Embedded finance: Seizing the opportunity

Explore the potential of embedded finance for platforms and the SMBs they serve, with insights from Epos Now.

Platform businesses that serve small-and-medium-sized-businesses (SMBs) are in a unique position. You play a central role in the day-to-day running of your users’ 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.

What is embedded finance?

Before we dive in, it’s helpful to explain what we mean by 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:

  • Retailers
  • 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 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

The increasing cost of living is hitting UK SMBs hard, making optimised cashflow more important than ever. Embedding financial services into your platform can help your SMB users both by streamlining the payments process so they can increase conversions and get paid faster, and unlocking access to pre-approved capital. This is made possible since the financing and payments are embedded into your platform. You'll have access to payments data, which makes it simple for you to quickly authorise loans for instance.

64% of SMBs are interested in financial services being embedded within a platform.

It’s hardly surprising therefore that our research found that nearly two thirds (64%) of SMBs are interested in financial services being embedded within a platform. Payments is also seen as the bedrock on which platforms will grow embedded financial services. Nearly a third (30%) of responding platforms already offer embedded payments services and nearly three quarters (74%) of SMBs are interested in it.

If that wasn’t compelling enough, 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 embedded finance 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:

Capital

The first is cash advances (or capital). Liquidity has never been more important for SMBs and so it’s no shock that a whopping 94% of them state that pre-approved cash advances are a product they would benefit from.

Business accounts

There’s an opportunity for platforms to provide SMBs with accounts offering unique features such as accelerated settlement, a single and integrated interface and ultra-fast opening. Moreover, SMBs are also showing interest in services such as treasury management or cross-border payments with FX, providing a basis for further cross-sell.

Card issuing

You can complete your payments offering by enabling your SMB users to spend their funds on platform-issued debit or credit cards. This presents a compelling revenue opportunity for you to not only monetise incoming payments via embedded payments but outgoing payments as well. You’ll achieve this by receiving a share of the interchange revenue from each transaction completed on a platform-issued card.

Setting up for success

The benefits are clear, but how does a platform get itself into the position to claim its share of the SMB banking and payments revenue pool? Here are three key components our research uncovered when setting your platform up for success:

69% of SMBs say they would change their payment processor if the solution were more integrated into their business process.

The power of one: Offering multiple services from one platform

The first is the capability for integrated services. According to our research, nearly seven in 10 (69%) of SMBs say they would change their payment processor if the solution were more integrated into their business process. The key differentiator of embedded finance will be its ability to become part of an SMB’s usual workflow, enabling features such as pre-approved capital, one-click provisioning, and dynamic repayments at the point of need. The central premise of embedded finance (a single interface without referrals to other pages, fast resolution, and a simple user journey) will be crucial to realising its full potential.

A single view: Harnessing the power of real-time data

Second is detailed, timely data. From real-time payment flows and cash positions to inventory levels and point of sale activity, platforms have access to a broad range of relevant user data, at a higher level of granularity than traditional financial institutions. Centralised, accessible data sets will ensure you can deliver a superior financial service offering. This includes greater accuracy of underwriting and risk models to make rapid financing available to SMBs.

Trust: Building on existing relationships

The third factor is the development of in-depth user relationships. Platforms have built trust through consistently strong performance and a deep understanding of their SMB users’ specific industry, challenges, and needs. This is evidenced by the fact that around 85% of those SMBs surveyed were satisfied with their platform. You can now leverage these strong relationships in order to differentiate yourself from traditional banking players. You can also use this good will to develop highly tailored solutions for users.

Case study: Epos Now

Hundreds of thousands of SMBs rely on platforms such as software as a service (SaaS) providers or ecommerce platforms to run their businesses. And now, thanks to the support of these platforms, niche boutiques and startups can find themselves on an equal footing with long established household names.

“Our customers tend to do anywhere from a hundred thousand to ten million in annual turnover” says Nathan Gill, chief product officer of Epos Now, cloud-based software provider, specialising in the design and manufacture of electronic point of sale. “So it's important we provide a lot of flexibility because no two businesses are alike. We need to make sure that the corner cafe, which is different from the bike shop, which is different from a multi-location franchise, has the tools it needs to efficiently run its business."

“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."

Epos Now powers businesses in the retail and hospitality sectors. “We’re a point-of-sale software solution that allows companies to manage their customers, their supply chain and their product deliveries as well as marketing the financial aspects of the business,” says Gill. “It’s essentially everything that they need to operate day-to-day.”

The ubiquity of the service puts Epos Now in a strong position to expand into new financial offerings, as Gill explains: “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 much more informed credit decisions than a traditional financial institution can.”

Looking to the future, Gill believes the sector will see consolidation among providers. “There will be fewer players but competition will still be intense, as demand grows and SMBs look for a full banking solution from their platforms,” he says. “Cloud technology will drive innovation and platforms will have to invest heavily to ensure that they’re offering their SMB clients the kind of services that they need not just today but for tomorrow and beyond.”

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 diversity into financial services. But you don’t have to do it alone. We recently announced our expansion beyond payments to build embedded finance solutions. As our VP of banking and financial products, Thom Ruiter explained:

“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.”

The SMB banking revolution has already begun, with platforms leading the charge. For those businesses looking to seize the opportunity of embedded finance, now is the time to take action and realise the full potential of their platforms.

“The opportunity is simply too big, and too synergetic with their core business, for platforms to ignore,” concluded Ruiter. “Frontrunners are already building positions, supported by agile partners bringing together payments, account, lending and card issuance capabilities.”

Embedded Finance Report

Learn more about the opportunity of embedded finance in our new report created with Boston Consulting Group.

Download report


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