We’re now in the embedded finance era (and it’s great for SMEs)

Louis Carbonnier
Co-Founder and Co-CEO

Embedded finance is travelling at lightning speed. For B2B buyers and sellers especially, the concept of embedded finance was severely underutilised this time last year. But fast-forward to today, embedded finance has made its way into almost every B2B industry, sector and platform – 43% of SMEs have already used an embedded finance service in the past twelve months. Momentum is building, new doors are opening, and the long-awaited digital transformation of B2B is well underway. Here’s an update on my embedded finance predictions from the beginning of the year. 

Embedded finance moves to new areas 

In my predictions, I mentioned that embedded finance would move to new market territories. As expected, the movement has expanded to sectors like freight, fashion and even freelancing with gusto. Anecdotally, we’ve seen interest in embedded finance enter new areas of B2B such as automotive, food and beverage, and corporate travel. 

One of the liveliest areas for growth is motor insurance. The industry has seen an explosion in the availability of embedded financial products. Some companies have been racing ahead to forge partnerships and gain a competitive advantage. Embedded insurance provider, Qover is one example. This firm has made significant partnerships in the past years, including Revolut, Deliveroo, NIO, Canyon and Monese. In July, the insurer partnered with challenger bank Zurich insurance and Monzo, as well as major financial institution ING. Motor insurance is one of the industries expected to see the most disruption from embedded finance, with Deloitte predicting that it will divert a staggering $50 billion from traditional automotive insurance by 2030. 

Another exciting direction of travel for embedded finance in 2023 has been, of course, trade credit. My co-founder Richard will probably cover this in more detail in his predictions follow-up. However, in a nutshell, we’ve personally witnessed a vast eruption of interest from firms of all sizes. At Hokodo, our embedded trade credit solution is now used by over 100,000 small businesses – but we’re far from done. The B2B Buy Now, Pay Later (BNPL) industry is expected to continue growing by at least a third each year until 2030, according to research from Euromoney.

The age of bolt-ons begins

As hundreds of thousands of SMEs are discovering, embedded finance is about much more than quick access to payments. At the start of the year, we hypothesised how bolt-ons like embedded insurance, accounting or other integrations could exist for small businesses. Today, they’re using it.

Even the most humble freelancers are rapidly gaining access to the kind of seamless cash flow management, accounting and insurance tools traditionally enjoyed by large firms. Xero, for example, offers 14 different in-house bolt-on options for its customers including embedded payments, payroll, and marketing tools. FreeAgent has gone down the partnership route, rather than acquisitions. The accounting platform offers its 150,000 small business clients 47 integrations across categories including; data entry, e-commerce, time tracking, customer lifecycle management, compliance, tax, forecasting, data migrations, finance, productivity, project management, payroll and trade credit. 

Across the industry, 43% of SMEs have already used an embedded finance service in the past twelve months, and many more plan to. The bolt-on age is ramping-up rapidly. 

Rocketing demand for BNPL 

One of the most famous embedded finance products is – of course – BNPL. Over 2023, we have seen usage grow steadily among consumers and businesses. Today, BNPL accounts for around 5% of purchases in the UK, according to research from the Money and Pensions Service. By June 2024, it’s expected to hit 10%. So, what propelled this demand?

Looking to the US, 28% of consumers choose BNPL because it is an interest-free source of credit. When it comes to personal loans in the US, interest rates have shot up to around 11.3%, as of August 2023. For context, in 2020, it was around 3.1% – nearly a quarter of the cost today. 

However, the demand is triggered by more than interest rates. Customers are now accustomed to having payment choices. When BNPL is not available, it can send a red flag. 43% of BNPL users admit that they would delay, cancel or opt for a cheaper product if this payment option was unavailable. Consequently, merchants who do not offer BNPL stand to lose 25% of sales from BNPL users on average.

BNPL helps businesses maintain quality and cash flow 

From our own books, we’ve noticed that buyers will tend to opt for more expensive products when they have B2B BNPL options. We believe this is better for everyone. In today’s world, the cost of materials and energy means that the quality of products is decreasing. Those businesses that invest in better tools and supplies can help to boost efficiency, maintain quality and steady their cash flow. They won’t need to buy the same machines again after a few years and better tools can help to keep their craftsmanship strong. Good quality stands the test of time, always.  

Finally, small businesses are in a position where they can start to compete against large corporations. They can grasp onto their cash flow like a climber grips onto a mountainside, using embedded financial services and BNPL options as carabiners to hoist themselves up to a more equal playing field. At Hokodo, we are proud to be side-by-side with small businesses on their climb.

Missed our 2023 predictions? Check them out here.

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