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Marketplaces are rapidly reshaping the global economy, with worldwide B2B marketplace sales predicted to reach an estimated $3.6 trillion by 2024, up from an estimated $680 billion in 2018.
Today online marketplaces account for 62% of all e-commerce spending as merchants embrace a more flexible, dynamic form of retail across multiple channels. At the same time, service models are evolving, with more marketplaces embracing embedded finance for merchants as a means to drive growth and retention.
The reasoning behind this is clear – the world of marketplaces is becoming increasingly competitive, as platforms compete to offer the best customer experience. According to Bain, embedded finance solutions for marketplaces and other software platforms will exceed $7 trillion by 2026, with embedded lending reaching between $80 billion and $90 billion.
We’ve seen this in action, with leading marketplaces such as Amazon, Ebay and Etsy leveraging embedded finance to stand out. Here we’ll explore what embedded finance means for marketplaces and how to use it to grow revenue and retain customers.
Understanding embedded finance solutions for marketplaces
The growth of embedded finance solutions means that marketplaces today have a range of options when it comes to supporting their business customers, including marketplace lending, merchant cash advances and revenue-based finance.
The right choice for your platform will depend on the kind of customers you work with, the technical capabilities of your platform and how you plan to integrate lending into your business model. Whichever you choose, it’s essential to understand how it can meet your merchants needs in order to drive effective adoption and value with your users.
Marketplace lending
Marketplace lending is a type of lending in which an online platform connects borrowers with lenders, essentially acting as a matchmaker. Here, individuals or institutional investors provide funding to businesses through online platforms usually as debt finance, offering fixed-term loans, fixed payments and fixed interest rates.
Merchant cash advances
With cash advances, merchants receive a lump sum in exchange for a portion of their future sales. This type of financing can be particularly helpful for merchants who need access to cash quickly, as the approval process is often faster than traditional loans, but can also require marketplaces to front the capital involved.
Revenue-based finance
Revenue-based finance (RBF) is an increasingly popular form of alternative financing where lenders provide capital to businesses in exchange for a percentage of their revenue. The financing amount is determined based on the business’s revenue, and the lender gets paid back as a percentage of the business's revenue until the total agreed-upon amount is repaid.
In these scenarios, the marketplace will act as the middleman, receiving a commission based on the amount of the loan, without incurring any financial risk on their own balance sheet.
How embedded finance solutions can help marketplaces drive growth and retention of merchants
In a volatile and competitive commercial environment, embedding financial services into your marketplace platform has the potential to differentiate the experience you provide for your customers.
- Increased merchant acquisition: By offering embedded finance solutions, marketplaces can attract a wider range of merchants through distinguishing their service model and expanding customer value.
- Higher merchant retention: Cash-flow is still the biggest threat to businesses. However, with access to low-risk financing options, businesses can survive challenging circumstances and seize opportunities when they arise. By providing embedded finance solutions to merchants, marketplaces can help ensure their customers' long-term success and growth, which translates to a more stable revenue stream for the marketplace itself.
- Diversified revenue streams: Revenue-based lending provides an additional owned-revenue source for platforms beyond subscription and transaction fees. Moreover, this source is aligned with the success of your customers, helping them generate sales and growth, which drives additional income per customer to increase CLV.
Strategies for effectively using embedded finance solutions
When implementing embedded financing for a marketplace, platforms need to balance the needs of their users, their business and the limits of their technology
- Data security: Given the amount of confidential business data required to facilitate lending, data security is a must. This includes assessing the data risk and complying with relevant regulation, whether this service is offered in-house or through a third-party white labeled solution.
- User experience: 57% of all SME credit applications are abandoned because they’re too difficult to complete. To be valuable, marketplaces need to offer a solution that leverages the data they hold to offer fast, reliable decisions, while still enabling choice.
- Time to market: Working with a third-party provider can streamline implementation, reducing the technical and resource requirements for integrating new financing functionality. Solutions such as YouLend offer hosted financing pages in just 7 days, with no development or coding resource required and no development risk, full white labeled.
- Customer positioning: The lack of reliable lending options for SMBs has often forced businesses to turn to unsustainable providers such as high-interest short term lenders or using assets as collateral. Digital business models enable seamless integration of revenue-based finance – with repayments managed as a percentage levied on revenues, meaning customers only pay as they earn.
- Capital risk: Marketplaces can choose to use their capital, or avoid the risk by focusing on drawing a revenue stream from connecting the customer to the funder.
Real-world examples of embedded finance solutions for marketplaces
Leading brands are now embracing the potential of embedded finance solutions to add value to their business model. Since April 2021 YouLend has worked with Ebay to offer Capital for eBay Business Sellers. In the first year of operations, this saw impressive results:
- 8,000 business fundings to 4,750+ unique sellers
- Over £75m in financing offered
- A 75% renewal rate among those who used the service
Key to delivering these results was creating a seamless experience, branded with eBay’s logo and color guidelines. This helped merchants explore their options while making it feel as if they never left the eBay ecosystem. Working with YouLend’s expert implementation team, the project was set up in a matter of days and generating revenue.
Making embedded finance work for your marketplace
As marketplaces face the challenge of retaining and growing customers in an increasingly competitive market, embedded finance solutions have the potential to be a game changer. Working with an experienced embedded finance partner like YouLend can help marketplaces move faster, tailor their customer experiences and reduce risk.
To learn more about how to adopt embedded finance solutions, book a demo or read our partner case studies here.
