The (corporate) expense management war

The corporate expense management war, a Dealroom deep dive

Corporate expense management comprises less than 1% of the $150 trillion+ B2B payments market, but it still is a huge opportunity for the fintech space.

Expense management processes are still mostly manual. Therefore, they are clunky, resource-intensive, costly, prone to errors and result in a lack of visibility and insights across the organization.

A huge amount of funding has poured into the field, especially to digital-first corporate card startups like Brex, Ramp, Pleo, Jeeves and many others. In 2021, over $2.8B have been invested in the segment and 2022 started even stronger with $1.6B to date.

Funding for corporate expense management startups

The sector is becoming increasingly competitive especially in Europe and the US, with tens of highly capitalized players. We can foresee an increase in spending on customer acquisition and future consolidation of the market.

Horizontal differentiation (e.g. expanding to adjacent services like payment processing, payroll, invoicing and lending), targeting underserved segments and geographical expansion will play a key role in winning in the field.

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Corporate expense management

What is expense management?

Expense management is a system for processing expense reports, approvals and reimbursing employees for expenses paid out of their own pocket. It is part of the greater spend management segment, which also includes procurement and purchasing but excludes short term fixed costs like payroll.

Expense management is critical for accounting in organizations of any size as it enables improved budgeting, reporting, and improves control over the operations and expenses incurred by the employees on behalf of the company.

In detail, expense management serves the need of 3 groups within companies:

  • Finance and accounting team: maintain accurate financial records and build budgeting models through the use of historical financial data
  • Employees: expect and demand an easy to use process with minimum friction as well as short reimbursement cycles. 
  • Management team: a well structured and integrated expense management system allows the management team to track expenses for risk management, growth, and cost-saving purposes among others.

For more details check out this blog post by Martijn Mulders.

 

The state of expense management

Expense management processes are still mostly manual. Therefore, they are clunky, resource-intensive, costly, prone to errors and result in a lack of visibility and insights across the organization. Manual processes range from paper receipt collection to the use of spreadsheets (e.g. Excel,  Google Sheet).

For instance, according to a study conducted by the Global Business Travel Association (GBTA) processing one expense report costs $58 on an average and 19% of the reports contain errors.

Expense management software refers to SaaS solutions which can automate the recording, tracking, approval and payment of reimbursable expenses. These solutions also allow the integration with other systems like ERP and accounting software.

 

How to differentiate in the corporate expense management market

A huge amount of funding has poured into the field, especially to digital-first corporate card startups like Brex, Ramp, Pleo, Jeeves and many others. In 2021, over $2.8B have been invested in the segment and 2022 started even stronger with $1.6B to date.

The sector is becoming increasingly competitive especially in Europe and the US, with tens of highly capitalized players. Customer acquisition mostly relies on discounts and rich cashback. With growing competition, these tactics could become unsustainable. Interchange fees are one of the main revenue drivers, especially in the US, but with advances in regulation and increased competition, it is a race to the bottom.

Also, with the developments of BaaS, the issuance of corporate cards is not a differentiator anymore. Ways to differentiate include horizontal differentiation, targeting underserved segments and geographical expansion.

Horizontal differentiation refers to the product expansion to adjacent services such as payment processing, payroll, invoicing and lending. The objective is to create an ecosystem of services which can increase the stickiness of the customers retain them in the long term and unlock revenue opportunities.

Lending in particular is a huge opportunity for these startups, which can gather data on spending from companies and use them to get an underwriting advantage.

Horizontal differentiation is also needed as a counterpart against the likes of neobanks such as Revolut, Monzo, Qonto, and Penta. These neobanks enable businesses to pay, get paid, and streamline their expense management process from one place, as well as offer value-added services such as invoicing, FX management, and payroll management.

Payment enablers, like Paypal and Stripe, and accounting services like Pennylane have also launched their own expense management tools for business with the aim of becoming the central hub for everything related to financial management.Neobanks and payment providers expanding into expense management

For more details check out this blog post by Mouro Capital.

 

Targeting underserved segments

Targeting underserved segments is also a key factor. Most of the startups in the field started targeting startups or SMBs, two segments widely underserved by traditional software providers in the sector and by mainstream financial institutions. Once the startup has a strong foothold in the nice it can expand to other segments. For instance, Brex, started targeting mainly startups and SMBs. Over time, Brex has gradually evolved its model with the aim of serving as a “financial operating system” for companies of all sizes.

The geographical expansion will also play a key role in winning in the field. As mentioned Europe and the US are becoming increasingly competitive markets, but even there the biggest players are not ubiquitous. For instance in Europe, Pleo is emerging as a leader in the Nordics, Payhawk in Central and Eastern Europe and Moss in the DACH region.

Emerging markets in Latin America, MENA and Asia remain instead underserved. Emblematic is the case of Jeeves, the startup has grown to a $2.1B valuation in less than 2 years, raising almost $400M in equity and debt. Jeeves describes itself as “an all-in-one corporate card and expense management platform for global startups” and is building out its own global BaaS layer.

 

Spotlight on some of the main startups

Pleo
is the most capitalized and highest-valued spend management startup in Europe. Pleo is expanding aggressively in all of Europe with the intention to enter 15 new European markets in 2022. Pleo is also expanding horizontally adding products ranging from invoice management to employee reimbursements to lending and credit and beyond.

Brex, one of the biggest US players was originally a startup focused on startups, providing corporate cards to startups and SMBs. Over time, Brex has gradually evolved its model with the aim of serving as a “financial operating system” for companies of all sizes.

Their latest product launch “Brex empower” is both a horizontal product and geographical expansion. Brex Empower enables distributed, global companies to move faster. It makes it easy for employees to do the right thing, lets companies use a “trust and verify” model to move fast while remaining compliant, and increases accountability for leaders.

Brex is expanding to new business lines but without forgetting its core business, as shown by its $90M acquisition of Pry Financials. Pry’s software gives founders the ability to directly connect their company’s bank accounts or integrate with QuickBooks or Xero to “immediately get an overview of their startups’ cash flow, burn rate and runway, track critical financial metrics, create a forward-looking financial plan and model different future outcomes.”

Airbase is also following a very interesting strategy trying to differentiate themselves in this competitive market and aiming to become the first all-in-one spend management platform. Most companies in the sector are giving out the product for free and making money from interchange fees. Airbase is trying to avoid this race to the bottom on interchange fees, by capturing all non-payroll company spending and essentially driving the margin from interchange revenue to zero.

To this vision, they announced the most feature-rich and competitive free spend management product in the market, which includes a corporate card, bill payments, and expense reimbursement products in one platform. They are also offering the highest cashback on a corporate card in the market, and to the best of our knowledge, the world 2.25% on a pre-funded model and 1.75% for charge cards.

Airbase also describes itself as a workflow-driven company first, fintech second. Payments are an important enabler but just that.

More details on their vision are in their public fundraising memo.

These are just a few examples. Do not miss out on emerging players in expense management! Discover 40+ corporate expense management startups. 👈
Corporate expense management
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Additional resources:

How horizontal differentiation can help corporate card platforms secure long-term growth – Mouro Capital

Unpacking corporate expense management Martijn Mulders