And now for something completely different.
During a recent meeting with our sales team, they took us through some of their day-to-day interactions with prospective clients. For many of us steeped daily in embedded finance, it was intriguing to learn that many professionals out there may not know very much about the benefits of offering dedicated financial products, the technology behind it, and other core details. We thought we’d address some of the quandaries that a lot of professionals seem to have.
During a recent meeting with our sales team, they took us through some of their day-to-day interactions with prospective clients. For many of us steeped daily in embedded finance, it was intriguing to learn that many professionals out there may not know very much about the benefits of offering dedicated financial products, the technology behind it, and other core details. We thought we’d address some of the quandaries that a lot of professionals seem to have.
If you’re a bit in the dark about embedded finance, read on to discover what we consider to be seven fascinating facets of the concept. From revolutionary partnerships reshaping traditional financial landscapes to the surprising benefits resulting from embedded finance solutions, allow us to unveil the transformative power of financial integration within corporations.
Even though digital embedded finance is a hot topic right now, the idea of a company offering financial services directly to customers or business partners has been around for a very long time. Historically speaking, many recognize The Ford Motor Company as the first proponent of embedded finance, when it began to offer purchase plans jointly with local banks in Europe in the 20s. Realizing they could offer better service to prospective customers, as well as keep a bigger slice of the pie, they soon created the Ford Credit Bank, which eventually crossed the pond and became the international Ford Motor Credit Company in 1959. The company continues to thrive today, raking in billions of dollars yearly.
The current rapid evolution of embedded finance – in its digital form – is swiftly transforming the idea from a niche concept into a mainstream offering for businesses. No longer limited to traditional banking services like accounts and money transfers, embedded finance within the corporate sector is beginning to encompass a wide range of financial products and services integrated into non-financial platforms, including financing, factoring, and many others.
The age of the concept of embedded finance is anecdotal but it clearly demonstrates that the paradigm has been around for a long, long time and has been leveraged successfully throughout.
Corporate embedded finance is happening quickly and is set to propel businesses to new heights of growth, expansion, and reinvention. Even though digital embedded finance has been a part of the consumer market for some time, the corporate embedded finance market is experiencing substantial growth, driven by the rise of digital platforms and the increasing demand for simple, integrated financial solutions. This expansion has clearly led to a wider array of players in the market beyond traditional financial institutions.
According to The Embedded Finance Report, published by the Boston Consulting Group (BCG) and Adyen, the embedded finance market is set to grow in the USA from USD 2.5 billion in 2022 to USD 6.9 billion in 2027. In Europe, growth will skyrocket from EUR 950 million to EUR 3.75 billion.
Bain and Company coincides and goes further, claiming that revenue opportunities for software platforms like Toqio and for infrastructure providers that power embedded offerings will more than double from USD 21 billion in 2021 to USD 51 billion in 2026. According to their prognostications, the total value of transactions carried out through consumer and corporate embedded finance transactions will surge to USD 7 trillion by 2026, accounting for 10% of financial transactions in the USA or more.
McKinsey and Company subscribe to the same school of thought. Starting with the fact that consumer embedded finance transactions in just the USA led to about USD 20 billion in revenue in 2021, their market-sizing model estimates the market could double in size within the next three to five years, and that a large part of that will be corporate embedded finance.
In short, everyone seems to agree that the success of consumer embedded finance is going to carry over into B2B relationships, with a vast array of opportunities available for those with the foresight to recognize them.
Whether we’re talking about a large corporate entity or a small- to medium-sized enterprise (SME), staying on top of regulatory compliance can be daunting. The good news is that the digital milieu is becoming more and more secure as regulatory bodies shore up loopholes while platform providers like Toqio work arm-in-arm with compliance specialists to ensure everything is safe and secure.
Compliance in B2B embedded finance is imperative, not optional. Platforms like Toqio are crucial for businesses adopting embedded finance, ensuring legal adherence and preserving customer trust. As the B2B embedded finance landscape advances, providing KYC (Know Your Customer) and AML (Anti-Money Laundering) mechanisms will become standard practice.
To understand how stringent regulations are becoming, consider BaaS providers that operate under the Electronic Money Institution (EMI) licence in Europe. They have to face more and more increased regulatory scrutiny, particularly in areas related to consumer protection and AML. Near the close of 2022, the European Banking Authority (EBA) issued guidelines on the outsourcing of payment services by EMIs, which emphasized the need for effective risk management and AML controls. After that, national regulators in several countries, including Germany, Lithuania, and the Netherlands, increased their supervisory activities and enforcement actions toward EMIs that provide BaaS offerings.
What does that bode for the future? If you look at the WhiteSight report The State of Banking-as-a-Service in the UK & Europe (commissioned by Toqio), Heather O’Gorman at Thistle Initiatives has this to say:
“Looking forward, it is likely payment service firms will be required to consider new rules similar to SMCR (Senior Managers & Certification Regime), which holds senior management and decision-makers accountable for specific roles and responsibilities within the firm. Although e-money firms are not currently subject to these rules, they still need to hold up to these guidelines and demonstrate that they are fit and proper.”
Basically, she’s saying that top e-money staff will probably be held legally accountable for the functions performed by their businesses. That’s going to prove to be critical for generating market trust when corporate embedded finance takes off. Appropriate and improved regulatory guidelines will act as a clear deterrent and give the charlatans of the world something to ponder prior to engaging in non-compliant activities.
Understanding the monetization strategies involved in embedded finance is key to the future growth of business. Companies may not be aware of two things directly related to embedded finance monetization.
First and foremost, digitally streamlining processes between businesses can cut down on required human resources, increase overall efficiency, and virtually eliminate inter-system friction, all of which translate to reduced costs. Let’s be fair, though: fewer operating costs can contribute positively to profit but they’re not necessarily equivalent.
Second, embedded finance offers a myriad of places where a company can charge for the services being offered, either directly or indirectly. In some cases, that might lead to individual transaction fees for end users. In other cases, a company might offer its partners a low-cost subscription model. If a company’s end-user licence agreement (EULA) allows for it, even aggregate data itself can be monetized, since embedded finance offerings typically yield extremely valuable, granular data which numerous other companies would love to review.
And those are simple, off-the-cuff examples. Regardless of how a company does it, embedded finance offers numerous pathways not only to recoup what has been invested on a project but to profit from it, as well.
The flexibility of embedded finance allows businesses across the spectrum to tailor financial services to the needs of their business customers. The concept isn’t limited to a particular sector, geographic locale, culture, or company size, making it a powerful tool for enhancing financial interactions and creating new business opportunities.
A supplier in the B2B space in Laos, for example, can embed invoice financing services directly into its existing billing platform. A manufacturer in Peru, on the other hand, might consider incorporating embedded shipment insurance services into its digital logistic app.
Businesses of all types sizes, from SMEs to multinational conglomerates, can participate in a new way of doing business.
Embedded finance often relies on partnerships to deliver value. Strategic alliances are incredibly important, whether considering those with technology providers, financial institutions, or other stakeholders. These days, business revolves around creating safe and beneficial ecosystems where interacting companies all gain from the network of relationships they’ve built.
The intersection of embedded finance and corporate partnerships signifies a massive shift in the conventional business paradigm. Establishing a secure ecosystem where all participants mutually thrive is considered the best route to take. For large corporate entities that have invested years and millions in extensive partner networks, embracing embedded finance offers significant advantages. It’s swiftly becoming a firm basis for operational excellence, revenue expansion, and the cultivation of robust, mutually advantageous connections with partner firms. In the ongoing evolution of business ecosystems, adopting embedded finance is not merely an option but a strategic necessity.
Toqio is unique in that it offers a corporate embedded finance platform that doesn’t require any extra software code. That means that just about anyone who knows how to use a computer can configure a piece of software to be distributed and used.
Think of e-mail. Everyone knows how to select a recipient, enter a subject and a message, and hit the send button. Fewer, however, know how POP3 or SMTP or IMAP actually work – nor do they really need to. The comparison to embedded finance system development, though a bit simplistic, is valid. Within that milieu, Toqio, at least, offers a no-code interface for non-techies to be able to get things done.
On the other hand, many companies have business needs and requirements that go beyond a standard experience. For those that want to go a little further, we offer an application programming interface (API). It does most of the heavy lifting, pre-configured to connect with numerous service providers and continually updated to offer more robust features and data flow. Even so, we have an interface that simplifies even the most technical aspects of API connectivity, data exchange, and real-time processing. We call it a low-code solution, because even though you might be using a drag and drop interface to arrange workflows, you can always jump in and add custom code wherever you think it’s necessary.
Exploring embedded finance is swiftly becoming an integral part of business. From its historical roots to its current digital manifestation, it’s on an upward trajectory and will soon be driving significant growth among corporate entities. The immense potential for revenue growth, as predicted by industry reports, positions digital corporate embedded finance as a vital paradigm in future financial transactions.