Embedded finance is on the rise in both the business and consumer payments markets. Analysts project its revenue will reach $1.91 trillion as adoption expands by 2028.
This steady acceptance is opening fintech operations to a wide range of marketplace opportunities. At the same time, it is forcing banks to morph their traditional catbird seat domain in doling out loans and bill paying services to partnerships with a variety of e-commerce platforms. This disruptive transition spans industries catering to both business-to-business and business-to-consumer transactions.
By integrating a financial task or function into a business’s infrastructure, embedded finance streamlines access to financial services such as lending, insurance, or payment processing. It does this without redirecting the customer to third-party destinations.
The embedded finance concept took root years ago with money handling operations such as PayPal and Stripe. Users could conveniently pay bills and deliver money to individuals and companies without individually handling such matters through their banks or postal services.
Banking as a Service
Finance platforms called banking as a service, or BaaS, are becoming an integral part of online transactions for both individual consumers and businesses. A dual industry is developing around the two processes.
These BaaS platforms enable digital banks — and even non-banks — to build various financial services into their online transactions, exclusive of product purchases. They operate with back-end banking functionality; whereas the broader category of embedded finance is more of a front-end access to financial services.
Together, the two are tied to the digital marketplace and the efforts to simplify and streamline financial services for consumers and businesses alike. Though embedded finance and banking as a service appear similar, they differ slightly in that BaaS is needed to deliver embedded finance.
One of the new trends in shaping B2B payment strategies, especially for non-financial companies, is the shift toward invoice funding, or factoring.
This solution is not a loan but a financing strategy where a company sells its invoices at a discount to a factoring company in exchange for a lump sum of cash. The factoring company then owns the invoices and gets paid when it collects from the invoiced customers, typically from 30 to 90 days.
FundThrough is an AI-powered invoice factoring platform with a big presence in the process of embedded finance in B2B payments. The company provides funding for a business based on the size of its outstanding invoices.
Online B2B transactions have three components — suppliers, buyers, and the platforms they use. Each component has its own set of needs that must be met to ensure a smooth payment process for all involved, according to Amanda Parker, chief growth officer at FundThrough.
An essential requirement for buyers is contentment with sellers’ payment methods and how their suppliers provide those services. Where suppliers are concerned, customer remittance intervals and delivery processes tend to vary by industry — and selling to B2B enterprises that have unreasonably long or inconsistent payment cycles can negatively impact the cash flow of suppliers, Parker noted.
Embedded finance, the larger umbrella category, encompasses all the different components of finance in the traditional sense. Embedded finance strategies can be built into whatever workflow that makes sense, explained Parker.
“It can be used right inside the workflow connected to a purchase of an item, a transaction, creation of an invoice, for example,” she told the E-Commerce Times. “It also includes embedded banking, embedded payments, lending insurance, you name it.”
Embedded Finance Unwrapped
The E-Commerce Times further discussed the inner workings of embedded finance with Amanda Parker. Following is that part of our conversation.
What more is involved in the process of embedded finance?
Amanda Parker: It varies and includes a connection to the customer, so you have some kind of connection to the data source.
Let’s take an example from one of our partnerships. We are connecting to the user’s company inside QuickBooks for getting information on what their company is, what it does, as well as a level of identity verification.
We are doing something called KYC, which is “Know Your Customer,” so we are asking the user a series of questions or asking for a series of documents to confirm their identity.
Then we confirm that the transaction they are requesting is legitimate, the relationship that they have with the business on the other side is legitimate, and that their bank account details are legitimate.
So those are kind of the components. It is verification, confirmation, and then sending the funds required through various banks.
How does this process work for other use cases?
Parker: Our bread and butter is lending or invoice finance. In general, embedded finance has tons of other use cases. You have B2C, tax or business-to-consumer contacts, and you have payments insurance. This is the exact same but in a B2B context.
So, for us, the use case might involve suppliers that want to get paid immediately. Now they can do that beside any workflow; whether a transaction, invoice, or purchase is happening.
How does this process benefit consumers or is it more a benefit for businesses?
Parker: We focus on businesses, but for consumers and everybody it is the seamless integration they gain so they do not have to leave their workflow. It is far more convenient and automated.
You are not using six different systems to try to get something done. You can now do everything inside one system. So, if you think about the way that finances have leveraged or changed over time, consumers can essentially buy anything online.
But B2B is a very fragmented system. So now, embedded finance is taking over into B2B to apply that same kind of frictionless experience that consumers have online to a B2B context.
What factors are driving the transition to embedded finance?
Parker: Frictionless experiences at the consumer level have always led the way. Now that is coming through to businesses.
Another key thing is as millennials take over more of the workforce, they typically get frustrated with systems and workflows.
Integrated payments and lending are really unlocking a lot of new business models for software companies. This vastly improves the experience to make it a more consumer-like experience but in a business-to-business context.
How is the adoption of embedded finance progressing?
Parker: We see a growing number of estimates for the global embedded finance opportunity. [Reportedly] embedded finance will reach a $7 trillion value globally in the next 10 years.
PayPal and Stripe were leaders, particularly on the consumer side and e-commerce. Now we are getting on the cusp of explosion on the B2B side of things, which is very exciting. There is over $100 trillion of GMP (guaranteed maximum price) inside B2B. That is just kind of open for the taking.
I think you are going to see a lot more of that as players over the coming years come out and start to want to assist in that movement of those funds.
What is needed to encourage further adoption?
Parker: I would say one of the key things is bank adoption. More banks need to embrace open banking and banking as a service.
Application programming interface (API) architecture is ever evolving and getting better. A number of fintech players have come out to give the banks a run for their money. So, I think we will start to see a ton of innovation in that space in the coming years.
Why are some banks hesitant to come on board?
Parker: Banks really want to hold back that customer and hold that experience. They do not want their customers moving over to another experience. They want to try to service it all themselves.
Banks also have a big concern about security. But we invest in that now to ensure we give customers the best experience. Consumers are connecting their bank accounts to tons of different services. It’s in [everyone’s] best interest to ensure a secure and frictionless experience. That is one of the big areas where we hope to see continuing progress in the coming years.