Embedded finance is, as the name suggests, the embedding of smart banking and finance products via application programming interfaces into other products. These can be finance and fintech companies, but primarily they’re commercial and non-banking products.
Klarna is a great example. E-commerce businesses integrate Klarna into their payment flows and can then offer their customers a series of short-term loans exactly when they need them most, right at the point of sale.
In business, this isn’t a particularly new concept. Many major retailers have offered some form of credit – or even their own credit card – for decades. And ever since the e-commerce boom of the late 1990s, people have been making payments via websites and platforms.
But the possibilities available to businesses today go far beyond payments. At its peak, embedded finance is about offering an ecosystem of personalised services that rapidly improves a business’s offering, while giving customers – either B2B or B2C – value-added, personalised services based on their financial data.
There are two main ways this is going to benefit businesses.
In 2020, Andreessen Horowitz’s Angela Strange declared that “every company will be a fintech”. She was mostly right. Most companies will employ and partner with a fintech. Now, thanks to embedded finance, almost any business from any sector can gain access to new financial products for their customers. These include business loans, cards, virtual accounts, wealth management, insurance, cross-border payments, FX and more.
Businesses can essentially become one-stop-shops for financial services, allowing their customers to conduct all their financial business on their site and platform. They can even become banks themselves – something modern consumers have an appetite for. According to one report, most consumers under the age of 55 would be willing to open a bank account with non-banking providers like Amazon, Google, Starbucks and Uber.
Furthermore, due to embedded finance aggregators like AAZZUR, adding multiple different services can now be done with one integration.
All this earns businesses additional revenue and has been shown to increase retention and engagement. A total of 87.5% of non-financial companies that have begun to offer financial solutions have increased engagement levels, while 85% said they have attracted new customers.
As more businesses begin offering financial services – and fintech providers and banks move from competition to integrated collaboration – business customers will clearly feel the benefit, too. A great example of this is Tide, the SME debit card. Tide doesn’t just offer a business account for SMEs. It has integrated with almost all major accounting software so that any business spending is automatically uploaded. Further to this, it’s partnered with companies like Smart Pension, LawBite and CMME (formerly Contractor Mortgages Made Easy), so its users have access to genuinely useful SME-focused financial services.
That’s embedded finance in action. But really, it’s just the start.
For the past decade or so, fintechs have been democratising financial services. It’s now easier to apply for business loans and insurance, while the costs of both domestic and cross-border payments have been cut drastically. Embedded finance democratises this further. Businesses won’t even need to go looking for these services – they’ll be offered exactly at the point of need.
This could be particularly appealing for businesses because nearly all of the risk is taken on by the fintechs providing the services. For loans and funding, capital is provided either by the fintech or a larger provider that it has already partnered with. This clearly can’t negate the risk of the regular market movements that affect FX, inflation or interest rates, but it means businesses won’t be left out of pocket if their customers fail to make payments.
Equally appealing is the simplicity of the agreements and subsequent revenue streams. These are often agreed on an individual basis with businesses paying a one-off fee for the integration; they will then earn revenue either on commission, interest, interchange or via fees for accounts.
As an example, at AAZZUR, we’ve just started helping a global web services provider build out a loan offering for their SME customers.
We integrated the client with one of our partners, an innovative business loan start-up, so now its SME customers get access to a high-quality loan with almost instant evaluation and results. Plus, we’ve worked out the appropriate triggers and opportunities in the customer journey, so the loan is only offered when the SME needs it.
To bring everything full circle, this benefits both businesses. The business customer gets offered a business loan right at the point of need, while the business provider gets a higher return on investment, increased loyalty and retention, and the loans are used to purchase its own services.
Philipp Buschmann is co-founder and CEO of embedded finance fintech company AAZZUR