Today’s ISVs have no room for error. SMB owners have more options and less time than ever, and their need for seamless solutions is causing a new problem…

The specialization of Payfacs and ISVs is a huge step forward. It allows them to deeply understand their merchants' needs and fosters trust and loyalty within the verticals they serve. Unfortunately, many payments companies are tripping over the next step forward: giving these narrow verticals a wider range of services.  

Software providers often diverge from their core skill sets in an effort to comprehensively meet client demands. This can quickly lead to a core competency problem, taking their focus off of what they do best and leaving them lacking in both areas. 

In order to understand the solution, we have to better understand the problem.

Understanding the core competency problem

The problem comes when ISVs step out of their wheelhouse in an effort to be the go-to app or platform for their industry. This is a great goal, but it can also be a stumbling block. After all, it’s specialization that got them to where they are. Focus is a superpower. Venturing into financial services like lending, while enticing, distracts from that focus. 

Straying too far from your core competency risks eroding the trust painstakingly built with clients over time, unless you have massive resources that allow you to functionally build a separate business unit on the side. For most payment processors, this just isn’t the case. 

Imagine your favorite coffee shop decided to start selling pizza. It’s not very good pizza, but at least it’s close by, right? Unfortunately, to make room for the pizza oven, they’ve taken out an espresso machine and they’ve pulled a barista to run it. Now they’re stretched too thin on their core business and the line at the counter is growing, and not in a good way. All for mediocre pizza that no one wants to order (especially at 6 AM). 

Like I said, focus is a superpower. So, should Payfacs and ISVs strive to be the go-to platform for their vertical? Absolutely! Just not alone. 

Overcoming the core competency problem

Access to capital is consistently the top problem reported by SMBs, presenting a golden opportunity for payment processors. In fact, it’s such a big pain point for SMBs that they’re often willing to change Payfacs in order to get that capital access. But building a lending business is also incredibly hard, and making a mistake here will cost you a lot more than an espresso machine. 

To build a successful capital product, you need five crucial elements: access to quality customers at the right time, consistent and reliable data for risk assessment, proven underwriting models, efficient operations and access to capital. These elements pose significant challenges for software companies venturing into financial services. They likely have the first two in spades, but the underwriting models, capital markets and operations are very specialized and hard to pull off, not to mention the regulatory hurdles and compliance risks involved. This is where embedded finance can be a game-changer.  

The embedded finance solution

By definition, embedded finance connects businesses or consumers to financial services through non-financial platforms. In this case, they can power Payfacs and ISVs to deliver capital to their merchants without building or servicing that financing in-house or taking on the associated risks and complexities. 

With secure APIs, embedded capital experts like Pipe can ingest all the underwriting data they need, eliminating most of the cumbersome manual application steps and giving the merchant a seamless experience. With capital embedded into your platform, it feels like a native part of your offering, allowing you to maintain that hard-earned trust and helping your merchants access funds without ever needing to leave your product. That kind of capital access has been shown time and time again to be key to the growth and success of small businesses, which can help boost both stickiness and GPV for their payments provider.

As crucial as it is to focus on your core business, today’s merchants demand a broader range of services from their providers. Embedded finance is the best way to solve this core competency problem. Partnering with an embedded capital platform like Pipe makes it simple to launch a capital offering quickly, delivering pre-approved offers to your merchants and driving revenue and increasing LTV and GPV for your business, all while staying laser-focused on what you do best.

Luke Voiles is a passionate fintech leader and business builder, who brings over two decades of experience with innovative industry leaders into his role as Pipe’s CEO. Before joining Pipe, he was the GM of Square Banking at Block, where he led the global team responsible for managing, launching, and scaling small business banking and lending products. Previously, he led the team building out Intuit’s small business lending unit, QuickBooks Capital, from scratch, scaling it to $2 billion in loans originated. Luke made the switch from private equity to fintech after more than a decade as a distressed asset and credit special situations investor at top-tier funds, including TPG Capital and Lone Star Funds.