The closure of Amazon lending earlier this year, a program that served a market valued at USD 140 billion, sent shockwaves through the SME community. For over a decade, Amazon provided sellers with quick access to loans, helping them manage cash flow and liquidity. This exclusive program offered term loans, lines of credit, and revenue-based financing directly through Seller Central, enabling vendors to get funds faster than from traditional banks. What made the programme successful was the ability for Amazon to leverage its extensive data on seller's history and customer satisfaction to make quicker and more informed lending decisions, making the process faster and less cumbersome than traditional banks (source: TechTarget).
Additionally, they leveraged strategic partnerships with financial giants like Goldman Sachs, allowing them to offer more substantial credit lines while maintaining lower credit risks which was key to scaling their lending platform and supporting more SMEs. Although Amazon will continue to honour active loans and connect sellers with third party lenders, its exit underscores the ongoing challenges SMEs face in securing financing.
Firstly, SMEs driving growth for Amazon now have to find alternative options. Secondly, global SMEs, which constitute over 90% of the global business population, now miss out on opportunities for cash flow management. Amazon's rationale for shutting the business down ultimately boiled down to cost versus profit. As a non-banking player, Amazon utilized its own balance sheet to underwrite the loans, making it very hard to manage financial and non-financial risk, especially amid increased regulatory scrutiny and a high-interest rate environment. Operating in such an environment meant higher costs to issue capital on its balance sheet.
Furthermore, many incumbent banks and neobanks are not yet ready to offer a fully integrated and seamless embedded finance experience due to its complexity. Too many are still heavily focusing on core offerings such as accounts and card-based payment services to innovate further.
Corporates, familiar with their networks, possess the data and insights to enable the cash flow and liquidity optimization their merchants need without taking on financial risk.
Understanding the challenges in B2B cash flow management today
Large companies with vast networks of SME distributors and merchants encounter significant cash flow management issues. Fundamentally, it's a liquidity optimization and working capital issue, where there is a constant need for balancing between liquidity and working capital, leaving businesses faced with a difficult dichotomy between their banking providers and the actual cash flow within their operations.
Delays in inventory replenishment, fulfilling orders, and maintaining higher order volumes create a ripple effect that slows production and erodes trust and profitability. SMEs aiming to drive high volume sales face problematic accounts receivable management due to manual processes and lack of automation. Additionally, they struggle to access capital expenditures (CapEx) loans for growth or asset financing for essential equipment. According to a recent survey by Versapay, common challenges for global finance leaders include:
- Inefficient payments limiting cash flow visibility and management (41%)
- Outdates manual collections processes (40%)
- Inefficient and/or disorganized collections processes (37%)
- Legacy systems and siloed data (35%)
- Customer communication difficulties (35%)
Accessing the right money at the right time: Corporates as the key enablers
Imagine a world where you could seamlessly connect your financial collaborators, distributors, and vendors in one unified platform to effortlessly manage a variety of financial products from different providers according to your unique business requirements - without any limitations. This is what embedded finance makes possible. The greatest advantage for corporates is the ability to swiftly and freely integrate financial services into their core offerings, leveraging their market expertise and robust merchant data. Financial partners, in turn, can tap into a corporate's network of distribution channels, reducing risk by accessing better SME data and expanding the outreach of their financial solutions. Ultimately, merchants can easily obtain the financing they need to overcome cash flow constraints. With embedded finance, it's a win-win situation for everyone involved.
By evolving business operating models into financial services ecosystems with platform-based integrated finance solutions, corporates can achieve more growth, efficiency, control, and visibility.
Here are just some of the ways it can be applied:
Revenue collections for cash flow optimization
Merchants often struggle with cash flow due to varied payment terms from different financial providers, ranging from two days to three months. This inconsistency hampers corporate control and visibility. An automated revenue collection solution consolidates financial products into one platform, providing full visibility of revenue streams like points-of-sale (PoS), account to account (A2A) transfers, digital cash, and direct debit (DD) collections. Enhanced insights into transaction data allow corporates to view sales patterns and seasonality, enabling them to offer competitive financial products to merchants through combined negotiation power.
Digital cash distribution
Often mired by manual-driven processes, corporates can now simplify this by using digital methods like topped-up cards or digital wallets, with controlled spending limits and currency options. They can also commercially link products to other existing or new offerings. This approach ensures accurate fund distribution and comprehensive tracking in one platform.
Automated payments and reconciliation for operational efficiency
Manual payment and reconciliation processes often lead to errors and delays. Automation can streamline these processes by setting payment rules for bulk collections, linking ERP systems to platform technology for digitized collections, and offering flexible payments terms (30/60/90 days) with discounts. This reduces errors, speeds up transactions, and improves cash flow visibility.
Lending for liquidity optimization
Merchant networks encounter situations where immediate access to funds is crucial, such as equipment failures that impede their ability to carry out their services. In contrast, traditional banks typically take upwards of 6-8 weeks to process SME loans, whereas a corporate partner can leverage their position to quickly approve and distribute funds to their merchants, promoting stability within their distribution channels and supply chains.
Merchant cash flow is affected by varying settlement periods and limited access to appropriate funding. Corporates can offer financial flexibility by providing cash advances and short-term loans based on merchant and sector-specific data. This support helps merchants better manage liqudiity and maintain operations.
Considerations for successful implementation
To successfully implement these solutions, corporates need the ability to:
- Orchestrate multiple financial products and providers
A platform that integrates various financial products and providers is essential. - Embed journeys in primary corporate actions
The technology must be user-friendly and powerful, allowing seamless integration into existing workflows. - Cater solutions to specific segments and corporate needs
Customizing solutions to address the unique needs of different market segments ensures relevance and effectiveness.
By adopting this approach, corporates can optimize cash flow, improve operational efficiency, and better support their SME networks. However, building an in-house solution can be complex, costly, and time-consuming, often taking around 30 months. As embedded finance platforms become more prevalent, corporates can choose between two primary models: horizontal software-as-a-service (SaaS) platforms or vertical SaaS platforms.
Horizontal platforms are suitable for mature businesses serving multiple industries, offering comprehensive financial functionalities that can enhance core products and generate new revenue streams. Key features include:
- Simple integration
Robust APIs enable seamless integration of financial services like payments, lending, and insurance into existing systems, ensuring smooth supply chain operations with minimal development effort. - Scalability
Cloud-native API architecture allows these platforms to scale with business growth, offering flexible configurations tailored to different industries. - Compliance
Built-in regulatory compliance and data security features protect sensitive financial data and ensure that operations are secure and compliant.
Why the future of distribution is embedded and ecosystem driven
The global embedded finance market is projected to reach USD 228 billion by 2028, reflecting its growing popularity. An Accenture survey found that 47% of SMEs prefer embedded finance solutions over traditional banks. While open banking offers enhanced access to financial data and services, embedded finance goes further by integrating these into non-financial platforms with emerging use cases on how it can unlock greater potential to complete in over saturated and commoditized markets while reducing costs and complexity through better automation.
What it enables:
- A flywheel of growth
Offering additional financial services on top of existing offerings to create a self-sustainable cycle of growth. - The disintermediation of financial services
Positioning corporates as preferred financial partners, reducing reliance on traditional banks. - Increased revenue and retention
Bundling financial services with core products to boost revenue through upselling and cross-selling. - The creation of new revenue streams
Providing access to alternative lending providers for exclusive financial products, generating new revenue share arrangements.
Concluding thoughts
Embedded finance is pivotal for the future of corporate supply chains. With nine of out ten of the world's largest corporates evolving into financial service ecosystems, the potential is vast.
At Toqio, we've created a unique platform that unifies financial services partners, distributors, and merchants into a single interconnected and cohesive environment. This allows corporates to build financial marketplaces and tailored propositions for their merchants, seamlessly integrating top-tier products from various third-party providers. Our platform simplifies operations, reduces costs, and drives growth by enhancing operational efficiencies across the corporate, merchant, and third-party ecosystems. By embracing embedded finance ecosystems today, corporates can future-proof their businesses for the challenges and opportunities of tomorrow.
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