People in the fintech industry find it hard to align on a single definition of embedded finance, perhaps because it has been so transformative to their industry in the last few years. A variety of embedded finance products and solutions are making waves across all sectors by challenging the status quo. It's a powerful force reshaping the distribution model of financial services - opening up a world of convenience and new possibilities for both consumers and SME companies. But what sits behind the trends, and how can you harness it for your own organisation?

There are many things that you need to know about embedded finance to stay on top of it, but let’s start with this one fact: The embedded finance market is forecasted to exceed over $138 billion by 2026. It’s not an opportunity that any enterprise would want to miss.

What is embedded finance?

Put simply, embedded finance enables businesses to ‘embed’ financial services into their business models at various points along their customers’ journey by leveraging their own proprietary data on top of external financial information. This allows any company - not just financial institutions - to become more competitive by offering financial services and products to their customers.

One of the primary aims of embedded finance is to streamline and open up access to funding - making it a much smoother, quicker, and easier process. Whereas before, a consumer or business would need to go through a financial institution to apply for credit, with embedded finance, credit can be accessed in the same place they shop or do business.

Examples include eBay’s business solutions for eBay merchants, or Klarna for consumers. Companies like YouLend, for example, make it simple for any company -including banks - to take advantage of the embedded finance opportunity by white labelling embedded lending or financing solutions..

Now that we know what embedded finance is, let’s look at the most important features and capabilities it can offer.

What does embedded finance do?

What makes them unique and popular is that embedded finance solutions offer financial products at the exact moment they are needed, in a distribution format that makes more sense for the customer. When a customer notices that they have sold more inventory than planned but won’t be paid in time to replenish their stock, they don’t need to leave their Point of Sales (POS) system to raise funds for restocking - they can just use the POS’s embedded lending solution.

Similarly, with revenue-based financing (which is a type of embedded finance) the loan paid back is based on a percentage of revenue, not on a fixed rate. This gives businesses the flexibility to pay back when they can and scale up or down on repayments to follow demand.

Moreover, like with eBay’s business solution, embedded finance allows companies that wouldn’t usually provide finance with an opportunity to offer an additional service. For example, Uber has recently announced a bank account offering designed for its drivers.

Who is embedded finance for?

Both businesses and consumers can benefit from embedded finance.

🛠 Embedded finance for SMEs

One of the greatest pain points for SMEs is navigating the complexity of finance solutions available to them. Consumers are now able to find financial services exactly where and when they need them. It needs to be the same for businesses.

A payment service provider, an online marketplace, a retail bank, or any other organisation that deals with SMEs can take a step in that direction as well, by incorporating financial solutions in their user journeys to make them accessible in the right format, at the time when the merchant needs them. That way, they provide small businesses with much-needed funding to overcome their cash flow challenges. That’s why companies like eBay, Shopify, Dojo or and many others have launched these solutions for their SME business clients.

Embedded finance for e-commerce SMEs

E-commerce businesses have their own unique challenges when it comes to funding, with the fast-moving market ill-served by traditional finance structures and lenders. Moreover, legacy lenders are often unwilling to lend to e-commerce businesses. Embedded finance for e-commerce SMEs has the potential to match the pace of online retail, creating a more flexible, tailored solution to suit this fast growing market.

👨‍👨‍👧‍👦 Embedded finance for Consumers

The most typical form of embedded finance that you’ve probably come across is for consumers, such as retailers offering buy-now-pay-later solutions on their online checkouts. By removing the typical challenges of applying for credit, consumers can instantly purchase an item and are more inclined to buy again from a retailer that offers this instant access. In fact, BNPL options have a 36% higher purchase frequency than regular shoppers.

How does the embedded finance value chain work?

Unlike traditional financial services, which rely on a two-part relationship between a service provider and a customer, the embedded finance value chain brings together multiple parties to collaborate to service the end user. These include:

The capital provider

The initial layer is represented by the capital source, which are essentially the funders of the finance provided. Our capital associates offer short-term, self-liquidating SME products.

The Financial Solution Provider

Following this is the platform layer. This is the realm of the embedded finance platform, typically delivered as a white-labelled solution, such as to YouLend.

The ‘embedder’

Next, we have the partner layer - these entities essentially 'integrate' the solution within their own platforms. These businesses and brands aim to cater to customer needs in a more cohesive manner to foster more enduring and loyal relationships. 

The end user

The concluding layer is the SME in search of finance. Customers are progressively becoming more empowered, seeking integrated experiences with the services and products they are accustomed to.

What does embedded finance mean for banks?

Embedded finance is effectively the integration of services that would have once been provided by a bank into a non-financial platform. While this has the potential to take market share from banks, there is also a chance for banks to embrace this change and expand their services into new arenas. 

However, this will require a different approach than they’re used to – one focused on integration, collaboration and flexibility.

🏦Embedded finance for digital banking

In spite of the disruptive nature of embedded finance, embedded finance for digital banking has the potential to secure the position of banking leaders in the market. By investing in technology and partnering with fintechs, banks can integrate their products such as financing, payments and accounts into other platforms to expand their target addressable market.

Embedded finance for challenger banks 

More and more neobanks are entering the market, and traditional banks are catching up with the process of going digital. In order to penetrate into new geographies and increase market share, challenger banks need to differentiate their products from traditional lenders, and from each other. Embedded finance for challenger banks is a natural extension of the mission to digitise and democratise access to financial services.

Why embedded finance is hot right now

During the pandemic, businesses across most industries were forced to digitally adapt in order to continue offering services. Projects that were planned for future years were brought forward and implemented within months.

Now, permanent changes to consumer behaviour mean digital adoption is here to stay. And with it, the opportunities for embedded finance continue to grow.

In particular, embedded financial products such as cash advances on invoices or revenue-based financing are crucial for attracting and retaining SMEs and digital part-time entrepreneurs.

💡 It’s key to provide flexible solutions for SMEs. They are an underserved market, which is surprising when they make up 99.9% of the business population - accounting for three-fifths of the employment and around half of the turnover in the UK private sector alone.

The different types of embedded finance

There are multiple forms of embedded finance. Here are some of the most popular use cases:

• BNPL - Buy now pay later (BNPL) is a popular new form of credit for consumers. Its popularity has taken over credit card usage and is often seen on retail sites.
• Insurtech - When purchasing a new product, customers can opt to insure their goods at the same time through the automated processing power of this tech.
• Cash advance - This is when a business receives a lump sum in advance and the repayment fee is established upfront - rather than having running interest.
• Revenue-based lending / Advances on receivables - These terms are often interchanged. Here, the loan paid back is related to a percentage of revenue, or dependent on a receivable being collected at a later date. The amount therefore fluctuates with income.
• Embedded card payment - Like with Paypal, users can link their Paypal accounts to their bank accounts to streamline transactions.

📕Further reading: Embedded finance products: Risks and rewards

What does embedded finance mean for B2B?

While embedded finance will surely have a major impact on consumers, the B2B market remains much larger. B2B embedded finance is an especially large opportunity for B2B platforms that offer services to online retailers and other businesses.

For platforms looking to enhance their value proposition, embedded finance is a massive and growing opportunity. Whether you’re a merchant marketplace, a payment provider, an e-commerce platform, the benefits of embedded finance include the ability to improve client retention, add new revenue streams and create a more distinct value proposition in an increasingly crowded industry.

Embedded finance for e-commerce platforms

As e-commerce becomes an increasingly important channel for businesses to sell, e-commerce platform providers need to find new ways to support their customers in the fast moving world of online retail. Embedded finance for e-commerce platforms can help merchants manage working capital, improve cash flow and source additional inventory.

📕Further reading: [Whitepaper] Embedded Finance: The Hidden Enabler in Commerce

Embedded finance solutions for marketplaces

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 solutions for merchants as a means to drive growth and retention.

Leading marketplaces who have embraced embedded finance solutions include

• Amazon’s flexible financing programme with YouLend
• Capital for Ebay Business Selllers
• JustEat’s funding for restaurants.

Embedded finance for payment service providers

The payment industry has been one of the fastest growing parts of the online economy, with many providers competing for slim margins and vast scale in the race for market share. In doing so, payment service providers (PSPs) have also become default financial partners for online businesses, creating the chance to add more value beyond traditional financial services. 

Embedded finance for payment providers has the potential to create a win-win scenario for platforms and their business customers, aligning financing with the same systems that clients use to run payments, creating a seamless repayment process.

📕Further reading: Embedded finance for PSPs: Strategies, winning moves & new frontiers

How to choose the right embedded finance provider

For non-financial businesses implementing financial services, choosing the right embedded finance provider is key to maximising the success of your embedded finance offering. When compared with the process of building an in-house solution, working with specialist embedded finance providers can offer essential expertise, technology and financial networks to offer these services with less risk, cost, and time commitment.

Key concerns should include:

• Technology compatibility: Look for APIs and tools that allow for efficient integration with your platform's existing systems, facilitating secure data exchange and a seamless user experience.
• Reliability and Security: Choose a provider with a proven track record of reliability and security, including compliance with all relevant data security standards and regulations, as well as being able to advise on implementation.
• Financial Products Choice: Different providers specialise in various services. Ensure you’re offering products that make sense for your customer base– for example, revenue-based financing is ideal for online businesses, integrating repayments with their existing sales model.
• Scalability: As the platform grows, your embedded finance capabilities may also need to expand, requiring a provider that can scale systems with volumes and transactions.
• Capital risk: Ensure your chosen provider gives your customers the right options for their needs, combined with robust underwriting and credit checks.
• Partnership and Innovation: The right provider can be more than a vendor, working closely with your platform to innovate and develop new offerings that can keep your business ahead of its competition.

📕Further reading: The definitive guide to embedded finance providers

What are the risks and rewards of embedded finance products?

While these embedded finance products promise additional market opportunities, especially for Small and Medium Enterprises (SMEs), they also entail a different spectrum of risks and rewards compared to traditional financing models.

New risk assessment methodologies

Embedded finance allows for more inclusive and accurate risk assessments by using a broader range of real-time data metrics, which can be especially beneficial for new or seasonal businesses that might find traditional bank loans inaccessible or unsuitable.

Enhanced information analysis

The capability to leverage enhanced information such as non-credit payment behaviours and website engagement metrics helps in creating proprietary models that not only facilitate financing but also provide valuable insights for business growth and customer understanding.

Improved customer satisfaction 

The quick processing of applications, facilitated by real-time data analytics, results in a smoother experience for business owners, potentially leading to increased sales and loyalty towards the embedded finance platform provider.

Secure data handling 

The requirement for sensitive business data to tailor financial solutions presents a risk, necessitating robust data security and privacy measures to ensure regulatory compliance and earn customer trust.

How to maximise success for your embedded finance implementation

While there’s an abundance of opportunity, there are risks associated with embedded finance implementation. To make sure your embedded finance project is a success, watch out for the following key considerations:

Sensitive data requirements

A significant amount of confidential business data is needed to offer this solution. Whether it's deployed in-house or through a partner, companies need to assess the risk and ensure they comply with the different regulations, depending on the type of businesses they serve, whether they build the solution themselves or go through a white-labelled partner.

A spotless reputation

Financial service providers need to be trustworthy and have up-to-date certifications. This can be a risk especially if partnering with an external provider to offer lending solutions under your own brand, for instance. 

For that reason, it’s crucial to make sure your chosen partner not only has all the required data security and privacy certifications, but also handles financial processes in a fair and ethical way. Some questions to ask a potential provider: how do you work to remove bias from lending decisions? How inclusive are your products? What industries do you work with and what sustainability priorities do you have in place?

Embedded finance integration

One of the core advantages of embedded finance for platforms is the ability to use existing customer information to accelerate the funding process through sharing data between systems. However, this brings risks. Building a reliable, secure embedded finance integration is essential not only for making it easy for SMEs to apply for finance, but also ensuring that all customer data used in the financing process is managed safely, without risk of breaches or unauthorised access.

Creating a seamless funding application journey 

Integrated embedded finance offers a way to improve the experience for both businesses and providers with automated application processes, especially when compared to legacy lenders.. By integrating open banking, digital documents and alternative data platforms can offer their customers a faster, fairer, more accessible embedded finance funding application journey.

Should you buy or build or build an embedded finance solution? 

When it comes to implementing financial services on a platform, businesses have a choice between whether to buy or build their embedded finance solution. Successfully launching this sort of solution in-house takes time and specialist skills, as most of the power of modern embedded finance solutions comes from:

• The sophistication of their data modelling
• The partnerships they have with various capital providers
• Their understanding of how to work within regulatory constraints while still offering their products to as many merchants as possible, and especially those who are not served by existing solutions.

These drivers are usually out of the core competencies of non-financial institutions, and even of some established financial ones.

So if they want to go to market quickly with an inclusive risk model that satisfies compliance and regulation, many lenders use a third party embedded finance provider.

📕Further reading: Embedded finance: Buy or Build

What are key embedded finance use-cases?

For platforms seeking to integrate embedded finance, the "how" is just as crucial as the "what." Understanding the most powerful embedded finance use cases can help platforms not only implement financial services seamlessly but also meet specific business and customer needs effectively. The following examples provide insights into how various platforms are utilising embedded finance to its fullest potential:

• Revenue-based financing: Digital platforms can now offer tailored loan programs based on sales history and performance, allowing merchants to maintain higher inventory levels and facilitate larger purchases. This approach is revenue-based, tying loan repayments to the platform’s sales, thereby creating a win-win situation for both the platform and its users.
• Instant payouts: Marketplaces and e-commerce platforms are implementing instant payouts, enabling merchants to access their funds immediately upon the completion of a sale. This feature not only enhances the platform’s value proposition but also addresses a critical pain point for small businesses — cash flow.
• Working capital financing: Marketplaces such as eBay are offering working capital loans through programs like "Capital for eBay Business Sellers," aiding in inventory management and facilitating sales growth for their vendors. Such initiatives have proven to significantly improve Gross Merchandise Volume (GMV) for those who take out financing.
• Virtual Accounts and Cards: Embedded finance solutions are offering virtual accounts and cards linked to platform accounts, simplifying financial management for businesses and contributing to an improved user experience.
• Credit Scoring and Risk Assessment Tools: Sophisticated credit scoring and risk assessment tools can be seamlessly integrated into platforms, reducing the risk of loan defaults and enhancing profitability for the platform.

What does regulation mean for embedded finance?

The rules around this new technology are still evolving, which means embedded finance regulation is a key area to watch.  We’ve seen early signs of what may be to come in the attitude of regulators towards BNPL, one of the fastest growing service lines.

In recent reviews by the Financial Conduct Authority (FCA), affordability was highlighted as a key concern. While some BNPL firms have taken steps to integrate affordability, more needs to be done to assess risk and better inform consumers on interest rates before they buy.

The regulatory focus on BNPL embedded finance is a hot topic both in the UK and overseas. The BNPL market has grown internationally and many other countries are taking a close look at providers too. For example, in the US, the Consumer Financial Protection Bureau (CFPB) issued orders in late 2021, to several BNPL companies, asking them to collect data on customers for use in risk scoring.

Wrap up

Embedded finance solutions allow all sorts of organisations to meet the nuanced needs of their small business customers, from payment service providers to online shopping platforms to food delivery hubs.

By augmenting their core offerings with these flexible and competitive financing options, they give themselves an advantage over the competition, and keep their customers happy and thriving. Ultimately, embedded finance is about creating delightful experiences around financial products, and that is probably the biggest reason for its success so far.

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