Estimates suggest that the value of the embedded finance market will exceed $7 trillion by 2026. However, despite becoming an increasingly competitive and saturated subdivision of financial services, many B2B e-commerce operators remain unaware of how embedded finance could help them to grow.
In this guide, we’ll explore the topic in detail looking at definitions and examples of embedded finance, before moving on to the embedding of B2B financial services.
What is embedded finance?
Put simply, embedded finance is the integration of financial services or tools – traditionally provided via a bank or other incumbent provider – within the products or services of a non-financial organisation. It is the act of offering services such as payments, insurance or lending at the point of need.
The truth is, as a consumer, you probably already use embedded financial technologies every week without even thinking about it. When you pay for an Uber ride, order a takeaway from Deliveroo or purchase a new pair of trainers using PayPal, you are interacting with a variety of embedded financial technologies. Quietly, these tools have transformed the relationship between consumers, companies and financial institutions for the better.
Embedded finance streamlines payments and purchasing processes by reducing barriers to entry for various products and services. For example, in years past it may have been necessary for a consumer to visit a physical bank to get a loan for a substantial purchase. Now, services like these are being made available easily at the point of need.
But the benefits of embedded finance are not just confined to B2C transactions. In recent years, fintech companies have begun to enhance business-to-business trade through the provision of B2B embedded finance products such as buy now, pay later (BNPL) and trade credit insurance that are more accessible, affordable and effective than legacy solutions.
Embedded finance examples
Now we know how to define embedded finance and understand the impact it is projected to have, let’s take a look at some specific areas of embedded finance.
By enabling instant payments at the touch of a button, embedded payment solutions make life easier for consumers and business buyers alike. But what are embedded payments?
Rideshare apps like Uber and Bolt are excellent examples of companies that utilise embedded payments in order to create a smoother experience for consumers. Payment technologies are integrated within the apps, meaning that customers don’t need to carry cash in order to ride and, more importantly, aren’t required to enter their card details for every transaction. Instead, upon completion of their journey, consumers are automatically charged the price they accepted before departure.
Since the launch of Apple Pay in 2014, digital wallets have become another integral way for companies to embed payment technology in their apps or websites. Enabling contactless mobile transactions and instant online purchases, digital wallets nullify the time spent inputting card details or pin numbers at both digital and physical checkouts.
Clearly, embedded payments are already commonplace on websites and apps where consumers purchase goods and services. As B2B transactions continue to move online – over half of business buyers already rely on web stores for frequent purchases – we will see a growing number of merchants and marketplaces offer seamless B2B embedded payments options alongside more traditional methods like credit card and Direct Debit.
Embedded lending allows buyers to access deferred payment facilities or short term financing at the point of purchase, without the need to visit a bank or engage with a traditional lender.
In consumer e-commerce, embedded finance is more commonly known as buy now, pay later, and is well-known among consumers thanks to the ubiquity, success and – only recently – the negative publicity of Swedish BNPL giant Klarna.
B2B Buy Now, Pay Later providers like Hokodo have developed similar embedded lending solutions which enable businesses to access an improved, digital version of traditional trade credit. Solutions like ours eliminate the need for the cumbersome paperwork and lengthy approval waiting times associated with trade credit, allowing buyers to access payment terms instantly, even on their first purchase. Meanwhile, sellers benefit from a 40% conversion rate boost and an average order value increase of 30%.
Before the days of embedded insurance, buyers seeking to insure a new purchase would need to endure the often difficult process of finding an appropriate insurance product at an agreeable cost.
These days, insurance products and policies are available as add-on services at the point of purchase. With just one click, consumers are able to insure flights, concert tickets and high cost items, eliminating the need to manually seek insurance.
Embedded insurance also has an important role to play in B2B trade. One example is found when buyers make an online purchase for stock or materials from overseas. At the point of sale, the buyer may be prompted to add cargo insurance to their order to protect against the risk of loss or damage to goods during transit.
The benefits of embedded finance for B2B marketplaces
Specifically, B2B financial services are being enhanced in marketplace settings by the introduction of embedded products and tools. Buyers benefit from an improved customer experience and seamless checkout process, while sellers and marketplaces themselves boost customer loyalty and discover untapped revenue streams. As Amanda Parker writes for Digital Commerce 360, “B2B marketplaces, apps, and ecosystems should no longer be asking if they should embed payment options into their platforms; rather they should be asking when.”
Improved customer experience
When marketplaces begin to add B2B embedded finance products to their offering, they create value for the end user. Take an embedded credit product, for example. Buyers are offered a suitable credit limit and payment terms at the point of need, without the hassle of filling out a form or waiting for a credit check. This all but eradicates the friction associated with offering credit in an online setting, resulting in a far superior customer experience.
Additional revenue streams
By offering payments, lending, insurance and other services directly from your website or app, embedded finance can expose your marketplace to additional revenue streams that would otherwise have gone to a bank or financial services institution, of which you can capture your fair share.
Increased customer loyalty
One of the biggest challenges faced by marketplaces is leakage (sometimes referred to as platform bypass). This is when a buyer and seller decide to take their transaction off the marketplace platform in order to avoid fees. When you offer embedded financial services at the checkout, you encourage buyers and sellers alike to remain loyal to your marketplace.
When marketplaces integrate payment processing and B2B financing into their platforms and back-end operations, they achieve greater visibility and control while reducing the time and costs of traditional payment processing.
Key challenges and considerations for your business
When a seller embeds a financial service in their online store or platform, there are a number of potential challenges that could arise, most of which concern risk and security.
It’s essential for sellers to ensure that any integrated embedded finance product is secure and compliant with regulations. The last thing you want is to introduce a product that is meant to make your customers’ lives easier and generate your business more revenue, only for the embedded finance provider to cause a data breach, for example.
In a similar vein, a significant challenge posed by the idea of embedded finance is that it has the potential to create ambiguity about which business takes responsibility in the event of a regulatory violation – the seller, or the embedded financial services provider?
A further challenge is the potential complexity for a customer to deal with two different suppliers. This can create confusion if customers aren’t aware which supplier is responsible for the different parts of their order. If they have an issue, who do they raise it with?
All such challenges can be easily solved or avoided, but merchants and marketplaces should still be aware of them when embarking on embedded finance projects.
Embedding financial tools in B2B
As we’ve discovered, embedded financial technologies have already cut their teeth within consumer e-commerce over the past several years, and more recently have started to permeate online B2B trade. But we’ve only scratched the surface when it comes to the potential of embedded finance.
“These solutions have the flexibility and universality to be applied to any company or industry where a transactional element is present,” explains Hokodo Co-Founder and Co-CEO, Louis Carbonnier. “If implemented correctly, they have the potential and momentum to fully revolutionise payments and broaden the horizons of innovation within financial services.”
If they haven’t already, businesses not utilising B2B embedded finance technology in their apps or websites will soon begin to lose revenue to digitally savvy competitors who have taken steps to improve their customer experience with embedded payments, insurance, lending and more.
Even large banks and traditional financial institutions, notoriously slow to adapt, have begun to take notice of the opportunities offered by embedded finance. However, the legacy systems these incumbents have in place are not fit to make the real-time decisions required for the sale of embedded financial services.
Instead, the most effective embedded finance solutions are those offered by agile startups who have built customisable end-to-end tech stacks from the ground up. This is especially important in the context of B2B trade, which is considerably more complex than consumer commerce. With banks such as Citi and BNP Paribas developing strategic partnerships with Hokodo, it’s evident that these traditional players see the long term potential of B2B embedded finance.
Businesses selling to other businesses need flexible and scalable embedded financial solutions which can be integrated into their existing platforms with ease. Hokodo offers just that – an end-to-end embedded lending solution built for B2B which covers everything from credit underwriting and fraud risk assessment through to financing, payments and collections. Book a demo today to find out how you could fuel the growth of your B2B e-commerce platform with embedded lending technology.
How to get started with embedded finance
As adoption of embedded financial services continues to gather pace, it’s essential for B2B sellers to start considering how they could utilise these tools. Successful integration of a B2B embedded finance product into your platform relies on solid planning and a structured approach. You’ll need to consider the factors below before embarking on your embedded finance journey.
Define objectives and strategy
- Clearly define your objectives for implementing embedded finance solutions.
- Consider how it aligns with your overall business strategy and goals.
- Determine the specific outcomes you expect to achieve, such as improved customer experience, increased revenue, or enhanced operational efficiency.
Identify customer needs
This step is crucial for designing tailored financial services that meet your customers' specific requirements.
- Understand your customers' financial needs and pain points.
- Conduct surveys, interviews, or focus groups to gather feedback directly from your target audience.
- Identify areas where embedded finance solutions can add value and address customer pain points effectively.
Conduct market research
- Thoroughly research the market to gain insights into industry trends, customer preferences, and competitive landscape.
- Identify the financial services that are most relevant to your target audience.
- Analyse existing embedded finance solutions offered by competitors or similar businesses to understand best practices and potential gaps.
Assess internal capabilities
- Evaluate your organisation's internal capabilities to support embedded finance implementation.
- Assess your existing infrastructure, technology systems, and resources.
- Determine if you have the necessary expertise or if additional talent, partnerships, or external support will be required.
- Identify any potential challenges or gaps that need to be addressed before implementation.
Select a partner
- Identify and evaluate potential partners, such as fintech companies, payment providers, or financial institutions, that can support your embedded finance initiatives.
- Consider their expertise, track record, technological capabilities, security measures, and compatibility with your business requirements.
- Establish clear criteria for partner selection and engage in thorough due diligence before making a decision.
Develop a roadmap
- Create a detailed implementation roadmap that outlines the necessary steps, timelines, and resources required for successful integration of embedded finance solutions.
- Define milestones and key performance indicators (KPIs) to track progress and measure the success of the implementation.
- Ensure alignment with your overall business strategy and consider scalability and future growth opportunities.
Ensure compliance and security
Embedded finance involves handling sensitive financial data, so you must:
- Ensure compliance with relevant regulations and security standards.
- Familiarise yourself with data protection laws, privacy regulations, and any industry-specific compliance requirements.
- Implement robust security measures to safeguard customer information and protect against fraud or unauthorised access.
Train and educate staff
To ensure the smooth adoption and effective utilisation of your new embedded financial offering you will need to:
- Provide adequate training and education to your employees about the embedded finance solutions you are implementing.
- Ensure they understand the benefits, features, and processes involved.
Monitor and optimise your solution
Once your embedded financial solution is implemented you need to continuously monitor its performance by:
- Tracking key metrics, analysing user feedback, and collecting data to identify areas for optimisation.
- Regularly reviewing and refining your offerings based on customer insights and changing market dynamics.
Need more help? Download and fill out our embedded finance project template to get a head start.