Embedded finance is emerging in both the corporate and consumer markets. Analysts predict revenue will reach $1.91 trillion as adoption expands in 2028.
This steady adoption opens up fintech business to a wide range of market opportunities. At the same time, it is forcing banks to change their traditional catbird seat domain to hand out loans and pay bills to partnerships with a variety of ecommerce platforms. This disruptive transition includes sectors that focus on both business-to-business and business-to-consumer transactions.
By integrating a finance task or function into a company’s infrastructure, embedded finance streamlines access to financial services such as lending, insurance, or payment processing. It does this without redirecting the customer to third-party destinations.
The embedded finance concept took root years ago with money processing businesses like PayPal and Stripe. Users can easily pay bills and deliver money to individuals and businesses without handling such matters individually through their bank or postal service.
Banking as a service
Financing platforms called banking as a service or BaaS are becoming an integral part of online transactions for both individual consumers and businesses. A dualistic industry develops around the two processes.
These BaaS platforms allow digital banks – and even non-banks – to build various financial services into their online transactions, excluding product purchases. They work with back-end banking functionality; whereas the broader category of embedded finance is more of a front-end access to financial services.
Together, the two are connected to the digital marketplace and efforts to simplify and streamline financial services for both consumers and businesses. While embedded finance and banking as a service seem similar, they differ slightly in that BaaS is required to deliver embedded finance.
One of the new trends in shaping B2B payment strategies, especially for non-financial companies, is the shift towards invoice financing or factoring.
This solution is not a loan but a financing strategy where a company sells its invoices at a discount to a factoring company in exchange for a lump sum. The factoring company then owns the invoices and gets paid when it collects from the invoiced customers, usually from 30 to 90 days.
FundThrough is an AI-powered invoice factoring platform with a strong presence in the embedded finance process in B2B payments. The company provides financing to a company based on the size of its outstanding invoices.
Online B2B transactions have three components: suppliers, buyers and the platforms they use. Each component has its own needs that must be met to ensure a smooth payment process for everyone involved, said Amanda Parker, Chief Growth Officer at FundThrough.
An essential requirement for buyers is satisfaction with sellers’ payment methods and the way their suppliers provide those services. As for suppliers, customer payment intervals and delivery processes vary by industry — and selling to B2B companies with unreasonably long or inconsistent payment cycles can negatively impact suppliers’ cash flows, Parker noted.
Embedded finance, the larger umbrella category, encompasses all the different components of finance in the traditional sense. Integrated financial strategies can be built into any workflow that makes sense, explains Parker.
“It can be used directly within the workflow associated with an item purchase, a transaction, creating an invoice, for example,” she told the E-Commerce Times. “It also includes embedded banking, embedded payments, credit insurance, you name it.”
Embedded Finance unpacked
The E-Commerce Times further discussed the inner workings of embedded finance with Amanda Parker. Below is that part of our conversation.
What else is involved in the embedded finance process?
Amanda Parker: It varies and includes a connection to the customer, so you kind of have a connection to the data source.
Amanda Parker, Chief Growth Officer
Let’s take an example from one of our partnerships. We connect to the user’s company in QuickBooks to get information about what their company is, what it does, as well as a level of identity verification.
We do something called KYC which is ‘Know your customer’ so we ask the user a series of questions or ask for a series of documents to confirm their identity.
We then confirm that the transaction they are requesting is legit, the relationship they have with the company on the other hand is legit and their bank account information is legit.
So those are kind of the components. It is verification, confirmation and then sending the required funds through various banks.
How does this process work for other use cases?
Parker: Our bread and butter is loans or invoice financing. In general, embedded finance has many other use cases. You have B2C, tax or business-to-consumer contacts and you are insured for payments. This is exactly the same, but in a B2B context.
So for us, the use case may involve suppliers who want to be paid immediately. Now they can do that alongside any workflow; whether a transaction, invoice or purchase occurs.
How does this process benefit consumers or is it more of a benefit to businesses?
Parker: We’re targeting businesses, but for consumers and everyone, it’s the seamless integration they get so they don’t have to leave their workflow. It is much more convenient and automated.
You don’t use six different systems to get something done. You can now do everything within one system. So if you think about the way finance has been used or changed over time, consumers can essentially buy anything online.
But B2B is a very fragmented system. So now embedded finance is taking over in B2B to apply the same kind of frictionless experience that consumers have online in a B2B context.
What factors drive the transition to embedded finance?
Parker: Frictionless consumer-level experiences have always led the way. That is now permeating the business world.
Another key point is that as millennials take over more of the workforce, they tend to become frustrated with systems and workflows.
Integrated payment and borrowing really opens up many new business models for software companies. This greatly improves the experience to make it a more consumer-like experience, but in a business-to-business context.
How is the adoption of embedded finance progressing?
Parker: We’re seeing a growing number of estimates for the global embedded finance opportunity. [Reportedly] embedded finance will reach a value of $7 trillion globally over the next 10 years.
PayPal and Stripe were leaders, especially on the consumer and e-commerce side. Now we are on the brink of an explosion on the B2B side of things, which is very exciting. There is over $100 trillion on it GMP (guaranteed maximum price) within B2B. That’s just a bit up for grabs.
I think you’ll see a lot more of that as players come out in the next few years and want to help move those funds.
What is needed to encourage further adoption?
Parker: I would say one of the most important things is bank acceptance. More banks need to embrace open banking and banking as a service.
The architecture of the Application Programming Interface (API) is constantly evolving and getting better. A number of fintech players have come out to give the banks a run for their money. So I think we’re going to see a lot of innovation in that area in the coming years.
Why are some banks hesitant to get on board?
Parker: Banks really want to hold back that customer and hold onto that experience. They don’t want their customers to switch to another experience. They want to try to operate it all themselves.
Banks are also very concerned about security. But that’s what we’re investing in now to make sure we give customers the best experience. Consumers link their bank accounts to many different services. It is in [everyone’s] importance to ensure a safe and hassle-free experience. That’s one of the big areas where we hope to see further progress in the coming years.