The Rise of Embedded Procurement: A New Wave in Business Software

In 2019, the concept of “embedded fintech” was introduced by Matt Harris, my colleague, to characterize the impending integration of financial services into the core of nearly all software applications. This encompasses functionalities ranging from payment processing to lending and insurance offerings, a notion that rapidly gained traction within the fintech sector.

Vertical Applications and the Future of Financial Services

Specialized applications, such as Toast for restaurants, Squire for barbershops, and Shopmonkey for auto repair facilities, are poised to become primary providers of financial services to businesses, surpassing traditional financial institutions in accessibility and relevance.

Introducing Embedded Procurement

While embedded fintech is still unfolding, a related concept – embedded procurement – is gaining momentum. This next phase will see businesses conducting their purchasing activities directly through vertical B2B applications, bypassing conventional methods like sales representatives or individual merchant websites.

Imagine owning a coffee shop and being able to automate recurring orders for essential items like coffee beans and milk directly within the same software platform used for payments, accounting, and payroll. Companies that have successfully monetized financial services through embedded fintech are now strategically positioned to do the same with procurement.

Embedded Procurement: A Natural Progression

Embedded procurement represents the logical next step following embedded fintech. Fresha, a software company specializing in salon and spa management, exemplifies the embedded fintech model.

Fresha: A Case Study

Fresha provides a comprehensive platform for spas and salons, offering features like appointment scheduling, data analytics, marketing tools, and point-of-sale systems. The software itself is offered at no cost, with Fresha generating revenue through payment processing fees.

Looking ahead, Fresha is expected to expand into embedded procurement, becoming a central hub for business owners to order and manage inventory – from shampoos and scissors to brushes and other essential supplies. This aggregation of demand will allow Fresha to negotiate better pricing with suppliers on behalf of its customers.

Group Purchasing Organizations in Every Sector

Vertical software companies will increasingly function as group purchasing organizations, a concept borrowed from the healthcare industry, across diverse sectors.

Point-of-Sale Systems as a Foundation

Point-of-sale (POS) systems are naturally suited to facilitate embedded procurement. Lightspeed, a publicly traded POS company, launched Lightspeed Supplier Market in January, becoming the first POS platform to directly connect small and medium-sized businesses (SMBs) with suppliers.

Growth of Vertical Payments Platforms

Several vertical payments platforms are experiencing rapid growth within their respective niches, including Toast for restaurants, Squire for barbershops, and Slice for pizza shops.

Expanding Addressable Markets: The embedded procurement opportunity significantly broadens these companies’ potential markets beyond their initial revenue streams from payments.

The Value Proposition of Software-Based Procurement

There are compelling reasons for businesses to procure supplies through software platforms. These include centralized efficiency, price transparency, customized ordering based on historical data, and access to negotiated discounts.

Synergy Between Fintech and Procurement

A key benefit lies in the synergy between embedded fintech and procurement. Clearbanc, a lender to e-commerce businesses, pioneered use-case-specific financing, recognizing that financing rates should vary based on how capital is utilized.

For example, funds allocated to acquisition marketing should receive more favorable terms than those used for non-essential expenses.

Informed Financial Services

More broadly, a software company’s understanding of a customer’s purchasing behavior – what they buy, when, and how – should inform its financial service offerings. An insurer, for instance, might adjust rates based on the equipment a medical practice purchases.

Similarly, a lender could offer larger loans to businesses investing in consistently popular inventory.

Completing the Circle

Analyzing granular cash flows is crucial for informed financing decisions. Embedded procurement completes the cycle by providing software platforms with visibility into both incoming customer payments and detailed outgoing supplier payments.

The convergence of software and financial services has become evident in recent years, and it is now clear that procurement represents the third essential component.

A Repeatable Playbook for Founders

A clear strategy is emerging for entrepreneurs: develop user-friendly vertical business software at an affordable price point, establish a strong distribution network to become the core operating system for numerous businesses, and monetize through payments and other embedded financial services.

The missing piece? Integrating a marketplace to connect aggregated buyers with their suppliers.

Procurement as a Starting Point

However, embedded procurement doesn’t necessarily need to be the final addition to a software platform; it can also be the initial focus.

Examples of Innovative Approaches

Material Bank, a B2B marketplace for material samples, serves as a prime example. After establishing itself as the leading destination for building material samples, Material Bank launched Material Desk, a workflow and collaboration tool for architects and designers, seamlessly integrated with its sampling service.

Ankorstore, based in Paris, is building an online wholesale marketplace for European brands and retailers, similar to Faire in the U.S. Its success is driven by the business management and financing tools integrated into the marketplace experience.

Implementation by Startups and Enterprises

Both innovative startups and established enterprises are adopting embedded procurement. In the latter case, third-party providers are assisting large institutions in launching marketplaces.

Mirakl, a French company, helps distributors, wholesalers, and B2C retailers seamlessly integrate third-party marketplaces into their websites, expanding their inventory reach. Aper, a Miami-based startup, takes a different approach, enabling financial institutions in Latin America to sell general merchandise from a network of suppliers.

The Future of Business Software

Angela Strange of a16z recently proposed that “every company will be a fintech company.” In the next evolution of vertical software, it’s likely that every company will also be a marketplace.

Bain Capital Ventures has invested in Mirakl and Material Bank.