Over the last few years, we’ve seen a lot of momentum build towards embedded finance solutions, pushing both financial and non-financial players to serve their SME business customers more effectively.

As more companies, marketplaces, e-commerce platforms, and Payment Service Providers (PSPs) look to embed financial services in their offerings, we explore how these opportunities can help you to grow your merchant base.

Why embedded finance solutions make a real difference for SMEs

Traditional financiers are out of touch and SME customers are frustrated: The current system isn’t working well for small businesses. Due to legacy systems and internal compliance rules, traditional lenders are often slow, unintuitive, and, ultimately, painful to work with.

Yet, in the age of one-click ordering and invisible payments, a smooth, effortless customer journey is non-negotiable.

As a case in point, if you’re an e-commerce platform, you might often onboard new sellers who had already been selling informally for a little while or might have an established audience through social media. When they suddenly come on your platform, it is not surprising to see them  trade for only three months and then achieve great success. And yet, if they went to a bank they would most likely be excluded from consideration for a loan.

So how do you make sure you can support them in a way that ensures growth and loyalty?

In another example, if you’re a payment solution provider and your customer is a bar in a tourist hotspot area, they might be severely limited in their ability to make fixed payments on a loan to a bank. That is yet another type of customer that desperately needs a better solution.

This is where embedded finance simplifies and solves. Through flexible revenue-based financing, these small businesses can invest in growing, and you can reap the benefits of that growth with them.

💡 With embedded finance, merchants can access the finance services they need, when they need it, within the platforms and interfaces they use in the day-to-day flow of life and work.

Platforms with embedded finance offerings can leverage enhanced information that identifies non-credit payment behaviours and metrics – giving more small businesses access to the financing that they deserve – and, in today’s economic climate, desperately need.

In addition to the customer needs driving this evolution, companies have increasingly seen the potential to monetise digital opportunities and the need to reinforce loyalty, particularly with merchant customers. In fact, an Accenture analysis forecasts that embedded banking for SMEs could capture up to 26% of global SME banking revenue by 2025.

6 ways embedded finance solutions create differentiation and growth

This evolution presents a huge opportunity for any company that is looking to grow its merchant base. So here are six ways you can grow your merchant base through embedded finance:

1. Help merchants grow their transactions

By supporting merchants with much-needed finance support, you will help them in turn to grow their transactions and therefore increase revenue.

That’s because funding enables merchants to buy equipment, materials, and supplies, recruit staff, and even fund sales and marketing efforts. This, in turn, helps to support a strong and healthy business that will put more transactions through your platform – a win-win scenario.

Interestingly, in a study published July 2021, Shopify found that merchants that received funding through Shopify Capital on average experienced 36% higher sales in the following six months compared to their peers.

2. Attract new digital-first businesses

Agility, time-to-decision, and resilience can dictate the success or failure of a digital-first business model. But traditional lending models are often too slow, cumbersome, and unintuitive to meet their needs. In fact, our data shows that 44% of people who applied for financing through traditional routes waited for 7 days or more.

Yet, in the fast-changing online environment, obtaining business finance the same-day can mean the difference between being first to market or losing customers and share to competitors.

This is where embedded finance comes in.

It speeds up the funding process because it is available at point of need and does not involve a cumbersome application process. That’s why embedded finance offerings are so attractive to new businesses that are purely digital.

3. Retain more customers

Small businesses may be small by definition, but their collective power is by no means tiny.

Harnessing these partnerships and creating more ways of working with them is increasingly essential to keeping them as customers.

More and more platforms are creating ecosystems that include everything SMEs might need to run their business – freeing them up to focus on developing their products rather than overcoming technical and financial limitations.

Working with who they consider key partners gives them reassurance and makes them more comfortable, meaning they’ll have a good experience and come back to your platform time and again.

4. Create delight through a seamless journey

Embedded finance’s potential lies in integrating it deeply into your brand’s user journey to keep merchants in the same ecosystem without interrupting their experience.

When opportunities arise, SMEs can access financial services when they want. For example, instead of needing to go to a different provider, apply through an entirely new process, and wait for weeks for an answer, they can access financing services almost instantly where they need them most in the flow of business activities.  

Suddenly, your customers have more choices, the experiences are seamless, and because they are seamless they get used more often too. The result? These delightful experiences translate into stickiness.

Even slightly more expensive services will win over their cheaper competitors if they can offer a seamless, fully integrated experience where the merchant solves the whole funding issue quickly and with a few clicks. And the way to create these experiences is to think about the depth and quality of integration of your whole backend.

In addition, your platform’s embedded finance offering may also come with value-added services, such as financial management and analytics tools.

5. Improve financial inclusion

Fast, fair embedded finance can unlock significant potential for merchants.

However, the challenge facing many of these businesses is that many of them have not been trading for more than two years – yet traditional finance providers look for a minimum of two sets of filed accounts.

Moreover, there is less information available about these enterprises for traditional lenders to use for risk assessment, and that creates a barrier to funding.

Embedded finance allows underserved businesses the opportunity to have access to the resources they desperately need. What’s more, resources provided by non-financial brands embedding finance into their offerings encourages businesses to use financial services, to start to expand, manage risk, and weather financial shocks.

6. Leverage more data to improve the merchant experience

Another benefit of providing embedded finance is that it allows you to collect and leverage more data on your merchants to ultimately find more opportunities to serve them even better and provide a great customer experience.

Moreover, when coupled with your existing real-time data on merchants’ seasonality and sales data, you gain an even greater picture to deliver tailored, pre-approved offers in application when merchants need it.

Finally, as an interesting side-note: your merchants are not looking for tiny differences in fees, you won’t be able to compete only on price. Your merchants want support to grow, a delightful customer experience.

In summary

Technology platforms and payment service providers will play an increasingly important role in supporting growth through business finance embedded in their core solutions.

We expect these trends to have staying power, and that companies will miss out on a huge opportunity to differentiate and create real loyalty with merchants if they don’t undertake a strategic refocus – and quickly.

Now is the time for each marketplace, payment provider, and ecommerce platform to decide where and how it will participate in a fast-changing landscape. Those that take a wait-and-see stance will get left far behind by more agile, fast-moving competitors.

Companies have many ways to do this. From building their own solutions and securing capital to fund them, to partnering with specialised providers who do it all for them - embedding financial tools directly within their site. Either way, the way for your organisation to thrive is through a stronger relationship with your customers, one that helps them grow sustainably

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