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Explore the potential of embedded finance for platforms and the SMBs they serve.
Software as a Service (SaaS) platforms, or marketplace businesses, are in a unique position. You play a central role in the day-to-day running of small and medium-sized business (SMBs) operations. You know a huge amount about their operating model, their seasonal challenges, and their financials. This means you’re ideally placed to offer them more.
SMBs have long suffered from sluggish financial processes. They’re often overlooked by business banking providers meaning they have inadequate access to the financial services they need. For platforms, this presents a huge opportunity. By embedding financial services into your suite of solutions, you’ll be able to deliver them to your SMB users via their everyday workflow.
64% of SMBs are interested in financial services being embedded within a platform.
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The demand for embedded financial products is here. According to our research conducted with the Boston Consulting Group (BCG), 64% of SMBs are interested in financial services embedded within a platform. And some of the biggest global platforms are proving how much added benefit they can offer their users by embedding payments alone.
Before we dive into embedded finance, let’s take a closer look at the foundation of embedded financial services: embedded payments.
Embedded payments are processed natively without any redirects or third parties, and there’s only one point of contact: your platform. This is a huge step up from having to refer your users to payment service providers, which shoulders them with another choice to make and another provider to manage.
69% of SMBs say they would change their payment processor if the solution were more integrated into their business process.
Embedded payments are becoming a major selling point for platforms. 69% of platform users would move to a platform that offers a more integrated payments experience. Embedded payments are also opening up a whole new revenue stream. Established platform businesses already see as much as 80% of their revenue coming from embedded payments.
Crucially, embedded payments also paves the way to offering financial services. By having access to the volume of your user’s daily transactions and sales trends, you can start to offer embedded financial products that are tailored to their money flow and create an extra benefit for them to stay on your platform.
What is embedded finance?
In the context of this article, embedded finance is the integration of financial products within an existing platform. Specifically, we’re referring to platform businesses that serve other, smaller businesses such as:
- Ticketing businesses
- Hospitality businesses
Embedded finance vs banking as a service
There’s some confusion around this so let’s clear it up. Banking as a service (BaaS) is the back-end capability that enables embedded finance. For example, Adyen is a banking as a service provider. Our platform customers package up our technology and licenses into whitelabelled financial products to sell on to their users.
How embedded finance works
Embedded finance works by platforms offering financial services to their users from within the same dashboard they use to run their daily operations. Already, your platform forms the foundation of your users’ business, now it can be their bank too offering services such as:
- Business financing, which can be offered and approved on the spot
- Bank accounts to streamline finance management
- Card issuing for faster payouts
The 70% growth opportunity for frontrunners
Our research found that, by offering embedded financial services, platforms could unlock a potential revenue uplift of up to 70%. But the time to act is now. The market for SMB embedded finance is still at an early stage of development, with less than 5% of penetration. But it’s poised to develop rapidly, especially as other platforms wake up to the opportunity.
Embedded finance in practice
So what does all this look like in practical terms? Here’s a quick overview of the three main areas our research has identified as potentially needle-moving for platforms:
Liquidity can make or break an SMBs growth. Whether SMBs need to bridge an uncertain period or need investment to support their growth, getting small business loans from banks is often the last resort. The reason is simple: applying for a traditional bank loan takes a long time, requires mountains of paperwork, and is often denied.
With embedded financing, you can offer business financing to pre-qualified users directly via your platform while minimising awkward denials. Everything is automated, from the proactive risk assessment, to the amount a business can borrow, to their repayments.
If your BaaS provider processes the embedded payments, they can estimate how much a user can borrow responsibly and automate repayments without burdening their cash flow. Embedded payments make it possible to automate how much a user repays per transaction.
The need for business financing for SMBs can’t be overstated. 94% of the SMBs that we spoke to for our Embedded Finance Report said they would benefit from access to liquidity in order to grow their business.
Embedded bank accounts
Opening an account at a bank requires a lot more work for an SMB than one might expect. Often, business owners need to go to the bank in person with a stack of documents and it can take days or weeks to activate an account.
With the expansion of embedded financial services, you can add an extra layer to your offering through embedded bank accounts and let users open and manage their business bank accounts directly on your platform. They’ll be able to manage their money where they manage their business, without having to log into different interfaces.
With embedded bank accounts, you leverage the know your customer (KYC) data you already have to open accounts in record time. On top of that, by running payments and accounts on the same infrastructure, payouts become faster and more reliable.
Issuing branded payment cards
If you want to offer a complete embedded finance experience to your users, you need to give them a way to spend their funds. By issuing branded payment cards, platform users get direct access to the funds in their embedded bank account.
An issued physical or virtual card has all the functionalities of a normal payment card, with the added benefit of being able to add spend controls. Because payments, payouts, cash-advances and issued payment cards are all managed on a single platform, your users get instant access to funds.
Issuing branded payment cards is a golden opportunity for your brand to become a part of your users daily operations by being present for every transaction. It’s also something that your users are interested in. According to our research with BCG, 60% of SMBs are interested in a payment card product provided by their platform of choice.
3 ways embedded finance impacts your users day-to-day
Financial management is often one of the least favorite tasks for entrepreneurs. Helping SMBs with financial services that are tailored to their needs are instrumental in supporting their growth.
Embedded finance eradicates these hurdles. Since payments and financial services are run on the same platform, payouts are instant, reconciliation can be automated, and additional financial services can be added as needed.
Here are some of the immediate benefits your users will enjoy.
1. Control of cash flow
It can take days for payouts to arrive in a business bank account, depending on the currencies and banks involved. Especially for a business that deals with a high volume of transactions, like a bagel shop. With hundreds of daily sales of bagels and coffee, it’s impossible for business owners to keep track of how much cash is still coming their way. When ordering supplies or deciding on an investment in a new counter, that’s crucial information.
By running payments and accounts on a single infrastructure, you can eliminate delays and can pay out SMBs hard earned cash on the same sales day making financial services an integrated part of any given workday. They log on to your platform and get immediate access to their business and finances in one place..
It also allows you to automate reconciliation. When it’s time to make up the books, users still need to manually sift through payments, payouts, receipts, and allocate tips. If they can manage all their financial services on one platform, they don’t have to reconcile between multiple systems or deal with paperwork.
2. Access to capital
When a business owner needs to invest in extra stock for peak season sales or to replace broken equipment, they might not have the liquidity to do so. With embedded business financing, you can give users fast access to the capital they need when they need it.
Pro-active risk assessments identify which users qualify for a cash advance based on historical transactional data. When business owners log in to your platform, they are presented with business financing options they can actually afford and get funded with a few clicks.
So when the van of a dog walker breaks down, they can minimise damage to their business. By logging in to their bookkeeping platform and getting fast access to funds, they can repair their vehicle and keep their business running.
Repayments are transparent and automated with each incoming payment. By holding back repayments instead of expecting set installments, the dog walker’s cash will continue to flow as normal.
3. Make decisions based on financial insights
By embedding financial services into the platform that facilitates the business operations of an SMB, you allow users to make decisions based on reliable financial data.
Many SMBs deal with seasonality, especially clothing store owners. Rather than having to guess how much inventory they need to buy when a big sales period is coming up, or inform them when stock runs low. They can also base how much to stock at the beginning of the season on how much they sold before.
Access to financial data can also help your platform inform your users where to invest at what time. By embedding financial products, you can gain insights into trends in the sector on a larger scale. Which means you can enhance your offering by adding proactive business insights to the mix.
“Our software is really the operating system that these merchants use to run their business. We already know a lot about their businesses and we can make informed credit decisions.”
Nathan Gill · Chief Product Officer, Epos Now
Embedded finance with Adyen
A close relationship with your users, coupled with a deep understanding of their businesses, puts platforms in a strong position to diversify into financial services. But you don’t have to do it alone, as our VP of banking and financial products, Thom Ruiter explains:
“By building our banking infrastructure as a part of the single platform from the ground up, we remove the limitations of legacy financial systems, enabling Adyen to deliver the power of a bank combined with the adaptability of a fintech. This approach means we can offer our platform customers the flexibility to meet the evolving needs of their users without the barriers of regulatory complexity, lengthy product development, or sponsor bank restrictions.”
“The opportunity is simply too big, and too synergetic with their core business, for platforms to ignore.”
Thom Ruiter · VP of Banking and Financial Products, Adyen
The SMB banking revolution has already begun, with platforms leading the charge. For those businesses looking to seize the opportunity, now is the time to take action and realise the full potential of their platforms.
Originally published at: Ayden