Embedded Finance Has Proven Its B2C Value. What Will Change Next?
Embedded finance — services like BNPL and in-app rideshare payments — have changed the way many consumers shop. The ability to pay digitally over time, or to pay seamlessly for an experience like a ride, has created more convenience for consumers and raised their expectations. For example, 47% of BNPL users say they pick retailers “based on their partnerships with preferred BNPL providers.”
Now, embedded finance is reaching new groups: B2B buyers and people with limited or no access to traditional banking services. Understanding how these groups are using embedded finance can illustrate this technology’s potential in many areas, from enhancing customer loyalty to smoothing corporate cash flows to accelerating regional economic growth. These use cases can inspire and inform businesses that are considering whether to embed financial services in their offerings.
Getting to know embedded finance
In the simplest and most general terms, “embedded finance” encompasses a range of financial products and services that integrate with non-financial digital products and services. As mentioned above, BNPL is a financial service that embeds in ecommerce sites. Uber’s seamless in-app transactions at the completion of rides are another example.
However, embedded finance isn’t limited to payment methods. If you’ve booked a trip on a travel app lately or made a major purchase online, you’ve probably been offered insurance for your trip or product at checkout. These policies are provided by a third-party whose functionality is embedded in the travel or ecommerce platform. Other use cases are loans and investments, as we’ll discuss in more detail below.
All of this is possible when banks and financial institutions make their banking-as-a-service (BaaS) tools available to integrate with other platforms via API. By working with these BaaS providers, online retailers, hotels, and businesses with a digital presence can provide financial services without having to apply for banking, insurance, or investment licenses or comply with banking and investment regulations. The embedded finance partner handles those requirements, so the business can focus on their core operations.
Besides the customer experience (CX) advantages of easier payments and greater convenience, embedded financial products can also help customers feel more confident about making major purchases through insurance at checkout. They can also keep customers on a company’s site, rather than requiring them to leave in order to make a payment or purchase coverage. And because embedded financial products are API-based, they’re comparatively easy to adapt to individual business needs and to scale as the business grows.
Embedded finance for B2B
As embedded finance makes digital experiences easier for consumers, it also raises their expectations for similar experiences in their professional lives. Nearly three-quarters of millennials who make B2B buying decisions have switched vendors in order to have consumer-like experiences, according to PYMNTS data. Embedded finance can help vendors meet these expectations, especially for SMBs.
For example, many small-business owners don’t have the budget to access fully integrated invoicing and payment systems that may be beyond their budget, or to the kind of one-stop payments convenience offered by their personal banking app. Instead, they often use multiple systems to track billables and generate invoices, send invoices, receive and log payments, and reconcile accounts. This creates extra work for these businesses and it makes payments more difficult for their clients and customers.
Accounting platforms that embed invoicing capabilities and consumer-style digital payment options can streamline billing for SMBs and accelerate time to payment by making it easier for their customers to pay using their preferred methods. There could be growth benefits as well, For example, a web designer that serves local businesses might book more clients if they offered a BPNL option to help customers manage their budget.
At the enterprise level, financial services embedded in a company’s enterprise resource planning (ERP) platform can streamline billing and payments on a larger scale. As with SMBs, streamlining the invoicing and payments processes can strengthen relationships with customers and accelerate the receipt of payments.
SAP Fioneer describes other enterprise B2B use cases that can help businesses manage their cash flow and supply chain. One is purchase-order financing to cover supplier payments, so manufacturers don’t have to wait on materials. Another is invoice financing, similar to BNPL for the enterprise, to help companies improve the cash flow and reduce the risks associated with outstanding invoices.
Financial inclusion and embedded finance
Embedded finance also promises to improve financial inclusion for underbanked and unbanked businesses. One example of this is Dinie, a Brazil-based fintech that embeds lending services on e-commerce platforms for micro-, small-, and medium-sized enterprises (MSMEs). Recently featured by the UN Secretary-General’s inclusive finance initiative, this embedded finance provider and others like it have the potential to help the smallest businesses with microloans and revolving credit to invest in capital equipment, new locations, and growth.
Underbanked consumers can benefit from embedded finance as well. In parts of Africa and India where traditional bank account use is low, mobile money is the primary banking channel for millions of consumers. Some embedded finance providers like M-Pesa in Kenya already provide consumer loan services embedded in other products. McKinsey describes Africa’s “fast-growing electronic-payments landscape” as a promising market for BNPL and other embedded finance services.
Meeting that demand can change lives. A recent survey of several markets in Asia found that 75% of consumers with access to embedded financial services like product or rental insurance reported a higher quality of life as a result. More than half said embedded financial products reduced their stress about money and made it easier for them to manage their finances.
The future of finance?
Because embedded finance has so many potential benefits for businesses, individual consumers, and entire economies, it seems likely that we’ll see financial products embedded in more platforms across more regions. As the embedded finance trend gains momentum in the B2B and financial inclusion spaces, we may see those products evolve to serve businesses and their customers in new ways. Businesses that want to stay competitive and innovative should watch this space closely and think creatively about how to apply embedded finance to their business model.