Much has been made of embedded lending in the past 2 years. With the pandemic shuttering businesses and forcing an unprecedented shift to online and digital services, you could argue this was inevitable. Now, the likes of Klarna, Stripe and PayPal have proven that consumers are ready (and willing) to apply for credit products in a few clicks. 2022 will take embedded lending even further.
MarketFinance has been focused on providing frictionless finance to small businesses for over a decade. Beginning with the UK’s first digital invoice finance solution, we expanded into short and long-term loans after recognising the need for flexible solutions from our customers. To continue our vision, we’ve been focusing our efforts on embedded lending, removing even more friction and making our lending products available to businesses when they need to access cash.
PayPal has arguably been one of the most signficant fintechs to impact our world. Their payment solution is now as ubiquitous as ever, and the preferred payment method for over 360 million people (with 4 billion transactions made in Q3 2021). Klarna took the successes of providers such as PayPal and extended these into a simple credit application at online checkout, fuelling their massive growth.
Though there are many reasons we could attribute to the massive success of both these businesses – design, UX, product features – without doubt, one of the most important reasons is that they inserted themselves at the point-of-need for consumers. In Klarna’s case, that “point of need” is when you're about to buy something from an online retailer, or maybe when you want to spread the payment of a new laptop. Klarna continued to focus on their product and built the necessary APIs to allow companies such as ASOS to embed their services within their checkout. It has proven to be a truly successful partnership, which boosted both companies’ bottom lines.
We spend a lot of time at MarketFinance talking to business leaders and entrepreneurs who need access to working capital to help grow their business. The most common attribute across them all is that they are time-poor. Having to juggle running their business alongside everything else usually means they commit their valuable time to the most pressing problems. Often, recognising a need for financing comes at a critical time and they need it ASAP. This is where point-of-need becomes so powerful in the business-to-business (B2B) world and is the cornerstone of every strategic partnership – at which point-of-need does a lending product make the most sense and take friction out of a purchase for a business owner?
Embedded lending is all about creating the tooling necessary for any app, digital product or service to provide lending products within their own platform or ecosystem. It’s always powered by a robust suite of APIs (software interfaces that connect computers). Since building a lending product isn’t easy (risk modelling, fraud, KYC etc makes something like a loan pretty complicated), developing this tooling and offering it to companies that aren’t fintechs through partnering allows them to provide financial services to their customers.
So which platforms allow us to be there at the point-of-need for small businesses? MarketFinance already has integrations with accounting SaaS companies like Xero, Intuit Quickbooks and Sage, allowing customers to automatically upload invoices. A natural next step is to embed lending within these platforms, so when a business owner recognises a gap in cash flow they can seamlessly apply for some working capital within their platform of choice. This also opens up possibilities for predictive lending.
Using machine learning (ML) and artificial intelligence (AI) to analyse rich data across transactions, open banking and online sources could suggest financing before a business is in a cash flow crisis. This would provide value to accountants too, who could use the advanced analytics and predictions from this tech to better serve a larger number of their own clients. With providers such as Xero actively pursuing this space, I expect a number of these embedded lending initiatives to develop in 2022.
This idea naturally extends to ERP providers – integrated business management systems that are helping serve the next generation of eCommerce businesses. Once a small business outgrows their processes, they usually progress to ERP systems to manage warehouses and track inventory. Although traditional lenders can offer finance to these larger small businesses, they’re often slow and require manual reviews to make changes. With embedded lending, a dynamic limit can be calculated by revenues, outgoings, shipment tracking and average order values. With the wealth of data available in ERP systems about the health, viability and potential growth of a business, partnerships with these providers could usher in a new, intelligent wave of small business lending.
Beyond these industry partnerships, we also must not forget the rise of finance aggregators such as Swoop, Funding Xchange & Capitalise. As consumers, we’re used to comparison sites such as Kayak to find flights, or comparethemarket for travel insurance – sometimes getting both through a single platform. These new digital brokers and aggregators bring the comparison site experience to small business financing, and are driven by embedded lending technology.
The expectation of simple, frictionless access to financing is coming to the B2B world in a big way this year and we’re excited to be part of the journey.
If you’re interested in embedded lending, partnerships or have a large SME client base learn more about our Strategic Partnerships team.