Embedded finance for e-commerce platforms: Launching financial services on your platform

In 2021, global retail e-commerce sales reached approximately 5.2 trillion U.S. dollars, and are projected to grow by 56% over the next five years, reaching about 8.1 trillion dollars by 2026. The six largest e-commerce markets in Europe have experienced a combined increase in sales of 116.1%, from £152.20bn in 2015 to £328.91bn in 2021.  

As e-commerce becomes the default route to market for retail – 2021 figures showed 78% of new business applications are planning to sell online and e-commerce needs to find a new way to not only capture a share of this revenue, but retain and scale it across their customer base.

Launching embedded finance services has the potential to dramatically enhance the value proposition for e-commerce platforms, providing services that merchants need while adding new sources of income for the platforms themselves. By partnering with financial technology providers, platforms can leverage the benefits of embedded finance to stay ahead of the competition in the digital age, while offering customers a more seamless experience to increase customer loyalty and growth.

However, to make the most of the rise of embedded finance, e-commerce businesses need to find the right partner to offer the necessary infrastructure and expertise to help businesses seamlessly integrate financial services into their platforms. Here we explore the advantages of embedded finance services for e-commerce platforms, how to choose the right partner, and the steps for implementing these solutions in your platform.

Why do e-commerce platforms need embedded financial services?

With the expansion of the e-commerce market, platforms are facing new challenges in scaling revenue while still retaining and growing existing customers. Merchants have more choice than ever when it comes to choosing their provider, while the bar for service is growing. 

E-commerce growth challenges

As the e-commerce market expands, e-commerce platforms face several challenges that can impact their growth and success. These challenges include:

• Increasing competition: With new platforms emerging and established platforms expanding and consolidating, the e-commerce marketplace has become more crowded than ever. E-commerce platforms need to find new ways to differentiate themselves and stand out from the competition through experience, services or pricing models, while still remaining attractive on pricing.

• Attracting and retaining sellers: E-commerce platforms rely on sellers to generate revenue, which means offering competitive fees and features to attract and retain merchants is important. As other platforms look to acquire and scale users, platforms need to maintain a seamless and user-friendly experience for sellers, while also offering a range of valuable features that can help sellers grow their business.

• Supporting businesses: E-commerce competition also affects sellers, who have been struggling with varying economic conditions. Many e-commerce businesses require financing to grow, but obtaining funding can be difficult. Embedded financing can help platforms support with payouts and financing to improve growth and resilience.

Balancing service and margin

As e-commerce platforms scale, competing for customers can put downward pressure on revenues due to marketing and service costs. Platforms need to balance the cost of expansion with the need to remain profitable and provide the service levels merchants expect.

Customer acquisition costs are one of the main costs of growth for e-commerce platforms. Businesses with low retention end up spending more on acquisition and cutting profit margins.

Platforms are limited in their ability to raise costs for sellers, as higher fees risk losing sellers to other platforms, but while retention is the most attractive route, retaining customers requires offering valuable services at the right price. 

Embedded financing offers the chance to increase revenue while also improving service levels, without driving up costs for users.

How does embedded finance generate new revenue for e-commerce platforms?

Embedded finance can help e-commerce platforms scale revenue by enhancing the customer's lifetime value through tailored financing options. The customer's lifetime value (CLTV) is a critical metric in e-commerce, determined by the average value of transactions per customer, the number of transactions per period, and the churn rate per period.

Embedded financing, such as revenue-based finance, can improve each of these metrics by:

• Maintaining or growing the average transaction size for merchants due to the ability to scale inventory and restock faster on high-demand items
• Providing more capital for growth and marketing, enabling merchants to expand their business on the platform
• Improving business viability in the face of uncertainty or cash flow issues, reducing the likelihood of merchants churning from the platform
• Improving retention by solving key pain points for customers, such as providing flexible payment options and better access to capital
• Providing finance in a way that doesn't leave the seller with debt obligations or fixed payments, reducing the likelihood of payment defaults and improving the seller's financial stability

Revenue-based finance also adds a new revenue stream for the e-commerce platform, which grows each time a customer renews on a credit line. This enables e-commerce platforms to generate revenue from both the seller and the customer, while also increasing customer loyalty and retention.

Examples of e-commerce platforms using embedded finance 

As a natural extension of the e-commerce enablement proposition, embedded finance is an increasingly popular route for e-commerce providers, with several leading e-platforms already adopting the solution for customers:

• Shopify Capital: This loan program for Shopify sellers provides funding based on sales history and performance. The loan is paid back through a fixed percentage of daily sales, making it an attractive option for sellers who need working capital but are concerned about unpredictable revenue.

• PayPal Working Capital: PayPal can take advantage of financing with flexible repayment terms and no credit check. The loan amount is based on the seller's existing PayPal data and repayment is made through the same platform executing their transactions.

• Affirm: a payment plan option for e-commerce platforms that allows customers to pay for purchases in instalments. This option appeals to customers who prefer a flexible payment schedule and may not have access to traditional credit.

How to mitigate risk for e-commerce embedded finance 

Alongside the benefits of embedded finance, e-commerce platforms need to proactively address the potential risks to maximise return on investment and customer experience. Some of the risks to consider when implementing  e-commerce embedded finance include:

• Credit risk: E-commerce platforms may face losses if sellers default on loans or payment plans. To mitigate this risk, e-commerce platforms can work with reliable embedded finance providers who have expertise in assessing creditworthiness and minimising losses. 

• Compliance challenges: When adding financial services, e-commerce platforms must comply with regulations related to financing, data protection, and consumer awareness. This can require building or acquiring additional technology for underwriting, risk assessment and credit management. The most effective way to address this is partnering with experienced embedded finance providers who have a deep understanding of regulatory requirements and handle compliance processes using platforms’ existing customer data to assess loan volumes and rates.

• Operational risk: E-commerce platforms may face operational risks such as technology failures, data breaches, and fraud. To mitigate these risks, e-commerce platforms can implement robust risk management procedures, such as multi-factor authentication, data encryption, and fraud detection algorithms. They can also work with embedded finance providers who have a strong track record of managing operational risk.

How to implement embedded finance on your e-commerce platform?

E-commerce platforms have the option to build their own embedded finance products, but the majority choose to work with an expert technology partner. Advantages of this approach include:

• Implementation risk: Specialist providers can help manage the scoping, technology, and implementation process to ensure that the process is completed on time and on budget, with all necessary functionality and safeguards. 

• Compliance expertise: Financial services require additional compliance considerations for data security, underwriting and consumer information – falling behind on these can lead to steep penalties from regulators. Working with a partner helps platforms address specific requirements to reduce risk and accelerate implementation. 

• Scaling support: Working with an experience technology partner ensures that embedded finance systems are ready to scale with your business, delivering a consistent customer experience for every user as your platform grows.

• Capital protection: While e-commerce platforms can choose to use their capital, working with a partner helps reduce capital risk connecting the customer to the funder while receiving a commission on the finance offered.

When choosing the right partner, platforms should consider:

• Time to market: Speed to market is key to remaining competitive –  solutions such as YouLend offer battle-tested APIs that are ready to go-to-market in just 7 days.

• Fees model: Embedded finance providers offer a range of fees and reimbursement options. YouLend works with multiple capital sources to offer competitive pricing for merchants while offering higher levels of commission for platforms on all financing provided. 

• Resource requirements: Intensive development projects can raise the cost of implementation and timelines for adding embedded financing. YouLend’s no-code platform works with a single API connection, fully white-labelled with no development resource required.

Maximising embedded finance value for e-commerce

E-commerce is going to keep growing as a channel – for platforms, the race is on to maximise customer value, improve retention and optimise business models for today’s marketplace. Embedded financing has the potential to turn e-commerce platforms into one-stop shop for running a whole business online, bringing more of the services your customers need into one place.

YouLend works with leading e-commerce platforms to help them move faster, tailor their customer experiences and reduce risk when it comes to offering embedded finance services. Our technology integrates seamlessly with your platform to help you offer a seamless journey to your users that provides consistent value.

To learn more about how to start offering embedded finance solutions on your e-commerce platform, book a demo or read our partner case studies here.