The Unstoppable Technology-Led Rise of Embedded Financing In The B2B Arena

Financing Automation & AI

Businesses are gaining efficiency thanks to the rise of embedded financing — the ability to advance loans for goods and services in exchange for installment re-payments. Long linked to big-ticket purchases like homes and cars, consumers are now using embedded financing in growing numbers to fund everyday purchases. Meanwhile, businesses increasingly use it to secure supplies and capital equipment in B2B transactions while regulating cash flow and taming seasonality.

Of technologies that came to prominence in the coronavirus era, names like Zoom and Venmo come first to mind. Boiled down, these applications helped people keep working — that is, make payments and conduct business meetings — while stemming the spread of a contagious virus. And while these tools, popularized in the first days of the pandemic, brought the concept of labor-saving apps to a larger audience, their success in the era of home offices and closed lobbies wasn’t an accident. Rather, it was contingent on two big things:

  • They solved an immediate problem (how to stay away from other people)
  • They were already up and running (and getting traction) before anyone heard of Covid-19

In tandem with popular apps for keeping distance, a host of lesser-known software applications for securing insurance, and getting loans also proliferated, to the benefit of consumers and businesses alike.

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Adding functionality through APIs

Altogether, the embedded finance market is worth a cool $43 billion, according to Juniper Research. Of that, embedded lending accounts for about a fourth. By 2026, the UK-based consultancy expects that number to top $135 billion, for a surge of over 200%. Also noteworthy, between early February 2020 and late October that year, media mentions of embedded finance increased more than one-hundredfold, according to CBInsights.

The rise of embedded finance is down to demand, certainly, but it owes a lot to  “the increasing availability of APIs from financial-service vendors,” according to one industry source.

An API, or “application-programing interface,” is a software “intermediary” that allows applications to “talk” to each other. Smartphone owners use APIs all the time — they’re why apps work on phones, whether for checking the weather, sending instant messages, or finding a place to eat. The Uber app, which lets you hail a ride and pay for it using a phone is a great example.

“In the context of business-operations technology, APIs add functionality to a department or organization by allowing a software suite grouped around a particular function — let’s say lending — to work with an organization’s core or ‘systems’ software,” says fintech expert Dmitry Voronenko, CEO and co-founder of TurnKey Lender.

In addition to the availability of vital connective tissue in the form of APIs, the market was primed in other ways for the rise of embedded financing.

1. Companies want new revenue streams

Earnings from banking services are in decline, a state of affairs that has put financial companies on the hunt for new ways to make money. So it makes sense for them to catch a ride on the embedded-finance bandwagon and start outsourcing its internal financial tech — say, around lending — to companies that want to offer such services in their own right makes good business sense.

2. The rise of digitalization

Digitalization converts business processes to digital technologies. Ditching pens and paper means companies can extend financial services (like lending) to more clients more efficiently — and without need of a bank.

3. Disruption by non-banks

How? Mainly by offering credit directly to consumers and businesses on the back of increasingly responsive technology. As a result, a slew of non-banks with big brands — think Alibaba, Amazon, Walmart — are seizing market share for providing credit that used to belong to banks.

4. The popularity of BNPL

The concept of “buy now, pay later” is getting a lot of traction. By the end of Q1 this year, Indian fintech Capital Float had added 1.8 million customers “by embedding an ‘instant credit’ option across e-commerce, travel and ed-tech platforms,” according to one source.

5. Advances in artificial intelligence

Instead of relying on loan-application forms, credit-bureau scores, and gut instincts, AI makes lending operations simultaneously more inclusive and less risky by incorporating behavioral markers derived from permission-based inputs such as spending habits and the ability to pay other bills. The result? The clearest and most balanced view of would-be customers ever devised.

How TurnKey Lender applies AI in lending automation

6. Consumers and businesses trust embedded tech

In fact, they trust it as much or more than bank services, with 42% of US household financial-decision makers claiming to use at least one non-bank fintech app in 2019. Without this, none of the trends and developments described above would matter. And as consumers’ comfort with embedded technology grows, so businesses follow, responding favorably to vendors’ offers of credit as a means to preserve cash-flow levels, mainly as an antidote to seasonal fluctuations in revenue.

For Voronenko, “embedded lending lets a growing host of non-financial companies provide credit services to customers in ways calculated to improve their ‘experiences’ as shoppers.”

It’s all coming together

With ride-share apps and online marketplaces leading the way, small and middle-market businesses are financing their customers’ purchases — followed by B2B players eager to reduce friction at the check-out counter, smooth revenues, and forge closer ties to the businesses they serve.

After all, using technology to deliver cutting-edge functionality makes customers — whether retail or B2B — more valuable. Venture firm Andreesen Horowitz sees it opening new verticals where previously the total addressable market for software was too small or the cost of acquiring customers was too high.

Bottom line, according to the Silicon Valley pacesetter, embedded financial services increase a customer’s lifetime value to a business about fivefold.

“Because of advances in technology, and changing attitudes and behaviors among shoppers of all kinds, how individuals and organizations interact with vendors is changing — and these changes have led to people embracing embedded financing,” says Voronenko. “Ultimately, that’s down to the fact that technology vendors are delivering on a promise of faster, more reliable, and more secure ways to make purchases.”

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