What Is Embedded Finance?
You might have heard about a rapidly growing trend that’s making its way into the business-to-business (B2B) ecosystem – embedded finance. But what is embedded finance exactly? Embedded finance is about enabling companies who are not financial institutions to include financial services or finance products in their digital products. Having financial services built-in to online transactions is business as usual for B2C. Now it’s becoming that way for B2B.
Eventually, embedded finance options will become expected, even for B2B purchases that have traditionally been handled offline. Before the pandemic, 70 percent of B2B decision makers reported being open to making fully self-serve or remote purchases valuing over $50,000. Of those, 27 percent said they were open to spending more than $500,000. Additionally, embedded finance solutions are also becoming a way to increase customer engagement and loyalty.
Because this change in how people are making purchases isn’t going away (and it’s a growing addressable market for so many industries), we’re digging deep into what, exactly, is embedded finance.
What Is Embedded Finance?
Embedded finance lets companies that aren’t banks or fintechs offer financial services or products within their digital platforms. It makes buying products faster and easier for customers, while providing opportunities to streamline back-end processes for business owners. It’s also giving rise to embedded fintech, which is when finance companies embed fintech options into their products and customer channels. It’s important to note that these are both different from the buy now, pay later (BNPL) trend that’s also happening in the finance space.
Buy Now, Pay Later (BNPL)
You’ve likely experienced the Buy Now, Pay Later (BNPL) trend for yourself. If you make an online purchase of a consumer product, oftentimes you can choose a finance product in the form of a payment program to make weekly or monthly payments from your bank account instead of paying up front. These point of sale loans are exploding in popularity, and are key drivers to elevating the user experience and customer loyalty through repeat purchases.
Embedded Finance Examples
There are a wide range of ways to use embedded finance. Some of the more popular examples of embedded finance services include:
Embedded payments allow any company to seamlessly integrate the entire payment journey into their end-user experiences. While online payments used to previously be a strictly functional experience, today’s embedded payment processes allow for a personalized, intuitive experience. This seamless integration and financial processes are probably part of your life in more ways than you realize.
Applications such as Uber and Starbucks allow consumers to pay for products and services without having to pull out their wallet. Digital wallets make it easier than ever to streamline the payments process within mobile apps. A report from IDC predicts that 74% of digital consumer payments globally will be conducted via platforms owned by non-financial institutions by 2030. The growth of embedded B2B payments isn’t far behind, and presents a huge opportunity for financial institutions to work with fintech partners to support growing demand. Payment options can be seen across every industry from automotive to insurance, to healthcare, construction, and even the oil and gas industry.
Integrating lending-as-a-feature into digital platforms is what’s known as embedded credit. This allows platforms to offer credit to customers within a familiar user experience rather than redirecting them to a third party site. Companies that offer embedded credit infrastructure supply underwriting, KYC, customer service, and work with banks in order to provide a comprehensive digital lending solution. This means that platforms and business owners can quickly launch with less hassle and upfront costs. Smooth credit enablement helps enable core business, allowing buyers to complete larger orders than they might otherwise have been able to. It also allows e-commerce platforms to scale vertically, to become a one-stop-shop destination for their industry. Finally, it offers an additional revenue stream as data gained can help with monetizing their customer base.
Embedded finance solutions make it faster and easier for insurance companies and customers to manage their insurance options, policy claims, and process payments. This is true whether you’re looking at travel insurance, auto insurance, or other types of insurance. Automation reduces the need for manual workflows, and there’s the potential to offer customers multiple ways to pay their deductible, coinsurance, or premiums. Embedded finance is what ultimately improves operational efficiency and the overall customer experience.
Managing the investing process takes time, expertise, and experience – unless you have an embedded finance solution. There are online platforms and apps galore for different goals and skill levels. Experienced investors can still evaluate the values of stocks and buy on their own. People new to the practice can automate these financial decisions, investing a set dollar amount or even spare change every month via an automatic bank draft.
Growth of Embedded Finance and Fintech
The embedded finance market is on the rise in the B2B payments space, which is projected to reach $1.91 trillion by 2028. However, the three sides of an online B2B transaction – suppliers, buyers, and the platforms they use – have different needs that must be met to not only ensure a smooth payment process for all involved, but to get the most value out of this change to the payments landscape that is here to stay. In particular, meeting the needs of buyers is oftentimes the focus, while the needs of B2B suppliers – especially those selling to large buyers who often have unreasonably long payment terms – is seldom a consideration.
With research showing that one in three B2B buyers purchase at least half of their products on business-to-business marketplaces, it’s safe to say we’re seeing a boom in the marketplaces, portals, and apps powering these experiences. Those that want to become leaders in their space will have to adopt embedded finance strategies and solutions to meet the demands of all stakeholders in a transaction.
Embedded Finance and the Huge Opportunity for B2B
Having financial services built-in to online transactions is part of the customer expectation for B2C – think about the experience on websites like Amazon and eBay. Buyers in the B2C ecosystem have many options when it comes to payments – credit card, PayPal, Google Pay, Apple Wallet, among others – as well as a plethora of B2C BNPL options appearing in just about every ecommerce checkout flow. Now, it’s becoming the same way for the B2B sector as expectations around the online purchasing experience shift.
Places that handle digital B2B payments, including B2B marketplaces, apps, and ecosystems, know that it makes sense to facilitate payments and credit in any way possible, and are all trying to figure out how to navigate this hurdle and choose the right solution.
Benefits of Embedded Finance
Because this change in how people are making purchases isn’t going away (and it’s a growing addressable market for so many industries), let’s look at what is embedded finance benefits that are driving its growth and opportunities.
Embedded finance provides the opportunity to drive revenue growth by monetizing transactions through payment processing fees, partner revenue share agreements, and offering additional services to suppliers like reporting and analytics. Embedding financial products can also help keep customers engaged, allow buyers and sellers to get paid on their preferred terms, and differentiates platforms from their competitors.
Especially for old school industries that may not be used to incorporating online technology into their workflow, implementing an embedded finance solution can vastly improve the overall user experience for their customers. Marketplaces, apps, and ecosystems are realizing that while embedded finance providers do make things easier for the tech-savvy, they also need to bear in mind that the solution they choose needs to be intuitive – especially for those old school industries – or users won’t adopt it, and thus no one will the benefits of increased convenience from embedded finance.
As buyers and suppliers continue to expect the same speed and ease of digital payments in their B2B transactions as they get with B2C purchases in their personal lives, implementing an embedded finance solution helps streamline the buying process and increases sales.
Increased loyalty and signups
Traditional marketplaces are horizontal, catering to many industries (think Amazon Business). Now, many of the new marketplaces, portals, and apps are vertical, and they are racing to be the leader in their chosen space. Embedded finance is one way these organizations are adding unique value to their users (just see how many use cases there are!), giving them a point of differentiation that buyers and sellers both find appealing. This leads to increased loyalty and signups, boosting stickiness and revenue.
All businesses need data to make informed decisions and learn about customers – B2B marketplaces, portals, and apps are no different. By keeping financial solutions within the user experience, it provides a rich source of information that can answer questions like:
- What is the size of our average transaction?
- How many transactions are we making in a month or quarter?
- Which types of suppliers are selling most/buyers buying most?
- How long is the sales cycle?
- When are most/fewest sales happening?
When a business knows these details, it can use that information to make changes to its product offering and marketing strategy to not only drive more sales, but more high value sales, in addition to increasing customer retention.
Builds trust with buyers and sellers
B2B payments are estimated to be about $120 trillion dollars a year globally. The high spend creates high stakes for the buyers and sellers in any transaction, so B2B marketplaces, portals, and apps have to find ways to build trust. It’s undeniably important for recruiting suppliers, attracting buyers, and ultimately increasing stickiness and revenue.
In addition to vetting suppliers and facilitating connections, many of these organizations are taking on credit risk to build trust: they are ensuring suppliers get paid quickly while extending credit in the form of long payment terms to buyers. This ties up cash that could be better spent on growth or other goals. Embedded finance solutions such as instant invoice funding fixes mismatched payment expectations by ensuring buyers still get flexible terms while allowing sellers to sell now, collect now – without putting marketplaces in a cash flow crunch.
Future of Embedded Finance
When it comes to embedded finance offerings, those that want to win will need to move fast and offer the banking products and experiences their customers are looking for in order to take a bite out of this multi-billion dollar pie. The rise of embedded finance solutions and banking as a service means that more and more non-financial companies can offer seamless payment solutions and increasingly own the customer relationship.
Embedded financing gives buyers and sellers what they want, solving mismatched payment expectations. It also enables e-commerce platforms to avoid the cumbersome requirements of becoming a fintech, while still reaping the benefits of seamless payments within their experience.
Ultimately, an embedded finance solution helps free up capital on all sides, giving buyers, sellers, and platforms what they want. Without having cash tied up in extending credit to buyers, marketplaces, portals, and apps can use their cash to grow and compensate for challenges such as rising inflation or COVID-19 supply chain disruptions. Their balance sheets also look healthier since they’re not carrying extra debt financing.
Interested in Embedding FundThrough?
FundThrough’s invoice financing solution can be embedded into platforms of all kinds. While payments are causing pain for many marketplaces, portals, and apps, embedding instant invoice payments offers a solution, while adding more value for buyers, suppliers, and platforms alike.