Much has been made of embedded lending during the past couple years. With the COVID-19 crisis shuttering businesses and forcing a major shift to online and all-digital services, you could say that this was inevitable. Now, large Fintechs like Klarna, Stripe and PayPal have shown that consumers are ready (and also willing) to apply for credit products with just a few clicks. 2022 could take embedded lending a lot further, according to the team at UK-based MarketFinance, one of the largest P2P invoice financing platforms.
MarketFinance notes in a blog post that it has been focused on offering frictionless finance to small businesses for more than 10 years. Beginning with the United Kingdom’s first digital invoice finance solution, the company expanded into short and long-term loans after recognizing the requirement for flexible solutions from their clients. In order to continue their vision, they’ve been focusing their efforts on embedded lending, “removing even more friction and making our lending products available to businesses when they need to access cash.”
The team at MarketFinance further noted that PayPal has “arguably been one of the most significant 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).” MarketFinance also pointed out that Klarna took the successes of providers like PayPal and “extended these into a simple credit application at online checkout, fuelling their massive growth.”
Though there are many reasons that we could attribute to the success of these businesses – design, UX, product features – one of the most important reasons is that they “inserted themselves at the point-of-need for consumers,” according to MarketFinance. In Klarna’s case, that “point of need” is when you’re about to purchase items from an online retailer, or maybe when you want to spread out the payment of a new laptop into more manageable installments. As noted in the update from MarketFinance, 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.”
The company also revealed:
“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, recognizing 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?”
MarketFinance further noted:
“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 so simple (risk modelling, fraud, KYC etc makes something like a loan pretty complicated), developing this tooling and offering it to firms that aren’t fintechs through partnering “allows them to provide financial services to their customers.”
MarketFinance also mentioned that they have integrations with accounting SaaS companies like Xero, Intuit Quickbooks and Sage, “allowing customers to automatically upload invoices.” The company pointed out that a natural next step is “to embed lending within these platforms, so when a business owner recognizes 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.”
According to MarketFinance:
“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.”
MarketFinance also noted that 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,” the team at MarketFinance noted.
They added:
“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.”
MarketFinance also mentioned:
“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 compare the market 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 company concluded:
“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.”