A few years ago, you couldn’t go to a fintech meeting without ending up with a discussion about embedded finance. In 2020, we even wrote that embedded finance may represent the future of fintech.
The distribution strategy allows fintech companies to integrate their services into other products and services, which in turn gives users access to new features without having to sign up for a new service. They are proving to be a particularly attractive approach for fintechs as it offers them a new layer of products to offer to larger banks and financial service providers.
Ember, a UK startup working on an integrated tax offering, is proving that strategy still applies in 2024. The small company has partnered with HSBC in the UK so that the bank’s business customers can access Ember’s services from online accounts. Ember could potentially win thousands of customers with just one partnership.
Ember’s service retrieves companies’ recent bank transactions and categorizes them automatically. After that, customers can track expenses, add receipts, create invoices and do basic accounting.
Ember then provides an overview of your company’s income and expenses, calculates how much you’re going to pay in taxes, and tells you how much money is available to withdraw as dividends for owners.
Larger firms will likely work directly with CPAs or even hire in-house accountants. But freelancers and small companies with fewer than 10 employees could at least simplify their accounting processes with Ember’s self-service product.
“Products like Xero, QuickBooks, FreeAgent are all built for accountants, not end business owners. And we saw a huge opportunity to create a transformative experience for an end business owner to take care of their entire set of tax obligations,” Ember co-founder and COO Daniel Hogan told TechCrunch.
However, the point is that this market is highly fragmented. There are hundreds of thousands of small companies in the UK alone, which means it’s hard to get customers.
“We were dealing with the advertising spend of the likes of Xero and QuickBooks, and it was hard to get customers directly for that very reason – it was expensive,” Hogan said.
That’s why Ember has started negotiating with major banks like HSBC UK to offer one integrated solution. HSBC pays Ember for each of its customers who choose to use Ember’s features, and if they want to access more features, such as the ability to add other bank accounts from other financial institutions, they can pay Ember to do so.
Ember also has a team of in-house accountants who can undertake complex tasks for paid clients, such as year-end accounting and corporate tax management. The free-to-use version of Ember that you get on HSBC’s online banking portal acts as the top of the funnel for the startup to acquire paying customers.
Ember will not work exclusively with HSBC in the future. Contracts with major banks take a long time to negotiate, but hopefully the company will have another bank partner to announce soon.
With the upcoming regulatory changes in the UK (“tax digital transformation”), accounting software will likely receive increased interest from small businesses. By 2026, about 1.75 million business owners in the country will have to change the way they file their taxes. The vast majority of them do not use any accounting services to help them in this process.
“[HM Revenue and Customs] has essentially made the decision to be an API-first organization. So instead of building it themselves, they rely on software providers like us to actually build that whole experience. They’re just the API layer,” Hogan said.
“They rely on us to create better user experiences to help customers report more often and more accurately.”
In addition to this initial partnership with HSBC, the regulatory opportunity is also part of the reason why Ember recently raised a £5 million ($6.3 million at today’s exchange rate) funding round from Valar Ventures, Viola Fintech and Shapers.
