The embedded finance revolution is underway in the B2B space, following on from its runaway success in business-to-consumer. Embedded finance is when financial services including lending, payment processing or insurance are integrated directly into another business’s products and services – such as business loans on Shopify, car insurance from Tesla, or app payments with Starbucks.
Its popularity among consumers for financial products like Buy Now Pay Later led the embedded finance market to reach $43bn globally by 2021, according to Juniper Research, which forecasts average annual growth of 60% to $230bn by 2025.
What sets embedded financing apart?
The pinch-point for many vendors selling products and services through marketplaces is inconsistent sales, resulting in uncertain cash flow. Research from Vodeno found that cash flow management is one of the major issues faced by the majority (62%) of European SMEs, underlining the need for alternative types of finance.
Embedded financing can offer some advantages over standard financing. For instance, factoring or revenue-based financing accessed by businesses directly through marketplaces means less admin for that business because repayments are made directly from sales. For time-pressed ecommerce businesses with cash flow gaps due to a marketplace’s payment terms, this can provide an elegant solution.
Embedded finance also streamlines the customer journey and reduces financial friction, meaning increased sales for the vendor, creating a more successful partnership between the vendor and marketplace.
We know there is growing appetite for embedded finance from business customers to help them solve payment challenges, streamline processes and make critical financial savings.
A Capgemini study found 60% of small and medium-sized businesses wanted embedded financial services to smooth their payment processes, while 50% believed this would give them better data they could use to improve operations.
62% of European SMEs say cash flow is a significant challenge.
The total market for embedded finance for SMEs could be worth $124bn by 2025, according to Accenture. It said business owners already have trust in the platforms they use, which could encourage them to access financial services this way, and make use of extra value-added services such as financial management or analytics tools. Research suggests they are willing to pay a premium for this.
As the embedded finance spaces evolves, the result could be that small businesses starting up today may never interact with a conventional bank. By logging into their e-commerce or accounting platform, they can open a deposit account, order a debit card, and meet most of their financing needs. Embedded finance is changing the game.
Benefits for marketplaces
Embedded finance offers important benefits for marketplaces. By exploring partnership opportunities with the banks and fintechs behind these products and services, marketplaces can share in the revenues created by this fast-growing area.
When a marketplace seller uses an embedded invoice financing service provided by Storfund, for instance, the marketplace receives a commission based on a fixed % of the seller’s sales.
Marketplaces can also benefit from increased revenue share via pass-through services, where the platform charges the financial service provider for access to its customers, and white labelling, where the platform offers a financial service under its own branding.
Data on cash flow, trends and transactions gathered by marketplaces can be used in the underwriting process to help lenders and insurers assess customers, in exchange for a share in the loan amount or cost of premiums. This data can also be used to offer tailored financial products which improve customer experience and increase merchant adoption, retention and revenues.
Marketplaces that offer seamless cash flow solutions enable their vendors to grow their businesses, helping to increase brand affinity and client retention.
They can essentially become one-stop-shops for financial services, allowing their vendors to conduct all their financial business on their site and platform.
For a marketplace acting as a distributor, embedded finance offers a way to enhance the customer and vendor experiences and create new sources of revenue without incurring the overheads associated with operating a bank.
All these additional revenue streams can help marketplaces weather a difficult economic climate.
The beauty of fintechs is that they are young and agile.
Why fintechs still rule in this area
The beauty of fintechs is that they are young and agile. They can approach a problem and build a solution to it, rather than trying to make existing products fit, as a traditional bank might. This is one reason why fintechs are leading the way in embedded finance. Another reason is that they can build and maintain the seamless infrastructures that connect banks with digital platforms. This ‘plug and play’ financial architecture will be essential for successful partnerships between marketplaces and financial services providers.
The embedded finance revolution in B2B can bring attractive pricing, convenience, and trust to your marketplace, helping you build long-term quality relationships with your sellers.
To find out more about what embedded finance options Storfund offers, contact us today.
