A few years ago, you couldn’t go to a fintech meetup without ending up in a conversation about embedded finance. In 2020, we even wrote that embedded finance might represent fintech’s future.
The distribution strategy lets fintech companies integrate their services into other products and services, which in turn gives users access to new features without having to sign up to a new service. It’s proven an especially attractive approach for fintechs as it gives them a new layer of products to offer to bigger banks and financial services providers.
Ember, a British startup working on an embedded tax offering, is proving that the strategy is still a valid one in 2024. The small company has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts. Ember could potentially gain 400,000 customers with a single partnership.
Ember’s service fetches companies’ recent banking transactions and automatically categorizes them. After that, customers can track expenses, add receipts, create invoices and do basic accounting.
Ember then provides an overview of your company’s revenue and expenditure, estimates how much you’re going to pay in taxes, and tells you how much money is available to withdraw as dividends for the owners.
Bigger companies will likely work with chartered accountants directly or even hire in-house accountants. But freelancers and small companies with less than 10 employees could at least simplify their accounting processes with Ember’s self-serve product.
“The likes of Xero, QuickBooks, FreeAgent are all built for accountants and not end business owners. And we saw a huge opportunity to build a transformative experience for an end business owner to look after their entire suite of tax obligations,” Ember’s co-founder and COO, Daniel Hogan, told TechCrunch.
However, the issue is that this market is extremely fragmented. There are hundreds of thousands of small companies in the U.K. alone, meaning that it’s hard to get customers.
“We were going up against the likes of Xero and QuickBooks on advertising spend, and that was tricky to acquire customers directly because of that exact reason — it was expensive,” Hogan said.
That’s why Ember has started negotiating with big banks like HSBC UK to offer an embedded solution. HSBC pays Ember for each of its customers who chooses 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 that.
Ember also has a team of in-house accountants who can take care of complex tasks for paid customers, such as end-of-year annual accounting and corporation tax management. Ember’s free-to-use version that you get on HSBC’s online banking portal acts as the top of the funnel for the startup to acquire paying clients.
Ember isn’t going to work exclusively with HSBC going forward. Contracts with big banks take a long time to negotiate, but hopefully the company will have another partner bank to announce soon.
With upcoming regulatory changes in the U.K. (“making tax digital”), accounting software will likely receive increased interest from small businesses. By 2026, around 1.75 million business owners in the country will have to change the way they file their taxes. The vast majority of them don’t use any accounting service to help them with this process.
“[The bank] has essentially made the decision to be an API-first organisation. So rather than building it themselves, they’re relying on the software providers, such as ourselves, to actually build all of that experience. They’re just being the API layer,” Hogan said.
“They’re relying on us to build better user experiences to help customers report both more frequently as well as 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 funding round ($6.3 million at today’s exchange rate) from Valar Ventures, Viola Fintech and Shapers.
