Embedded finance products are becoming mainstream – mostly because they offer such an interesting market opportunity to the countless enterprises that crank the wheels of commerce behind the scenes: payment service providers (PSPs), marketplaces, and ecommerce platforms.
But to truly take off and become the main provider of flexible financing to small businesses, these products have to go above and beyond the offerings of traditional, mainstream financial providers.
Embedded lenders, specifically, have to extend to a far greater pool of businesses, and offer products that are flexible, tailored, and adapted to their needs – and this comes with a number of risks and rewards.
Why SMEs look for solutions embedded in their trusted ecosystem
One of the greatest pain points for SMEs is navigating the complexity of finance solutions available in a highly-fragmented lending market, while consumers are now finding financial services exactly where, and when they need them. It needs to be the same for businesses.
💡There’s still a disconnect between current business finance and what businesses actually require from their funding to survive, thrive, and grow.
This state of affairs was the driving force behind key providers such as eBay recently launching Capital for eBay Business Sellers, an embedded finance solution that provides small businesses with much needed funding to overcome their cash flow challenges.
The opportunities in implementing embedded finance products
Embedded finance is an area that’s full of opportunity. Here are some of the key areas of opportunity from embedding finance into your platform.
A new approach to risk assessment
New lending models within embedded finance solutions often use wider real-time data sources, such as online presence or ad spend, providing more accurate risk assessments. They are therefore able to accept a larger number of applications, with extremely low default rates.
This approach to risk assessment is particularly key for new businesses.
For instance, let’s take a new business that has been publishing hair styling videos for a couple of years and has a built-in audience, then starts a small online store for hair styling products. They would need to be trading for at least a couple of years before a bank would even consider them for a loan.
Similarly, someone who runs a seasonal business, perhaps selling hand-knit scarves in winter on the side, would find it hard to adhere to a fixed repayment schedule if they apply for a business loan through a bank. Instead of helping with their cash flow, getting a loan would make it worse.
Embedded finance’s new approach to risk assessment can solve these challenges. The most forward-thinking embedded finance options use a wider range of data than traditional providers, providing more accurate and more inclusive risk assessments.
Leveraging enhanced information
This is also where enhanced information comes in.
Embedded lenders can leverage enhanced information that identifies non-credit payment behaviours and metrics (such as total visits and engagement, total traffic sources, and key audience and website information) – giving more small businesses access to the financing that they need.
This new data means platforms can also build proprietary modelling that helps you to better understand your customers, predict growth or stagnation, and even offer other products around business support or advice.
Improved customer satisfaction
What’s more, because embedded finance providers can assess these metrics in seconds, they're able to make sound risk assessments and process applications instantly in many cases, and in a few hours at most.
This kind of automation enables scale and speed, and therefore an extremely smooth and satisfying experience for the business owner. We’ve seen how this in turn leads to a significant increase in sales and much higher loyalty with the SME’s embedded finance platform provider.
The risks of implementing embedded finance products
However, the industry’s main benefit is also the source of its greatest risk. Here are the key risks to consider when implementing embedded finance solutions.
Sensitive data requirements
In order to build and offer solutions that meet these criteria, embedded lenders require a significant amount of sensitive, confidential business data and information from customers.
To successfully deploy them, either in-house or through a partner, companies have to take into account the risks and make sure to set themselves up for success. Business data is governed by a large set of different regulations depending on what type of business it is, where it is based, and who provides the funds.
A spotless reputation
This is where a spotless reputation, trusted partners, and up-to-date certification are crucial for embedded lenders. They have to ensure that they position themselves as totally trustworthy if they are to succeed.
Challenges building embedded finance in-house
It makes sense for some companies to build their own embedded finance products, typically when time to market is not an issue and they have the necessary in-house talent and resources to build them, or if they want total control over the customer support side of the process.
Many companies, however, will prefer to work with an external provider to enable them to go to market quickly and effectively with an inclusive risk assessment model.
💡 P.S. We’ve written about this topic at length in our latest guide: Embedded finance: Buy or Build. Receive your free copy here
A lack of trust
Customers have become so used to traditional lenders being slow, unintuitive, and, ultimately, painful to work with, that when they see how quick and seamless embedded finance can be, their first thought is often: there must be a catch. They don’t always trust it – and that is a fair concern.
In order to overcome this challenge, it is particularly important for embedded lenders to prove their trustworthiness, as the industry does not yet have a reputation to fall back on. They can do this by, for example, working only with trusted, reputable partners, ensuring that they earn the right data privacy and security certifications, and communicating broadly about the built-in safeguards they have in place.
For instance, capital providers usually audit the companies to whom they provide capital for embedded finance products, so it's a good idea to ask your embedded finance provider what audits are in place, what certifications they have (ISO27001 being a must), if they have been working with the same capital providers for a long time (if their capital providers churn, it might be a red flag), and what kind of controls they have around the thoroughness of their risk assessment practices.
Finally, while any type of company in any industry can offer its customers embedded financial services, including payments, insurance, loans, and investments – embedded finance isn’t for everyone.
You should let your merchants be your guide. The opportunity here is not for extra revenue streams – although those are definitely a natural result of this sort of product. The real advantage is in creating a valuable, sticky experience around your core offering.
Until a few years ago, offering embedded finance solutions required a large investment in resources, time, and technological development, and was therefore not commonplace at all.
But today, marketplaces, e-commerce platforms, and payment providers are increasingly recognising the potential for financial solutions to enhance their core products by helping to solve customer challenges. New kinds of embedded finance infrastructure are making it easier than ever to create and manage embedded finance products. As long as companies are managing the risks, they can reap substantial rewards with embedded finance products.