New Revenue Opportunities From Embedded Accounting

Why a Report on Embedded Accounting?

Three trends give rise to this report, namely: 1) the digitization of small business; 2) developments in the digital platform and vertical software as a service (SaaS) markets; and 3) the growth of the application programming interface (API) economy.

The Digitization of Small Business

Small businesses have long been the engine of growth in the American economy. According to the U.S. Small Business Administration, small businesses account for nearly half of the U.S. economy’s gross domestic product (GDP) and roughly two-thirds of all new jobs created in the country.¹ What’s new and different about the small business environment is the extent to which small businesses are becoming “digital” and relying on technology.

Small businesses are:

• Becoming virtual. One small business owner told Entrepreneur.com: “Twenty years ago, we had an office with computers on desks and a phone system. Today we don’t—everyone works from home. Our applications are managed by someone else. Our phone system is hosted. My people use chat and online collaboration tools to share files and data, track projects and invoices, submit expenses and get work done.”²
• Looking for a one-stop shop. According to Forbes, “As businesses grow, they get harder to manage because they become more complicated—the most likely signals of change are step functions which create span of control, capital and operational challenges.”³ To deal with these challenges, small businesses are increasingly looking for providers who can be a “one-stop shop” for their operational, technology and financial management needs. In fact, as we’ll see later in the report, nearly 8 in 10 small business owners would be more likely to select an industry-specific software provider if it integrated all accounting functions (i.e., bookkeeping, invoicing, expense management, financial reporting, and income tax services) into one application.
• Embracing artificial intelligence (AI) and automation. A study from Constant Contact found that 74% of small businesses are interested in using AI or automation in their business, and 70% of small businesses would pay more for access to AI or automation tools. Among small businesses that currently use AI or automation, most say they have saved time and are working more efficiently.⁴

Small Business Challenges

Increased virtual work, automation and complexity add up to new and increased pressures and challenges for small businesses, however, including:

• Financial management. Managing finances is one of the biggest small business challenges. According to the U.S. Bureau of Labor Statistics, 1 in 5 small businesses fail within the first year due to poor financial management and lack of capital.⁵ Financial management challenges can span a wide variety of issues, including cash flow management, difficulty tracking expenses, and limited resources for invoicing, bookkeeping and tax compliance.
• Human resource management. Nearly 60% of small companies report that worker shortages affect their ability to operate at full capacity, according to a survey from Vistage Worldwide Inc. About 8 in 10 small business owners said they’ve increased wages and compensation in response to hiring challenges, according to the survey, and another 11% plan to do so. In addition, 60% of small businesses have refined their recruiting strategies, while 46% have boosted employee benefits.⁶

Developments in the Digital Platforms and Vertical SaaS Markets

The increased digitization of small business has created a need for digital platforms and vertical SaaS providers. Vertical SaaS offerings are software solutions that cater to the distinct needs of a single industry, such as Toast or restaurants, Shopify for ecommerce merchants, and Jobber for home service businesses.⁷ For small businesses, vertical SaaS alleviates the need to custom-develop applications to support their operation and avoid (or at least reduce) the use of generic tools like spreadsheets and database management tools to run their business.

Bain Capital Ventures describes three reasons for the growth of vertical SaaS providers or offerings:⁸

• Digitization knock-on effects. In a wide range of industries, employees have become more comfortable using technology to do their jobs. In no small part, the COVID crisis forced many workers to use technology in new ways, inside and outside of work. Now even the most manual-process-heavy industries are staffed by workers who are more comfortable with digitization—and therefore more likely to adopt new software at work—than they would have been just a few years ago.
• Improvements in foundational technologies. Cloud and mobile technologies helped jumpstart vertical SaaS offerings by digitizing manual workflows and supporting end users in the field. Today, startups build their software on a foundation of capabilities that were not readily available to the first wave of vertical SaaS providers, such as automated marketing, generative AI and APIs. Specialized software can more closely resemble a ‘‘one-stop-shop’’ than ever before, streamlining the end-user experience and building loyalty.
• Increased access to data. Data availability, including vertical-specific data from companies like Rutter (commerce), Axle (trucking), and Agave (construction), allows developers to focus on building differentiated solutions without the nuisance of managing constant data integrations and access.

The Growth of the API Economy

The API economy refers to the burgeoning use of APIs to expose an organization’s digital services and assets to its partners, customers and other participants in its ecosystem. From a banking and financial management perspective, APIs are used for account authentication, payment processing, loyalty programs, account aggregation, budgeting and financial planning, business accounting and subscription management.

According to Statista, the number of open banking API calls is forecast to grow from 102 billion in 2023 to 580 billion in 2027, enabling the value of open banking transactions to grow sharply as well and reach $330 billion in 2027.⁹ APIs aren’t just for technology companies—they offer companies the ability to:¹⁰

• More easily reach digital audiences. APIs can position companies to offer products and services more easily through emerging platforms, unbundle and re-bundle their core competencies, and offload noncore competencies to digital platforms, vertical SaaS and other third-party providers (like Lyft’s use of Google Maps, Stripe, Twilio and Amazon Web Services).
• Accelerate technology development. By digitizing capabilities such as shower reservations, parking availability and prepaid fueling through APIs, Pilot Flying J, a North American truck stop chain, enabled mobile app developers to quickly and conveniently package services for their truck driver customers.

According to Sensedia:

Why This Report? The Intersection of the Three Trends

The intersection of these three trends leads to two questions that need to be addressed:

1. Faced with increased competition and challenging economic conditions, what must SMB-focused digital platforms and vertical SaaS providers do to attract and retain users and create new (as well as protect existing) revenue streams to drive growth and profitability?
2. What can SMB-focused digital platforms and vertical SaaS providers do to address the unique financial challenges of small businesses and make their users’ financial lives easier to manage?

Cornerstone Advisors believes the answer to both questions lies in a concept called “embedded accounting”—the integration of accounting and financial management capabilities (like bookkeeping, invoicing, expense tracking, financial reporting and tax management) into digital platforms and vertical SaaS offerings.

This report will build the case for embedded accounting, referencing a survey of small business owners and executives.

About the Data

In Q4 2023, Cornerstone Advisors surveyed 750 small business owners and executives about their accounting and financial management challenges, tools and technologies, and providers. For the survey, small businesses were defined as those that generated between $50,000 and $1 million in revenue in 2022.

Small Businesses’ Accounting Burden

On average, small business owners spend about 20 hours each week on accounting functions, roughly evenly split between bookkeeping, invoicing, expense tracking, financial reporting and tax management (Figure 1). About one in five spends more than 30 hours a week managing their accounting functions.

Although half of small businesses outsource accounting functions to third-party providers, the owners of those businesses spend roughly the same amount of time on accounting functions as small business owners who perform their accounting functions in-house.

Using third-party providers can run up a big bill for accounting services. Across all small businesses, the accounting bill comes to roughly $11,000. The variation across revenue segments isn’t very high, however, leaving smaller businesses paying somewhere between 13% and 20% of their overall revenue for accounting services (Table A).

Overall, small businesses average 3.5 full-time equivalent (FTE) staff in accounting, with roughly a quarter having three or more people supporting the bookkeeping, invoicing, expense tracking, financial reporting and tax functions.

Technology and Tool Support for Accounting

Small businesses’ use of technology to support accounting functions is all over the map. More than half of small businesses rely on spreadsheets — or no technology support at all — for bookkeeping, invoicing, expense tracking and financial reporting. Between a third and 40% of small businesses use an accounting suite (e.g., QuickBooks) for each of the accounting functions, but many also use a specialized app as well as a spreadsheet. About 10% don’t have technology support for their accounting operations, while between 14% and 23% get technology directly from their third-party providers (Table B).

Accounting and Financial Management: A Pain for Small Businesses

The disjointed use of accounting technologies, coupled with the mix of internal and third-party resources, add up to one thing: Accounting is a hassle for many small businesses. Roughly 4 in 10 small businesses say that expense tracking and invoicing are pain points, while 3 in 10 have challenges with financial reporting and income taxes (Figure 2).

What are small businesses’ specific accounting pain points? Nearly 6 in 10 complain that their accounting functions are manual and labor-intensive. Between 30% and 42% say they’re untimely; roughly a quarter say they’re inaccurate; and about 1 in 5 say their accounting functions are not well integrated with other financial functions (Table C).

Invoicing is a particular pain for many small businesses, with nearly 6 in 10 saying it’s manual and labor-intensive and roughly 4 in 10 complaining that invoicing is untimely and costs too much. Surprisingly, perhaps, those percentages don’t vary much by the number of invoices the business sends out each month.

What does vary by number of invoices sent, however, is days sales outstanding. In our survey sample, a third of respondents send 10 or fewer invoices per month; 3 in 10 send between 11 and 25 invoices; and 35% send more than 25 invoices (a handful didn’t know how many they send). Among small businesses that send out more than 11 invoices each month, a third average more than 30 days sales outstanding (Table D).

The Accounting Opportunity for Vertical SaaS Providers

Roughly 6 in 10 small businesses use a vertical SaaS offering like Shopify, Toast or Jobber to support their business’ operations. Although small business owners are mostly satisfied with these apps—73% are “very” satisfied and 23% are “somewhat” satisfied—three-quarters are very or somewhat likely to be looking for a new provider (Figure 3).

What can vertical SaaS providers do to attract and retain small businesses? One step they can take is to provide better accounting and financial management services.

Although small businesses are generally satisfied with their vertical SaaS providers, financial management may be an Achilles’ heel. While about half of small businesses say their software provider does a great job of helping them manage various aspects of their finances, nearly half don’t rate their provider as highly (Figure 4).

Small businesses want financial management and accounting services from their vertical SaaS provider. Nearly half—44% to be exact—say they’re definitely interested in obtaining accounting/financial management services from their provider, and another 42% say they might be interested (Figure 5).

In addition, roughly 8 in 10 small businesses would be more likely to select an industry-specific software provider if it had all accounting functions integrated into one application (Figure 6).

Creating New Revenue Streams from Embedded Accounting

Two conclusions stand out from our analysis of the survey data:

• Despite using a range of technologies to support their efforts, accounting and financial management is still a manual, labor-intensive effort for small businesses. In addition, these efforts take up an inordinate amount of time each week for small business owners/executives—time that would be better spent on other activities.
• Providing (i.e., embedding) accounting and financial management services offers digital platforms and vertical SaaS providers an opportunity to generate new revenue streams, drive greater loyalty of existing users, and create differentiation from other providers that will lead to new user growth.

While small businesses want better integration across their accounting functions, vertical SaaS providers and digital platforms have a specific opportunity to create new revenue streams by providing a one-stop shop with seamless, end-to-end small business accounting built in. According to Raj Bhaskar, CEO of Tight, embedded accounting opens doors to new revenue streams through:¹²

1. Value-added services. Platforms can offer premium accounting features like invoicing or business expense tracking as additional services.
2. Cross-selling and upselling. With detailed accounting data, platforms can identify opportunities for cross-selling and upselling relevant products or services such as virtual bookkeeping.
3. Partner integration. Collaboration with other fintech services like payments or payroll can create new revenue-sharing models.
4. Market expansion. Automated accounting makes entering new markets or catering to different customer segments with varied financial reporting needs easier.

How should digital platforms and vertical SaaS providers go about integrating accounting and financial management services for their users? They could spend the time and money to develop their own solutions, but the better answer is to embed accounting with white-label APIs from the right providers.

Embedded Accounting with White-Label APIs

In small business accounting, QuickBooks and Xero dominate thanks to their comprehensive features, widespread recognition and robust ecosystems. As the survey for this study proves, however, tools like QuickBooks and Xero don’t always translate into accounting effectiveness and efficiency for small businesses.

These users need better—and more seamless—integration between accounting programs and the platforms and/or vertical SaaS offerings they use to run their businesses. For vertical SaaS and digital platforms serving small businesses, this level of integration is essential to delivering a cohesive user experience without abrupt transitions between platform features and financial tools. This is “embedded accounting.”

The concept of white-label solutions in accounting APIs is a game-changer for vertical SaaS providers. White-label APIs empower SaaS providers to offer advanced financial management tools under their brand. This not only enhances their value proposition but also reinforces their brand identity.

By utilizing white-label APIs, SaaS providers can deliver a seamless financial management experience to their clients, all while ensuring that the spotlight remains on their brand, not the technology behind it. It’s a strategic move that elevates their platform’s capabilities while maintaining a consistent user experience.

Examples of Embedded Accounting

Examples of embedded accounting include:

• Shopify and Melio. Through this partnership, Shopify merchants can pay and manage their vendors and contractors in the same place they run their business: through the Shopify platform. The embedded accounts payable solution, called Shopify Bill Pay, enables merchants to pay bills with their preferred method (e.g.,credit, bank, wire transfer, etc.) and to choose how the vendor receives the payment. Shopify estimates that the embedded accounts payable solution saves merchants 16 hours per month on paying business bills.
• Housecall Pro and Check. More than 30,000 home service professionals—including HVAC contractors, plumbers, electricians, carpet cleaners and landscapers—use Housecall Pro to run their businesses. The vertical SaaS provider offers its customers functionality for scheduling, time tracking and job management.Through its partnership with Check for embedded payroll, home service professionals can pay their employees on the same platform they use to manage the rest of their businesses.
• Nymbus and Tight. The partnership between Nymbus, a provider of banking technology solutions, and Tight, a provider of embedded accounting solutions for small business platforms, creates a holistic, one-stop shop for small business banking and bookkeeping, from invoicing to income taxes. Nymbus' turnkey LaunchSMB solution, with embedded accounting built in, is designed to enable banks and credit unions to meet the full digital needs of small and medium-sized businesses.

Challenges in Integrating Accounting APIs

Integrating accounting APIs into vertical SaaS platforms requires careful consideration of compatibility with existing systems, ensuring that the API integration doesn’t disrupt the platform’s core functionality. There’s also the task of maintaining data integrity and security during and after integration, a critical aspect given the sensitive nature of financial information. Furthermore, user adoption can be a hurdle; ensuring that the platform’s users can seamlessly transition to the new financial management tools is essential for the success of the integration.

The Future of Accounting and Financial Management APIs

The role of accounting APIs in vertical SaaS is poised for even greater significance. We see four emerging trends:

1. Increased deployment of user-friendly interfaces and enhanced customization options that enable tailored financial management solutions;
2. Increased integration of embedded accounting functions and industry-specific experiences in vertical SaaS offerings;
3. Increased use of vertical SaaS and digital platforms by small businesses’ bookkeepers and accounting staff; and
4. Increased use of advanced security features that protect financial data as data security concerns rise.

Embedded Accounting: First Step to a Banking Relationship

Embedded accounting alleviates pain points of small businesses and helps create new revenue streams for vertical SaaS providers and digital platforms. But it also helps open the door to offering banking and lending services and solutions.

Many small businesses are interested in getting checking accounts or loans from the digital platforms and vertical SaaS providers they do business with (Figure 7). Among small businesses on Square’s platform, for example, nearly half have opened a checking account with Square. In addition, in 2023, Square issued more than $4 billion in loans to 461,000 of the merchants doing business with the technology company.

Embedded Accounting: Growth Opportunity for Vertical SaaS and Digital Platforms

An embedded accounting strategy fits the playbook spelled out in Bessemer Venture Partners’ “Ten Lessons from a Decade of Vertical Software Investing.” ¹³ Lessons include:

1. Build a layer cake. According to Bessemer, a “layer cake” strategy—building additional products to sell into their core vertical market—is what separates the good from the truly great in vertical software. Embedded accounting services—including bookkeeping, invoicing, expense tracking and tax management—are examples of additional services vertical SaaS providers can add to their core service.
2. Sell integrated services. Bessemer points out that vertical market software vendors can compete against generic third-party providers by “delivering a vertical-specific offering that is often more usable, more affordable and better integrated with your software.” The advantage to vertical SaaS customers is that they don’t have to buy more software—in fact, they’re typically replacing software they already pay for, which “makes the cross-sell feel free and lowers sales friction.”
   
   Vertical SaaS providers are uniquely positioned to meet the one-stop-shop needs of small businesses. As the Bessemer report points out, “Specialized software can more closely resemble a ‘one-stop shop’ than ever before, streamlining the end-user experience and building loyalty.”
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3. Deepen competitive moats. Bessemer describes a competitive moat as something that prevents switching or drives higher switching for customers. The deepest moat in software is the platform upon which the entire industry does its work. According to the venture capital firm, the platform approach can take one of these forms:

• Integration/API platform. Integrations and a developer-friendly API that make it easy for customers to connect all their other software and pipe data into the platform. Samsara has quickly grown to $500M+ in revenue thanks to its many out-of-the-box hardware and software integrations.
• Application platform. An ecosystem for third-party application developers that can build tools and products that exist on top of the platform. Shopify has built a $100 billion+ platform by enabling a robust “app store” of third-party applications and shipping/fulfillment providers.
• Collaboration platform. Multi-player functionality built into the platform that makes it easy for lots of stakeholders to collaborate. Canva has built a $40 billion+ business by making it easy for creative professionals to collaborate on design projects.

Endnotes

¹ https://www.bankrate.com/loans/small-business/small-business-statistics/#:~:text=Small%20businesses%20are%20at%20
the,the%20U.S.%20Small%20Business%20Administration
² https://www.entrepreneur.com/living/10-huge-ways-running-a-business-has-changed-in-the-past-20/234396
³ https://www.forbes.com/sites/forbesbusinesscouncil/2022/10/31/managing-increasing-complexity-in-a-growing-business/
⁴ https://news.constantcontact.com/small-business-now-ai-2023
⁵ https://connecteam.com/challenges-small-businesses
⁶ https://www.wsj.com/articles/small-businesses-get-creative-as-they-still-struggle-with-hiring-11664184781
⁷ https://www.singlegrain.com/saas/vertical-saas
⁸ https://baincapitalventures.com/insight/the-current-state-of-vertical-saas
⁹ https://www.statista.com/statistics/1389414/number-of-open-banking-api-calls-worldwide
¹⁰ https://www.hbr.org/2021/04/apis-arent-just-for-tech-companies
¹¹ https://www.sensedia.com/pillar/importance-of-apis-in-the-digital-age
¹² https://www.tight.com/blog/unlocking-new-revenue-streams-for-digital-platforms-with-invoicing-automation
¹³ https://www.bvp.com/atlas/ten-lessons-from-a-decade-of-vertical-software-investing