How Competition Between Software Vendors And Banks Could Give Way To Collaboration

For banks, the growth of embedded finance in recent years has been cause of both celebration and anxiety. The good news is that, by embedding banking products within a growing range of ISVs in sectors from gardening to dentistry, banks find a convenient front end for their products in market niches that a bank on its own—as a consequence of scale—would struggle to reach. For a bank to build its own proposition specifically for landscape gardeners, for example, wouldn’t be cost effective and would likely require industry specific knowledge a bank doesn’t have. Embedding financial products within ISVs such as Real Green for example, focused on serving that market, is a shortcut to advanced segmentation.

The potential downside is the fear that banks become simply white label product providers to increasingly sophisticated ISVs and a tech ecosystem. Is there another way to think about this however? One based on collaboration rather than competition—and with embedded ISVs as well as embedded finance?

Winner takes all?

Competition after all comes with its downsides.

While ISVs offering embedded financial products can offer customers convenience and experience, they have no control over the terms of the finance products they offer. Banks can absorb macroeconomic events—for example, a base rate move. For a specialized ISV with a relatively small customer base, however, events like this pose a significant challenge.

Banks looking to demonstrate segmentation meanwhile have historically used cosmetic changes (text and images rather than products and propositions). More recently, some have attempted to offer links to more specialized software; however, this has resulted in customer experience (CX) feeling disjointed, riddled with multiple sign-up screens and lacking the kind of integrated data that business customers need.

But more than this the competition model is rooted in the mistaken assumption that banks and ISVs are competing to sell comparable products to SMBs. In reality, while ISVs and banks might serve the same customers, they’re selling very different products.

Where banks offer the financial services SMBs need to grow, ISVs offer the segmentation, experience and CX that make business easier. Collaborating can bring these elements together into a single, much improved product to the benefit of banks, ISVs and—most importantly—business customers.

If banks and ISVs can agree that it’s not about 100% customer ownership, and more about who is the primary relationship for what, then perhaps this can be achieved.

Beyond Payments

Offering payments is a natural extension to the scheduling, booking, employee management and other functionality that ISVs are built around. Not only does this embedded finance make an ISV a more attractive proposition for end customers, it also significantly improves their revenue per customer. As an example of this in action, Toast now gets almost 82% of revenue from financial services, and only 18% from their subscription services and hardware.

It follows from this that the greater the range of financial services an ISV can embed, the greater the range of business models and services it can offer. From credit or staggered payments, banking partnerships have the potential to open up new business possibilities. An ISV such as Dentally, for example, could potentially offer clients a way of paying for expensive dental procedures in installments, opening a greater range of products to a greater range of customers. Banking partnerships can also give an ISV access to a large number of potential customers within the bank, representing a huge business opportunity.

With the regulatory landscape in the U.S. seemingly shifting in a direction that will make the case for closer bank partnerships even stronger, could we also see a trend of fully embedded ISVs within banks?

Embedded ISVs?

The rationale for closer banking partnerships and embedded ISVs is clear, so what’s holding the market back?

Part of the answer here is that the ISV market is in its infancy. While there are some large and established ISVs, it is not yet clear who will be around in five years’ time. The same is not true of banks. Alongside this, there are more industry verticals than there are financial services products. As such, it’s easier to embed acquiring and lending but harder to embed the specialized software for the myriad industry segments a bank serves. Take a loan: While the process of assessing credit worthiness will differ, the actual loan product is no different for a dentist to a restaurant. The same is not true of business management software.

For partnership to truly work, too, an equilibrium needs to be found between the needs of ISVs and those of the banks. If ISVs want to move into offering their own financial services, then there’s no need for partnership. However, if seamless two-way traffic between the two can be created, SMBs could actually benefit—accessing essentially the same service no matter which entry point (bank first or ISV first) that they choose to take. Then the case for partnership becomes much clearer.

As noted by Deloitte recently, regulatory changes could result in some nonbank financial companies (NBFCs) to exit the market. More ambitious ones may apply for banking licenses. This is no easy task, and existing banks have a huge advantage here in that they are well-established in the banking sector, often with hundreds of years’ experience behind them.

Those digitally native NBFCs that do secure a banking license, however, and that have grown up on CX and segmentation, could prove to be formidable competition in years to come. No doubt we’ll see some of these businesses emerge from the world of embedded finance. By turning the tables, however, and embedding ISVs within their own product suites, rather than the other way around, banks have a time limited opportunity to beat the competition in the race to bring together the best of banking and the best of CX.

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This article was originally published on Forbes.com on August 14, 2025.