A few years ago, you could not go to a fintech meeting without talking about embedded finance. In 2020, we even wrote that embedded finance could also be the way forward for fintech.
A distribution strategy allows fintech corporations to integrate their services with other products and services, which in turn gives users access to latest features without having to enroll for a latest service. This has proven to be a particularly attractive approach for fintechs as it gives them a latest layer of products to supply to larger banks and financial services providers.
Cigarette butt, a UK startup working on an embedded tax offering, is proving that this strategy is still relevant in 2024. The small business has partnered with HSBC in the UK so that the bank’s business customers can access Ember services from their online accounts. With a single partnership, Ember can potentially gain hundreds of consumers.
Ember retrieves corporations’ recent banking transactions and mechanically categorizes them. Customers can then track expenses, add receipts, create invoices and perform basic accounting activities.
Ember then gives you an overview of your organization’s income and expenses, estimates how much you will pay in taxes, and tells you ways much money is available for distribution as dividends to owners.
Larger corporations will likely work directly with auditors or even employ in-house accountants. However, freelancers and small businesses with fewer than 10 employees can at least simplify their accounting processes with Ember’s self-service product.
“Programs like Xero, QuickBooks and FreeAgent are all designed for accountants, not end business owners. We also saw a huge opportunity to build a transformative experience for the end business owner to take care of their entire tax responsibilities package,” Ember co-founder and COO Daniel Hogan told TechCrunch.
The problem is that this market is extremely fragmented. There are lots of of hundreds of small businesses in the UK alone, which suggests it is difficult to draw customers.
“We were competing with the likes of Xero and QuickBooks on ad spend, and direct customer acquisition was difficult for that very reason – it was expensive,” Hogan said.
So Ember has entered into negotiations with large banks such as HSBC UK to supply embedded solution. HSBC pays Ember for each of its customers who chooses to make use of Ember’s features, and if they need to access more features, such as the ability so as to add other bank accounts from other financial institutions, they will pay Ember for this.
Ember also has a team of in-house accountants who can handle complex tasks for paying clients, such as year-end annual accounting and corporate tax management. The free version of Ember, which may be obtained on the HSBC online banking portal, is the starting of the startup’s path to acquiring paying customers.
In the future, Ember won’t cooperate exclusively with HSBC. It takes a lot of time to barter contracts with large banks, but we hope that the company will announce one other partner bank soon.
With upcoming regulatory changes in the UK (“digitalization of tax”), accounting software is prone to see increased interest from small businesses. By 2026, roughly 1.75 million business owners in the country will have to vary the way they file their tax returns. The overwhelming majority of them do not use accounting services that might help them in this process.
“[HM Revenue and Customs] has fundamentally made the decision to be an API-first organization. So as a substitute of building it themselves, they rely on software vendors like us who actually build the entire experience. They are simply an API layer,” Hogan said.
“They rely on us to build better user experiences to help customers report more frequently and more accurately.”
In addition to this initial partnership with HSBC, regulatory opportunities are also one of the 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.