OPPORTUNITY EMBEDDED: THE DATA-DRIVEN INNOVATIONS SHAPING THE FUTURE OF FINANCE

Embedded finance, in which non-financial businesses integrate financial services into their product offerings, has revolutionised how consumers buy goods and services, allowing them to pay ecommerce vendors seamlessly without ever leaving their site, or even get instant approval for ‘buy now, pay later’ credit from industry leaders like Klarna. Rapid B2C uptake has already helped revenues from embedded finance surge to more than $20 billion in the US alone, according to McKinsey.

However, it is B2B that will drive the next – and possibly biggest – growth spurt, as companies look to strengthen their supply chains by embedding financial services into their inventory, sales, procurement and other processes. This will involve tapping into a wealth of under-used data to inform credit decisions and speed up payments. Juniper Research predicts this will help global revenues from embedded finance triple by 2027 to over $183 billion.

Who stands to gain?

Embedded finance promises to bring huge benefits, not only for smaller and under-served companies, but for the fintechs, funders and tech providers that serve them.

We believe small and medium-sized enterprises (SMEs), and the supply chains that rely on them, will be the biggest winners. By facilitating a more holistic, contextual understanding of SMEs’ revenue rhythms, risk profiles and the ecosystems within which they trade, embedded finance could enable them to get the liquidity they need, at a price that’s right for everyone, while helping to close a global trade finance gap now estimated at over $2 billion.

With the right tech partner, corporates can also dramatically improve the efficiency of treasury and other back-office processes. And by gaining real-time, business-critical insights into data sets they had previously either ignored or lacked access to, they may be able to respond more quickly to liquidity needs, identify new revenue opportunities and build stronger relationships with their customers.

By tapping into diverse and non-traditional data sets – including everything from payment flows to social media engagement – financial service providers can also build a more holistic view of the companies they serve, as well as their broader trading networks. This will allow better estimates of companies’ future trade flows, costs and revenues – enabling funding that more accurately reflects their real default risk, and potentially at more competitive prices. Rapid credit decisions should also improve customer loyalty and retention, while a more intimate knowledge of customers’ specific needs and pain points will give financial firms a head start on competitors in terms of pitching adjacent products and services.

And while fintechs and non-traditional financial service providers have been fastest to embrace embedded finance, it could yet be a valuable growth driver for big banks, enabling them to build low-margin, high-volume revenue streams.

Why now?

Embedded finance’s moment in the spotlight comes at a critical time for global commerce. Severe inflationary pressures and a stubborn economic downturn are hurting SMEs disproportionately, but overcoming both depends heavily on their resilience. The digitisation of trade is finally approaching a tipping point where mainstreaming embedded finance is feasible. And the majority of banks and non-traditional financial service providers have now reached a stage in their digital transformation journey where they can offer it. A data explosion also means that vast pools of information are lying in siloes, simply waiting to be explored and exploited. And as more individuals experience embedded finance as consumers, this is raising the bar in terms of their corporate expectations.

But seizing this opportunity will require an innovative approach from the lenders, platform operators and tech partners who will likely shape the B2B embedded finance space.

The journey so far

Momentum is already building as creative players – both new and established – get their hands dirty. For example, logistics provider Flexport now taps into transaction, tracking and customs data from its clients’ shipments to offer them embedded supply chain financing solutions for inventory in transit – an area from which traditional lenders have tended to shy away. By embedding receivables finance solutions into suppliers’ eInvoice systems, Raistone is also able to access – and make credit decisions based on – invoice history and approval data. And Shopify – initially a simple shopping cart solution for SME ecommerce vendors – has started using those vendors’ transaction data to offer them working capital loans that are embedded in its platform.

Emerging markets too are a hotbed of innovation. Nigeria’s Field Intelligence, for example, embeds ‘pay as you sell’ supply chain finance solutions into a digital inventory optimisation service it offers to thousands of small African pharmacies.

Where next?

But this is just the beginning. The quantity and quality of transaction data lying relatively idle within everything from companies’ own treasury systems to B2B marketplaces and logistics platforms continues to mushroom. And there are numerous ways – including many we haven’t yet thought of – that finance offerings could be embedded in business processes so that data can feed into credit decisions and support areas of the economy that otherwise struggle to secure flexible, affordable finance. 

For example, the acceleration of trade digitisation will unlock opportunities to embed B2B financial services into point-of-sale and point-of-purchase transactions – similar to the ‘buy now, pay later’ model seen in the consumer space. This could generate huge demand from corporate buyers.

SMEs – which typically don’t have access to the treasury solutions that banks often extend to large companies in combination with lending products – would likely embrace one-click payment mechanisms as a way of speeding up invoice settlement. And with access to the right data, it could even be possible to fund their trade earlier in the cycle, such as through embedded purchase-order finance.

Challenges of course remain. Creating the infrastructure required for embedded finance to work comes with some cost, and this may deter smaller players in particular from entering the fray. Education, outreach and upskilling may be required for SMEs to embrace embedded finance. And banks, fintechs and tech partners must collaborate proactively to understand their pain points – and find ways to solve them.

How can Aronova help?

For fintechs, banks and corporates looking to gain an early lead in embedded finance, Aronova offers unrivalled expertise and decades of niche experience. As a true receivables specialist, we are already partnering with big-name working capital platforms to glean insights from transactional and other data. Our systems automatically manage every element of funding deep into the supply chain, and our risk and credit limiting algorithms come pre-approved by numerous funders and insurers.

To find out more about how we could work together, contact us.