing, or are you the use case?

[00:11:51] Hemmo Bosscher:  If we ran one of these horizontal platforms today, what do you think we should do? Because surely, we haven't lost yet. There's still time to fight. I think what would you advise them?

[00:12:01] Max Zevin:  It's a great question. I would advise two things. So one is, like and a lot of them are doing this already. If you're a QuickBooks or someone, like, your game is that you can provide your use case to the vertical players. So it's a channel strategy question. You can provide your use case to the vertical players better than anyone else. And so, like, are you the category killer in that use case? I think that that's something that we're already seeing play out with channel partnerships, certainly in tax prep, payroll, ARIP automation, invoicing. Like, that's already happening.

[00:12:32] Hemmo Bosscher:  You have to make it so well integrated that it's not worth disintermediating you and building it yourself because it works so well. It's defensive, but it's probably successful.

[00:12:41] Max Zevin:  Yeah. And then, you know, I think, like, at the margin, you play the defensive play and you figure out what are the adjacent again, back to what are the adjacent use cases that you have a right to offer. And then the real tough question, which I think is where you're going, is, like, are there verticals or areas where you build some level of differentiation? And I think that's a really tough one. Like, how do you go from being the broadest possible offering to, like, I'm gonna be really broad, but build some differentiation in these three things? Because at the end of the day, there's an operating system out there that works for it.

[00:13:12] Hemmo Bosscher:  I mean, we will probably live to see it happen in the market, so I can't wait to see what happens next. Just switching gears slightly. In our report, we wrote that over 50% of SOBs are likely to adopt what we call a full suite of embedded financial products in the near future. Can you talk a bit about what this full suite looks like today? And then as a part two of that answer, I'm personally very curious if you believe like I do that there is a chance that through software platforms, traditional banks can be entirely disintermediated in a time span of ten years from small business banking altogether. Two parter. Thank you.

[00:13:47] Max Zevin:  Two parter. You got it. Okay. Part one, and then we'll come back.

[00:13:51] Hemmo Bosscher:  Yeah. What's the full suite today, essentially?

[00:13:53] Max Zevin:  Yeah. So this is where I think, like, embedded finance gets cool, and this is where I think we're on the bleeding edge of it still. Although, you know, you may argue you guys aren't on the bleeding edge of it. I would argue there's a lot of people that have yet to adopt what good looks like. So okay. Payments acceptance, that's a really clear one. That, I think, is a trend where a ton of SMEs are already adopting payments acceptance through their SaaS player, ISB, whatever it is. That's like the anchor product of all of this. Where this gets really interesting is with payments acceptance, you can do cash flow based underwriting. Cash flow based underwriting means you can either underwrite to more people or you can underwrite more cheaply to someone. Again, theoretically, I think now we see it often as underwriting to more people, which is, I think, quite a useful use case. So those two, I think, make a lot of sense. What gets kind of fun is when you add deposit accounts, you can now link the payments acceptance to the deposit account. That can be your settlement account. And you either get cheaper pricing, right, or you get a bundled price or something. And so you actually make it as a small business a little bit better for you all around. You have funds in that account, so maybe that helps again with a loan. And you can also add a high yield savings account. So you get money in, you pop it into an interest bearing account. Sits there, you can use it, you can cash it out, etcetera, etcetera. And then you can also use cards either to borrow or pay via debit directly off that or charge card. So where this gets interesting is in the same way that banks serve consumers and small business today, like, you win with an integrated offering. And I think we're in the really early days of that, and I think that's why we'll see a lot of adoption over the next, like, five to ten years.

[00:15:28] Hemmo Bosscher:  I think right now, what you described is perfect, but what still happens today is that the large majority of small business owners would funnel their money out of that account to their real bank account. If you were a betting man, what year do you think that shifts that, let's say, more than half of the business owners keep it on that integrated account? How quickly will this go?

[00:15:49] Max Zevin:  More than half. That's interesting.

[00:15:51] Hemmo Bosscher:  More than half on a software platform. That's what I'm talking about, I think the fundamental shift or the, like, the paradigm shift will be when they feel they no longer need their what is now their real bank account, but that becomes superfluous?

[00:16:04] Max Zevin:  It's a great question. So I'll give you a year. But before I do, I think that it will depend greatly on the value that, like, embedded finance players can articulate to small and medium sized businesses because ultimately, we saw this with neobanks play out in The US and to some degree in Europe and The UK. In The US, the neobank Bell prop was garbage for most consumers. So most consumers and bank to banks reacted. Big banks said, okay. We're gonna be better. They got a lot better. Frankly, the big banks crushed the neobanks all day at consumer banking. What happened in the events? UK and Europe, that didn't quite happen. Neobanks, I would argue, in The UK in a much greater role. Europe is a mixed bag. So I think there is a major role to play for, like, EF providers to actually articulate that value prop really clearly to make it happen. Because if not, like, it's not gonna happen. That said, like, I think if EF providers do that job well, mid twenty thirties is probably a fair guess of when we see, like, real at scale adoption. And the reason I say that is because, like, the scale of the banking system in The US, less so in Europe, I think the European banking is a tough place to exist. The scale of the banking system in The US, even on small businesses, which I think are historically worse served than consumer and commercial banking, it's huge. The scale of embedded finance today is versus the planet Jupiter. And so even if EF grows at what I think frankly is gonna be an extreme growth rate, which it has over the past five, six years, like, it's the law of large numbers. But, again, the direction of travel and the growth rate is undeniable. Like, it's a thing. It's happening. It's real. So what's the number? 2035.

[00:17:46] Jakob Carstens:  Okay. No. That's what I

[00:17:47] Hemmo Bosscher:  would have guessed. Your story sounds a lot more bearish than that. I think that gets reasonable. Ten years is reasonable. You you spoke just now about different geographies. I think for me, there's quite clearly the fact that The US is years ahead of The UK, which in itself is is years ahead of Continental Europe. Is that also what you're seeing? And what have you seen in your experiences? I assume

[00:18:07] Jakob Carstens:  you talk to businesses from all of

[00:18:08] Hemmo Bosscher:  those locations. What do you think are the main drivers of that? Is it culture, prior behavior, regulation, digital adoption? What are your thoughts?

[00:18:16] Max Zevin:  It's a good question. Totally agree with you, which is good because we wrote that in our report together. So

[00:18:21] Hemmo Bosscher:  Oh, did we? Oh, that's good. I'm glad we did. Fantastic report.

[00:18:25] Max Zevin:  Yeah. It's written by some really smart folks. So I think that the simplest answer is that there is a ton, a ton, a ton of venture capital money and private investment, and now it's public. Like, we see it with public players that backed the trend in The US around SaaS becoming vertical SaaS and horizontal SaaS previously. But I think US public and private markets are absolutely massive relative to European and UK markets, and the amount of investment dollars per grabs are extremely high. And so I think because of that, we saw the move earlier and faster in The US. I don't think that there's something when it comes to the SaaS trend that has, like, regulatory climate or it's easy to say like, oh, you know, small businesses in one place or another were more ambitious or less ambitious. There's nothing there. I think it's really a dry powder question.

[00:19:12] Hemmo Bosscher:  Dry powder. What does that mean?

[00:19:14] Max Zevin:  It's like the sheer amount of capital looking for a dollar of of investment return.

[00:19:18] Hemmo Bosscher:  Alright. And embedded finance is halt, so let's go.

[00:19:21] Max Zevin:  That's exactly it. I do think, like, for embedded finance specifically so that's, like, the vertical SaaS trend. For embedded finance specifically, I think that The US tends to be, like, a little more, you know, another Americanism, like, a little more I wanna say wild, wild west, but maybe open on a regulatory framework basis is true versus Europe. But I think that where the SaaS trend goes, embedded financial products will follow.

[00:19:46] Hemmo Bosscher:  I hear you. I think there's a further cultural element in Europe where I think the American ideal of sort of this individualistic, we're all self made, the Steinbeck thing of we're all temporary, embarrassed millionaires. There's no poor people. I think in Europe, there's more respect for institutions. So what I mean by that is I think the trust gap that exists between the software platform and a bank is probably more of a thing in Europe than it is in The US where the immediacy just wins out. Like, hey. It's better for me. Let's go. There's innovation all around me anyway. And I think especially in markets like Germany, still very cash heavy. There's a spark asset like a local bank around every corner. You trust your banker, and you're not quite sure about this techie from Berlin. So I don't know. I love working in this space because there's all of these cultural nuances that creep in, and that's very exciting. Is there anything in this chat that we haven't touched on? I've very much enjoyed this conversation. If there's anything else you'd like to add or highlight?

[00:20:43] Max Zevin:  Man, it's a billion dollar question. I mean, I think it's a fascinating space, super high growth. It's interesting. But if you're a SaaS platform, I think, like, the question is not an if question anymore. It's a how question, which is cool. I think we've covered pretty much all of it. It's been a fun chat as well. Hopefully, we get a chance to open the coffee shop and also maybe write the software that operates the coffee shop for everyone.

[00:21:05] Hemmo Bosscher:  That would be ideal. Thank you very much for taking the time, and I'm sure we'll see each other again in another context. Happy to. With the big picture in mind, let's shift to the platform perspective. Welcome to the episode of Adyen presents embedded finance. We are here today with Jakob Karstens of SumUp. Jakob, welcome onto the podcast. Could you kindly take a moment to introduce yourself and perhaps touch on SumUp and its mission and what you're trying to change in the world?

[00:21:35] Jakob Carstens:  Of course. Thank you, Hemmo. Thanks for the invitation, and thanks for giving us stage also to SumUp. My name is Jakub Karstens. I live in Berlin. I'm married to a wonderful wife and father of one little girl. I studied business and stopped out of university and somehow got stuck in the fintech scene for the last twelve years now. I worked in crowdfunding companies and stuff like that. And then in 2020, I joined SumUp pretty much on the day of the lockdown here in Germany. I more or less reached out to them or they reach out to me. And that was actually also the time when the product was born, which I'm working on now with the team that's called the merchant cash advance. That's SumUp's credit product or lending product. And since then, in the last five years, we've spent some time on building this and shipping it to more merchants across the SumUp ecosystem.

[00:22:26] Hemmo Bosscher:  And at the time, five years ago, what was SumUp then?

[00:22:30] Jakob Carstens:  Well, it was mostly a payments company. Probably not everyone in the firm would say that. However, it was dominantly known for their small white card readers that you, uh, probably the one or the other have seen in a coffee shop or in a small retail store. And since then, has heavily developed because they took that path from being a payments company in the place to being a multiproduct company today where we're offering multiple services, but I'm sure we'll talk about that a little bit later. Maybe to also spend some on the history of SumUp itself. The company was born actually in 2012. And back then, it was really that small merchants and retailers and coffee shops and sole traders had no good opportunity to access payments themselves. Uh, it was a classic market dominated probably by bigger players and by banks, and it was very hard for them to access, like, simple forms of payments and get, um, started with only days. So the idea was born, and some are pretty much built a very like, nowadays, it looks a bit stupid, obviously. A small device that had, like, very few features only and then tapped into probably a market opportunity that was not so obvious back then, but has developed fantastically since. Today, we are building not only the hardware and selling that to our merchants, but more importantly, we also that ecosystem where they, today, can pretty much access every tool that they need to thrive. There's a sum up's mission, right, that we focus on the small merchant, and we give them everything they need to run a wonderful and a growing business. And that's the stage where we are today.

[00:24:09] Hemmo Bosscher:  That's really interesting. Thanks, Jakob. And how small is small? Like, what order of magnitude should we be thinking about?

[00:24:14] Jakob Carstens:  Well, we are starting with sole traders. Like, in my job, from time to time, I see merchants who tell us their story why they use the capital product, and we are starting with hardware installing people that just when they have installed, I don't like, a new floor at the customer. They directly check out using the summer hardware, and they run a sole trader business. They did everything their revenue is what they do on a day to day.

[00:24:39] Hemmo Bosscher:  What's the ceiling in your product market fit currently?

[00:24:41] Jakob Carstens:  The bigger the merchant gets, the more difficult. It's a bit hard to redefine a cutoff because we do grow or our aims to grow the merchant, really, from being a sole trader going to full story from the sole trader, maybe hires a few colleagues, and then they are multi person to some point multi revenue business, we could still give them the tools, and we aim to give them the tools. Probably more in the hospitality sector where we then offer multi waiter solutions with, like, smaller devices for order management with our POS and softwares and stuff like that. So we even go into enterprises. So a couple of delivery companies are customers of SumUp where they are giving the small card reader for the delivery men and women. And if they have to charge services at the end customer, they're using SumUp as well. So the range is really, like, from one man businesses or one woman businesses to full scale large, large enterprises.

[00:25:43] Hemmo Bosscher:  That's really interesting. Is then how you go to market a bit more agnostic? Sort of like put it out there and see where it gets stickiness? Or did you very deliberately go like, okay, it's gonna be this type of merchant, and we're gonna go after them. How did that work? That's a good question.

[00:25:58] Jakob Carstens:  So, obviously, it's easier to reach the mass market, like the very small ones, via traditional marketing channels where we have done a lot of brand, and we do a lot of out of home, and just well known as a brand by brand recognition, I would say. And then the more difficult it gets, the more complicated also the use cases, the more we do a hands on personal approach. We have obviously a bigger sales team now, and we go up the ladder until, like, doing classic enterprise sales with the team that is around and is serving these bigger clients. So we try to do all at once with, I would say, a customized marketing and sales approach.

[00:26:38] Hemmo Bosscher:  Okay. So the it is a bit segmented in how you go to market depending on the size? Exactly. Yes. Alright. So you started in payments with a small device fit for a micro merchant. Now you said that we go upmarket all the way to enterprise. How has your sort of payments offering evolved along that journey? What was the sequencing?

[00:26:58] Jakob Carstens:  Yes. So we pretty much started with what we called an AI card reader. We talked about it earlier. That was really just a very simple card reader with, like, very, very basic features. And after that, like, obviously, it was about rolling that out, bringing that to the market, finding some merchants that would use it. And I think for a couple of years, we were pretty much focusing on just getting this done, getting the hardware in place, and getting the, obviously, the payments stream in place and stable and scalable and everything like that. And then I think very soon, we already realized that if you would only do payments, that's not really the offering that our merchants need because they actually, like, got to us and said, like, somehow we love your card reader, but can you please also give me something where I can put my revenue on my like, a bank account or something like that? And then we build a bank account and offer like, the merchant can now put the revenues they do on the sum up bank account. And then they said, oh, now I want to spend my revenues. Can you also give me a credit card? And then we said, okay. Let's build a credit card as well. And then they said, okay. Can we now do also cost management tools? I want to split what we're doing or what we're spending our money on and would have a clear overview. What do I spend on stock? What do I spend on my salaries? What do I have to put aside for tax and so on? So we are very much a listening company and taking into account the feedback that we get and build in stuff like that. So after bank, we started to give them additional tools for team management, invoicing solutions. We do sales reports. Like, we have a big team that is really focusing on merchant analytics so that we give the the merchant the right analytics tools so they can draw and pull sales reports. They can pull product inventory, product success, I would even call them. So it's a long history. The range is not stopping there. We do payment links now if merchants want to accept payments also without a hardware device. We recently launched self-service kiosks. It's a really nice feature that merchants can use for like, you probably know it from McDonald's or stores like that, and that is now available for the coffee shop around the corner. So in an affordable price, the technology is there. And that's, I think, like, how it widespread. And then at some point, the product that I'm responsible for, the credit product, joined the party as well five years ago and is now available to most merchants in our major countries.

[00:29:28] Hemmo Bosscher:  That's really interesting. And before we get to the credit bit, I just wanna talk about you just said you led with hardware and then came through listening the other solutions, so banking, etcetera. That's interesting because normally you see these horizontal SaaS providers start with a bank account and maybe a card, and then, oh, yeah. These people need to accept payments too. Maybe we'll give them a terminal, but you did it in reverse. But on that listening specifically, you said we're a listening company. How does that work in practice? How do you collect all that feedback? How do you prioritize within that StackRack? How does that go?

[00:29:58] Jakob Carstens:  I would say, maybe for me also when I joined SamUp five years ago, it was really a learning curve from more coming a background that was maybe a bit more, I would say, business driven to a company that was so merchant and product driven. So I think it starts with how you set up the company in its organization. So we have very independent teams. So the credit team that I'm part of, for example, barely for the good or the bad, We don't know. Barely intact a lot with other teams. I don't have to go to the CEO. We don't have to go to the CXO every day to report or to ask, can we do this? Can we do that? We have a very clear mission. We have set our targets, and that enables us to really focus on our product and build the best credit product. Obviously, we have to listen to the rest of the company to connect and make sure that we are benefiting from the services that we get from there, but I think it starts with independence. The other piece is obviously about being open and talking to the merchant. And there, I would say, SumUp definitely stands out in customer service, has always been proud of its great support team, and how we are able to also transform from what we get there as feedback or as also complaints and turn that into product features very soon. And I think the credit product actually is a good example for that. And, obviously, we do the full range of customer research, conduct EMPS surveys, and make sure that we are staying on eye level also with competition just by what merchants tell us. When they do their own research, they can easily tell us, okay. I now know if I go to provide x, I would get that, or you don't have feature zed. And please build that because, otherwise, I'm about to churn.

[00:31:43] Hemmo Bosscher:  So most of these are just really qualitative one on one conversations of you reaching out and asking for feedback?

[00:31:48] Jakob Carstens:  Many of them. I would say it's a combination of all of them that's put it together. And then, obviously, looking at the market and making in the end, I think that's the smart way of conducting or building a successful fintech company is to make the right decisions at the right time and what order you would want to ship, what products, what is really necessary.

[00:32:07] Hemmo Bosscher:  Exactly. Switching gears then to your area of the business credit, what we call capital, cash advances, loans, etcetera. You just said when I joined, this is sort of the start of it all, and your ascension of the company ran in parallel, I think, to the growth of this part of the business. But was it just as simple as you realized, hey. We've sold tens of thousands of small terminals to these types of merchants. They're often cash constrained, live in the low margin verticals. They need cash. We can offer it. Or how did that calculus go, and when did you decide to really take it seriously?

[00:32:38] Jakob Carstens:  Well, the story is actually that in 2020, when the lockdown, SumUp realized that it should have properly built the credit product a little bit sooner than that. Because very soon, obviously, the revenues of SumUp merchants were tanking. So that was definitely crisis mode in the company. It was a coincidence that I was looking for a new opportunity back then, and then I was happy to join the team. And, unfortunately, I joined a few weeks too late. So the loan was already issued. The cash advance was already paid out to the customer. But the story is still lockdown happened in The UK, or we were pretty much screening, okay, what can we do? The idea was actually whether we would work with government funding because there was obviously a big thing during the lockdown when the governments wanted to push money into the SME market and more probably even into hospitality and retail businesses that had no chance of switching revenues onto an online stream so quickly. So we were looking for opportunities and then quickly realized, okay. It's much faster. We just build it ourselves. And the merchant cashier was pretty much was the most logical product because it's so close to what we're doing in payments because it is, like, using two aspects of it. It uses the payments data to for underwriting, and that enables us to do preapproved cash advance offers to our customers. And it uses, on the other hand, the payment technology that SumUp had put in place to then facilitate the repayment of the cash advance. And that works that we are deducting a small percentage of every transaction that the merchant does till the outstanding debt has been paid. And both aspects, also having seen different loan products in my past experience, enable some up with the cash advance, pretty much everyone else in the market that is doing payments. But the cash advance preapproved and then conveniently collected is, like, the best loan product I could imagine as a merchant. It is preapproved. You don't have to go to a bank. You don't have to submit paperwork anywhere. Credit scores are being ignored because they don't matter because as a payment company, we sit closest.

[00:34:41] Hemmo Bosscher:  You see that they're credit worthy. Exactly. You take out the human error in repayment. Yeah. It works well.

[00:34:47] Jakob Carstens:  Exactly. And we sit on top, um, revenue stream of the merchant as well. That puts us in a prime position, obviously, even in a non secured, no guarantee lending setup that we run to still have some form of guarantee even if it's not, like, a written or something like that.

[00:35:02] Hemmo Bosscher:  And then as your loan book grows, did you start offloading that risk, or how do you look at that?

[00:35:07] Jakob Carstens:  Well, offloading, I wouldn't say. Um, we brought in a partner, a US based investor that is joining us and is just bringing in, well, I would say, a bigger pool of money that some, uh, was just not focusing on putting on its own balance sheet, I would say. So we preferred staying lean and benefiting from, like, the better economics if you work with a partner that knows the product well and knows also and brings in some experience that even helped us a little bit in refining risk here and there. So that partnership is now in place and helps us.

[00:35:42] Hemmo Bosscher:  Did you see also an evolution then in the average ticket size of these loans or what your maybe risk appetite was on how high you could go?

[00:35:48] Jakob Carstens:  Yes. Definitely. I mean, we started with the maximum of £2,000 in The UK in 2020, which was, like, just the bare minimum that we wanted to do.

[00:35:57] Hemmo Bosscher:  As used to stay afloat, or what was the business case? I'm just curious, like, was it that was just to stay afloat during COVID?

[00:36:03] Jakob Carstens:  Exactly. Just give a bit of, like, a helpline to merchants. And in the days, obviously, there was a bit of, like, playing money for us as well just to see whether the product works in regards of merchant acceptance where we, obviously, during the COVID lockdowns, we got a phenomenal response. And then also in repayments and payback performance and, like, loan book return performance, that took a bit longer, obviously. A loan book always takes some time to mature and give you the feedback that you need to then refine your credit risk models. Since then, we have increased the average loan amount. We're doing up to £15,000 and euros in the countries where we are live. And so we can serve also bigger merchants and also different use cases.

[00:36:45] Hemmo Bosscher:  That's really interesting. And did you find also in the early performance that people who had just paid off a loan that they immediately take a new one, something we're seeing in the industry?

[00:36:54] Jakob Carstens:  Yes. I mean, this is again, like, I'm the biggest enthusiast of the merchant cash advance. Also, from a marketing and a growth standpoint, which is my job in the team, it sounds fantastic. So we see really high adoption rates in the countries we are live, especially in The UK where it's a very well known concept, the merchant cash advance as such, that works very well, and repurchase rates are higher than 80%. So we can tell we're onboarding merchants on a good conversion rate we're happy with, and then we're keeping them in the loop, and they're taking a new one. The use cases, actually, when we talk and interview merchants, it's really interesting, are very different. So some people just benefit from it as a buffer that they want to have. They are maybe not even using it on a database as to just, like, like, I suggest the money on the account already or just having the assurance that they would have the cash advance easily available because all they have to do is go into the SumUp app and do three clicks, and then you have the money on the account in less than two days. And that is, like, really help money for use case. I love the story of we have a efficient chip store. I think he got his cash advance now. And in the incident, it was pretty much, I think, on a Thursday. His sufficient chips machine, his fryer, was breaking down. And to save the weekend business, he had to buy a new one. So he went to the sum up app, pulled the money, got the money on the next day, went to his local dealer, got a new fryer, and the weekend business was safe. So these are the use cases that we see a lot where I think you can't compete with the availability and the convenience that you get with this capital product in the summer bath.

[00:38:26] Hemmo Bosscher:  I mean, there isn't really a competitive product to that. The immediacy and meeting the need at the point where he's already doing business.

[00:38:33] Jakob Carstens:  And, obviously, like, we have always this it's a bit of even a philosophical question. Would you run this as just an injection into the ecosystem where you pretty much run the product as pro bono, or would you make its own, like, revenue contribution product? And we are trying to find a good middle ground between both. Obviously, the product is not cheap because even with having the payments data, you do preapproval, but you are still having a lot of unknowns that you would capture if you would do credit scores, if you would look on the balance sheet, or if you, like, ask additional questions that would make the product more complicated. But what we definitely see is that merchant sellers or I'm aware it is not cheap, but I'm still willing to pay a little bit of an extra, a little bit of a premium compared to me going to my local bank and asking for a loan, which took me maybe two weeks, and I spent hours on submitting documents. And so I would say it's business decision. It's a priority decision, and we are happy that often we, uh, being considered as a good and competitive offer against other alternatives, at least for the use cases that we just talked about. Right?

[00:39:45] Hemmo Bosscher:  And when it comes to sort of the immediacy of funds, and it's kind of also a credit product, of course, how do you look at faster payouts and same day payouts? Like, how does that fit into your ecosystem and your vision?

[00:39:56] Jakob Carstens:  Yeah. That's an interesting topic. We saw it in lending, obviously. That merchant said, okay. The sooner I get the money, the better it is for me. And we saw the same then on the card reader. So, historically, we always had a bit of delay there. And then at some point, we could roll this out, and we are, obviously, enjoying the partnership with Adyen, in this case, where you're helping us to ship this product and make this available to merchants as soon as possible. And that is a feature that merchants asked about and that they are now benefiting from a lot.

[00:40:26] Hemmo Bosscher:  I mean, there are obvious synergies between the two. Right? If I'm operating a small cafe, I need my cash quickie, whether I'm paying out some of tomorrow's deposits now, and I'm giving you some basis points for that or taking your capital loan. Do you see any cannibalization there, or do you always want to offer both flavors? Well, I wouldn't say cannibalization

[00:40:44] Jakob Carstens:  is a big issue in SumUp. Um, as long as it helps the merchant, we are happy with offering it. And then, like, if they tell us now, I'm happy with getting my money in the place and, uh, immediately, and I didn't need less capital products because of that, then we have to build that up capital products. It's a good competition to have, and it's good that this sets pretty much the benchmark of our speed to ship money.

[00:41:07] Hemmo Bosscher:  Let me ask it a slightly different way. If you see behavior, for example, from a user taking out a lot of small ticket credit products, do you then suggest to them, hey. For your use case, it might be better to just go to a faster payout scheduling or something like that? Or is it more like, hey. We've got this, and you pick and choose what you want from the menu?

[00:41:26] Jakob Carstens:  Uh, it's analytically driven. Like, if a merchant does that, let's offer also this or at least not in, like, manually written guidebook or something like that. We have in our CRM engine that is now fully AI enabled. So it might actually happen even if I wouldn't be aware of it so that our engine tells us just this merchant behavior. Lots of merchants who benefit from instant payouts on their card reader revenues also are interested in Cash Aban's offer, or maybe it's the opposite and they are not are less interested. I actually don't know. It's an interesting point. I should look into this.

[00:42:09] Hemmo Bosscher:  That's, uh, I think you said that a lot of data, obviously. But, equally, there are so many tailwinds in the space that maybe there's no urgency around that either. Hey. I wanna switch a bit to geographies. To me, being a Dutch living in Amsterdam, you've been ubiquitous for a very long time. So it feels to me like a distinctly European offering, but I believe you're now active in well over 30 markets. You're huge in Latin America and The US and in Europe. Is this an offering that you think will fit everywhere? You know, we can see those little white devices all over the world, or how do you look at sequencing your geographies and picking out the margin pools?

[00:42:44] Jakob Carstens:  Yes. Good question. We are very, very proud of being so successful in so many markets. And I would also say in hindsight and not having been part of the full journey, but still, it is impressive to see how the different use cases also make different countries differently successful. So just to give a few examples, obviously, in The UK, I would say it's a bit more, uh, credit card heavy country now that is just probably a bit more financially developed, I would even say, than other countries. That was kind of, I don't know, obvious that SumUp would be successful. But when I joined, I didn't expect SumUp to be so successful in Brazil, where you have also a huge steam or a huge economy of that is based on small merchants, And you have also big motivation from the government to increase card payments. And then putting this together, you have just a young and highly developing citizenship or, like, uh, people who live in the state and who use then credit cards on a daily basis. And you see how market is is growing and how we are being part of that. We are looking into new markets, and we want to launch a few new markets in still this year. So the road map is never stopping. But also something that I learned probably more when I joined Saurabh is obviously that payments is a heavily regulated play. You at Adyen, you know this better than me. And it's not only or the decision on when to enter a market is not only driven by what we think is the economic value, but also what is the feasibility from a regulatory perspective. And putting both together pretty much then sets the agenda of how could we enter a market. Do we do it with a partner? Do we do it ourselves? Do we apply for licenses? And so on. What hardware would we use, and what products would we then be able to start with?

[00:44:41] Hemmo Bosscher:  Yeah. I mean, very similar motion to us. And on the credit road map, does that follow payments quite naturally, or do you do your own sequencing? Because, of course, the rules and regulations are slightly different there, not just geographically, but also compared to payments. So how does that go?

[00:44:56] Jakob Carstens:  So until now, the lending slash credit offer is only available in countries and to merchants where we are already live with the payments product at least, because that is the only way how we do the underwriting for our credit offers. And so pretty much the road map is set by where we are live with payments. We can also offer credit. They're very interesting. You are at this classic chicken egg challenge. Do you offer a credit product because it is so heavily demanded in the market even if it wouldn't be worth from our prioritization standpoint? Because the market is obviously very small. Let's assume we start in a new country tomorrow, and we have, like, 10 customers. And each of the 10 tells us, I actually need lending because no one else is giving me a loan. Can you please also enable your lending offer? And then we would need to think, okay. How can we find a way in a new country also to offer a lending product? Maybe in a way that is different to our classic setup that we already use in the countries where we are live. So we are looking into all kinds of partnerships as well for lending, where we are either, like, using regulatory setups that would put us put on a speedboat to make it available sooner than if we would do it completely ourselves, or that we even consider to have some market served completely by a partner so they would do take the credit risk as well and would take the underwriting decision maybe because there's a local partner who already knows the market and knows what data points to look at and maybe also would just be then in a better position to do better underwriting that we could do in a foreseeable future. And if you then think it through, it would be better for us to go with the partner. We would probably not get the full upside in revenue, but we would probably get a bit of referral commission or something like that. But last but not least, the customer would be in a better position because we could, instead of sum up going very slowly and ramping up a market and testing the waters, developing and refining credit risk models, we would have a partner who would be all in from day one, and we could then very quickly scale and go along. And pretty much every payments customer who's interested in lending could benefit from the offhand of having such product available soon.

[00:47:07] Hemmo Bosscher:  That would also increase the stickiness of your product. So you you'll make money elsewhere even if it's not entirely in credit. And you spoke earlier about you being a listening company, and you're building out this suite of products and features for these small business owners and increasingly mid and larger business owners. I think philosophically, what I hear is you're trying to sort of become the operating system or the command center from which they run their business. Right? You've got the analytics. You've got all the channels. If you look ahead sort of the rest of the decade, is there anything you're particularly excited about developing or that you think like, hey. This is really gonna be the end all that solves their needs? Is it gonna be something related to AI? Surprise me.

[00:47:44] Jakob Carstens:  Well, AI will play a role in that, but I think until the end of the decade, we are still talking about millions of merchants doing daily business in a, hopefully, physical and offline world and or in an online world where they can also use some app. But, predominantly, we still wanna go buy our shopping or do, uh, buy and buy a coffee. And I wouldn't want my AI robot to do that for me. And even there would be some form of payments that the coffee shop would need to accept. I think for us, it's more that brand vision that we want to grow with merchants. So how else can we develop more products that are close to the journey of once a sole trader now a 10 people business. What are the different needs, and how can we still, like, serve it from day one to being in the market for a couple of years and growing? And the other aspect is about closing the loop. So maybe less known, but yet popularized, the summer pay consumer app that we're offering, where you get a free virtual credit card in the app, and you get a cashback, and you can do pretty much your expense management and so on as a consumer. Obviously, that's a nice play as well, and we have seen that with other players in The US already. If you can close the loop between the merchant side and the consumer side, you're also then benefiting from some better economics on the payment networks as it would pretty much be some up moving money, like, from one end to the other end, but still in the same, um, pool of our, um, realm and but somehow has under control. And that is, I think, the other path that we will double down on, and they were suing good traction already on today.

[00:49:34] Hemmo Bosscher:  That's really interesting. Is that limited then only to markets where interchange isn't capped, or do you just see that as a lesser opportunity but still sizable for that product?

[00:49:42] Jakob Carstens:  Well, I wouldn't say it's linked to interchange and or in pricing in general. I would say it's probably not even the biggest motion. It's just that there's even from a data perspective, right, if you can connect consumers with merchants, I think this opens up so many opportunities of, like, services to merchants and services to consumers we are not yet even thinking about.

[00:50:05] Hemmo Bosscher:  In the realm of loyalty, or what are you thinking?

[00:50:08] Jakob Carstens:  Exactly. Like, loyalty is another product that some of it is offering. We acquired a company there. I think it was now three years ago or four years ago, and that is now available to all some of merchants that pretty much even the independent coffee store around the corner can run a loyalty product, and it could then target their consumers on the consumer app. Stuff like that is then possible if you have links to both ends.

[00:50:32] Hemmo Bosscher:  Really interesting. Thank you for sharing all that with us. Is there anything we left out of this conversation that you'd like to share with the audience?

[00:50:39] Jakob Carstens:  Just maybe a recollection of what we briefly touched base on, like, building or shipping great payment products to merchants is obviously the tip of the iceberg always looks like a shiny app or a nice hardware. And when I talk to my friends where do I work, I work at SumUp, they say, I I I know the card reader. I think what's below the iceberg is this big compliance game, the regulatory game of getting this in order and finding the right setups that enable you to run this whole thing. And that is also a bit of my takeaway from our time so far at some help that running this is a hugely complex task, and doing it right, I think, is the what is really distinguishing company. And when I think about Adyen and when I think about Saab and when I think about the other players in the markets that have made it to that size, I think that's really what is, like, making them send out that they have played this in a smarter way and in a better way and in a more reliable way and in a scalable way.

[00:51:36] Hemmo Bosscher:  Maybe that's why we work so well together.

[00:51:38] Jakob Carstens:  I guess that's the reason. I feel like there are so many touch points. And, like, whenever I talk to the team, I see how many products they are shipping. I know you have also the speedboat with your capital product. I think that is interesting. And so far, what I saw, I think, is like a logical connection as well. So and, I mean, AdSense success speaks for itself, and we are happy to benefit from the services that we do connect to and that we can benefit from. And from there, it's just inspiring to see how everyone who is working in the space has access to the vast amount of data, is leveraging their data, and is then able to build better products or is offering additional services.

[00:52:19] Hemmo Bosscher:  Definitely. I have a bonus question. We were not done.

[00:52:21] Jakob Carstens:  Go for it.

[00:52:22] Hemmo Bosscher:  Since you maybe not from scratch, but you played a large part in building out credit at SumUp, what advice would you have for prospective founders building a software platform, whether it's a horizontal play like SumUp or a verticals play for something very specific. I can and then not broad strokes, but just think about the sequencing, but, like, the hires you make, the markets you target, what products you offer. Anything you learned that you really felt, I hadn't expected this going in?

[00:52:47] Jakob Carstens:  So so many dimensions, so a bit hard to cut it short. Maybe let's focus on a few points. I would say one is definitely the markets that you want to operate in. And as I said, it should always be a combination out of business value or economic value and customer demand with what's the regulatory setup. So how can you build a product that is selling well because there's customer demand for it, and still you're not going to jail or you're paying high penalties to a local regulator. That's one. I would say then, like, once you get closer and if you work at the fintech space, you definitely have to set up a proper and reliable and high functional compliance and regulatory team that is covering that aspect because that, in the end, will make it easier for you to ship. I would then say, once you realize how difficult the regulatory challenge is, make smart decisions on do you build it yourself, or do you work with a partner? And there are so many partners outside, right, that do embedded finance in one form or the other and helps you get to market much faster. I think at least for the beginning, that is always a good idea. And then well, what we also talked about, like, being customer centric is easily set, very difficult to maintain, and to keep an agenda that is inspired by customer input and by customer research and is customer centric, but is not, like, going after the customer as with this famous quote from Henry Ford about, like, customers asking for faster horses instead of for cars. You have to somehow put in a little bit of intelligence yourself and then make the right decisions of what you put in place or in front of the customer because they would not explicitly tell you, but you then will need to, uh, like, have a bit of creativity and come up with the solution that is really sending out. And it may be a nice looking payments device that maybe no one also expected, like, to finish off it. It's such a remarkable brand. I can now, for sum up, We could probably produce some version would even sell very well just because people love how the SumUp card reader looks. So maybe that's in the last piece. You need to look good and have something sexy on your product, something that is really having you standing out.

[00:55:03] Hemmo Bosscher:  Let's end on that. Thanks a lot, Jacob. I enjoyed this one. Appreciate it.

[00:55:07] Jakob Carstens:  Well, thank you for having me. Thanks.

[00:55:09] 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. Embedded finance is a proven opportunity, and it's still growing. Platforms can act now and still have a mover advantage in the markets wherein they operate. Thank you for listening.