Embedded finance: what is it and how could it expand your business offering?

The Bank of England raising interest rates to a 15-year high of 5% is another blow to UK startups already battling the cost of living crisis, a tech downturn, and tightened purse strings from both investors and consumers.

Whilst the future is uncertain and costs remain high, investing in a new potential revenue stream is one way to help startups stay afloat. Enter embedded finance.

Embedded finance is the integration of financial services into non-financial business processes. The phrase sounds complicated. But embedded finance has been around for some time and it is mature in digital consumer products. Small business owners likely interact with them every day without realising.

Many of today’s biggest apps offer the ability to pay by credit card, on the spot lending or Buy Now Pay Later (BNPL) – all of which are examples of embedded finance.

Why use embedded finance?

There are different reasons to employ embedded finance, such as distributor payment processing, lending services to suppliers, and providing supply chain financing. The use cases are almost endless. Yet they all seek to accomplish the same basic goals:

1. Streamline B2B processes
2. Minimise risk
3. Improve business relationships
4. Open up new revenue streams

“Consider Shopify, which allows businesses to set up an online store and sell their products,” says Eduardo Martinez Garcia, CEO and cofounder at embedded finance platform Toqio. “In addition to its core ecommerce offering, it also provides payment processing services, lending services, and other benefits to subscribed businesses.

“It offers a complete solution so that merchants only need to use services in one place, while Shopify exploits parallel revenue streams from other services.”

Similarly, Amazon has a lending programme for small businesses that offers loans to platform vendors. Risk is assessed according to the merchant’s payment history, volume of sales, and expected revenue. This allows Amazon to provide added value to its vendors while also capturing a share of the financing market.

Uber is another example of embedded finance use within an app. Users order a car, make their journey and then exit the car, all without doing anything outside of the Uber app. This is because the company has used embedded finance within its app to take care of the payment side of its operation, as well as finding a driver for the user.

A new revenue stream

One of the key advantages of corporate embedded finance is that it lets businesses leverage their existing customer relationships and distribution channels to offer financial services.

“Corporate embedded finance can also help to lower the cost of financial services by exploiting existing infrastructure and distribution channels, as well as simply the size of a large venture that has a better shot at negotiating favourable conditions with banks or financial service providers,” adds Martinez Garcia.

Ben Robinson, CEO of fintech product marketing platform Aperture, believes embedded finance can help startups turn a profit.

“Many startups have growth but low revenue – so their unit economics are low customer acquisition costs and low customer lifetime value,” says Robinson. “This is the opposite of financial services, so revenue share agreements between embedded finance providers and startup distribution partners are a ‘marriage made in unit economics heaven’.”

Previously, embedded finance was only available to large businesses with the resources to develop new products or services. Now, as Martinez Garcia explains, technologies such as payment gateways have advanced to the point that SMEs are able to capitalise on the idea.

“Large companies have been embedding financial services in their B2B processes for decades in the form of commercial terms and conditions and lending options to sell their products more efficiently,” adds Martinez Garcia.

“However, changes in technology and regulation enable them to take these products and services to the next level. Today, embedded finance is making its way into the corporate ecosystem in a way that is set to reshape the financial landscape completely.”

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What are the first steps?

So, you think embedded finance could work as a new revenue stream for your startup – what’s next?

It’s important to understand embedded finance, grasping what it is and how it can benefit your company. What are the use cases that you can be a part of? Are there specific pain points you need to address for your existing customers, users or suppliers? How can you prioritise the user experience?

Once you’ve figured out how, and why, you can and should use it, finding a partner is the next step. Embedded finance can be done in-house, but that involves building the necessary infrastructure from scratch.

Finding an external business partner that you trust means they can provide you with the infrastructure, compliance, and expertise required.

“Look for providers that help with the underlying complexities – not just of the product, but regulation too,” says Robinson. “Look for other startups that orchestrate the embedded finance experience in the way that Stripe has done so successfully with payments.”

It’s important to avoid skimping on security and compliance procedures when using embedded finance. Being lax on these two key elements could lead to breaches or fines, which, in extreme scenarios, can destroy a business.

“Start off small and grow,” concludes Martinez Garcia. “You can incorporate one simple financial service into your digital offering in an MVP and try it out. If you market it properly and it really provides value, then you can add other services.

“Don’t be afraid to branch out and create partnerships with complementary platform, service or technology providers that can enhance your embedded finance offering. Take your time, do it right and make sure to keep offering an excellent experience.”

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Kirstie Pickering - business journalist

Kirstie is a freelance journalist writing in the tech, startup and business spaces for publications including Sifted, TNW, UKTN, The Business Magazine and Maddyness UK. She also works closely with agencies such as CEW Communications to develop content for their startup and scaleup clients.