Vertical SaaS: Hype or the Future of Embedded Finance?
The Vertical Ascent
The promise of embedded finance – seamlessly integrating financial services into non-financial platforms – has been swirling for years. We’re told it’s the future, the next big thing. But as a data analyst, I need to see the numbers, the real-world traction, before I buy in. And what I’m seeing in the vertical SaaS (vSaaS) space is…intriguing, but not quite revolutionary.
The core argument is straightforward: vSaaS platforms, which cater to specific industries (salons, pizza shops, home services), are becoming the operating systems for small and medium enterprises (SMEs). Because they handle daily operations – scheduling, inventory, payments – they possess a treasure trove of data. This data, proponents argue, allows them to offer tailored financial services more effectively than traditional banks.
BCG and Adyen estimated the total addressable market (TAM) for embedded finance in North America and Europe at around $185 billion. Current penetration? Roughly $32 billion. That's a big gap, and vSaaS platforms are positioned to fill it. Vertical software adoption by SMEs reached 59% in the US in 2024, up from 50% just two years prior. And last year, SaaS providers offering integrated payments solutions accounted for 36% of SME acquiring revenues. By 2028, the expectation is they will expand their share to 45%.
But here’s where the hype needs a reality check. While embedded payments are increasingly common (more than half of relevant independent software vendors in North America offered them in 2025), other embedded financial products – loans, cards, accounts – haven’t seen the same uptake. As the article points out, only a single-digit percentage of merchants consistently use software finance products like cash advances.
Why the discrepancy? SME banking relationships are stickier than their relationships with software providers. Banks offer bundled services, and many merchants are simply “satisfied enough” (a damning phrase) not to switch. Plus, embedded finance offerings are more complex to underwrite than simple payments.
Data vs. the Dream
vSaaS platforms do have advantages. They possess real-time cash flow data, enabling more thoughtful underwriting. They have a direct distribution channel, with SMEs using their software daily. And they have deep connectivity, understanding the nuances of their specific verticals.
But these advantages haven't translated into widespread adoption of non-payment financial products. The user experience for many embedded finance products is lacking. Many providers rely on pre-approved, generic offerings, essentially "spamming" their users with irrelevant options. And many SaaS vendors are content with the "guaranteed" growth from their core software and payment offerings, seeing new embedded finance products as too risky.
Here's a thought leap, a methodological critique: How are these "penetration" numbers being calculated? Are they measuring usage or simply availability? A cash advance offer sitting in a software dashboard is not the same as a merchant actually using it. I suspect the real usage numbers are far lower than the reported penetration figures suggest.
The key, according to the analysis, is achieving the right product-market fit. vSaaS platforms need to anticipate and meet the specific needs of SMEs throughout their business lifecycle. A construction business, for example, might need a merchant cash advance in its early days, point-of-sale financing as it grows, and insurance as it scales. The article suggests that tailored products, offered with intent for specific use cases, will encourage customer stickiness and boost monetization.
But even with tailored products, the go-to-market strategy is crucial. SaaS providers need to bundle and price their offerings effectively, taking a page from the banks' playbook. They need to leverage their data to target customers with personalized offers. And they need to prepare for a future where AI agents guide purchase pathways, integrating agentic AI into their platforms to help SMEs navigate financial services.
And this is the part of the analysis that I find genuinely puzzling: the assumption that SMEs are clamoring for more financial products. Are they really underserved, or are they simply content with the financial services they already have? The data suggests the latter. Unless vSaaS platforms can offer significantly better value – lower rates, more flexible terms, truly integrated experiences – they'll struggle to pry SMEs away from their existing banks.
Capability Conundrums
Finally, vSaaS platforms need to design and scale their capabilities thoughtfully. Embedded finance products come with more macroeconomic and microeconomic exposure (business cycles, credit risk), a higher regulatory burden, and potential balance sheet implications. As a result, the multiple on a dollar of embedded finance earnings is lower than for SaaS (or so the authors claim without providing a single shred of evidence to back it up).
Therefore, the analysis argues, SaaS platforms should prioritize user experience while minimizing their own risk and regulatory burden. They should own the user experience, product selection, marketing, and partner oversight, while partnering on the product offerings themselves. Over time, they can evolve this model, making choices around vertical-specific products, front-end UI/UX, underwriting and credit risk, risk management, funding, servicing, and partner oversight.
The ultimate goal is to create mutually reinforcing spirals of demand: payments feeding deposits, which feed lending and cards, all deeply integrated into merchants' workflows. But this requires a level of sophistication that many vSaaS platforms currently lack.
Just Another Buzzword?
Ultimately, the success of embedded finance in the vSaaS space hinges on execution. The potential is there, driven by the data vSaaS platforms possess. But potential doesn't equal reality. Unless these platforms can overcome the hurdles of sticky banking relationships, complex underwriting, poor user experiences, and a lack of tailored offerings, embedded finance will remain just another overhyped buzzword in the tech industry.
