Embedded finance refers to the integration of financial services into non-financial business processes. The concept has been around for some time in digital consumer products. Many apps offer the ability to pay by credit card, on the spot lending, buy-now/pay-later (BNPL), and a variety of other features. Embedded finance, however, is making its way into the corporate ecosystem and is set to reshape the financial landscape completely.
Slowly but surely, we’re seeing embedded finance creep into corporate offerings, including distributor payment processing, lending services to suppliers, providing supply chain financing, and a host of other implementations. The use cases are nigh infinite yet they all seek to accomplish the same basic goals, namely to streamline B2B processes, minimize risk, and improve business relationships. When the high level of adoption of consumer embedded finance carries over to the B2B space, then we’re genuinely looking at the next big thing.
The goal of corporate embedded finance will be to create an integrated experience for businesses within a self-sustaining ecosystem while also generating new revenue streams. By embedding financial services directly into their offerings, companies can provide a more holistic solution to distributors, retailers, manufacturers, suppliers, and others, as well as capturing a share of the financial value chain. It’s already happening in several industries. Companies that work with other companies clearly need to get on board with the paradigm quickly before their competitors do. Eventually, they may have to share the space, but they’ll enjoy a massive advantage as the first to market touting a shiny new way of working.
Overall, corporate embedded finance is set to deliver tremendous value. There is an emerging opportunity for companies to capitalize on, worth an estimated USD 3.7 trillion over the next five years. In fact, more than 50% of businesses have expressed the need and desire for cash flow financing vehicles through a platform as opposed to their bank, according to a McKinsey report. You can also download a free copy of the report we commissioned from WhiteSight which verifies much of what McKinsey is saying.
One of the key advantages of corporate embedded finance is that it allows businesses to leverage their existing customer relationships and distribution channels to offer financial services. Corporate embedded finance can also help to lower the cost of financial services, by exploiting existing infrastructure and distribution channels, as well as simply the size of a large venture that has a better shot at negotiating favourable conditions with banks or financial service providers
Well-known examples of corporate embedded finance include Shopify, the leading e-commerce platform, which allows businesses to set up an online store and sell their products. In addition to its core e-commerce offering, they also provide payment processing services, lending services, and other benefits to subscribed businesses. They offer a complete solution so that merchants only need to use services in one place while Shopify generates previously untapped revenue.
Similarly, Amazon has a lending program for small businesses, offering loans to small businesses that sell on its platform. Risk is assessed according to the merchant’s payment history, volume of sales, expected revenue, and other data. This allows Amazon to provide added value to its sellers, while also capturing a share of the financing market. Amazon has a closer relationship with its small business partners than any other entity, ensuring they can approach a lending program with far less risk than a large bank.
Companies like Flexport and Freightos are also using embedded finance to offer supply chain financing to their partner businesses. By providing financing options to suppliers and other partners in the supply chain, these companies can help to improve cash flow and reduce the risk of supply chain disruptions. This creates added value for their partners while once again generating new revenue streams.
All these examples typically provide the companies running initiatives with higher customer retention rates, as participating member companies are normally loath to jump ship when they have everything they need in one place. As the trend continues to evolve, we can expect to see more innovative uses of embedded finance in a wider range of industries.