Various technologies and banking practices have been pushed to the forefront of discussion in payments, fintech and financial services. With all the talk around Open Banking, AI, blockchain, crypto and tokenization, it can be difficult for fintech stakeholders and investors to decide on what to hedge their bets on.
Sharing his views with Payment Expert, Michael Galvin, Co-Founder of SaaS provider Toqio, argues that embedded finance should be high on the agenda for corporate decision makers. Companies must ensure they are not late to the market, he asserts, citing that first mover advantages are still open – but this won’t last forever.
Why corporates should be early movers on embedded finance
One only has to look at how successful Klarna has been since entering the UK market almost 10 years ago to be aware of how ubiquitous embedded finance has become on a B2C basis.
Consumers have been quick to take up the fintech-driven finance options that have emerged in recent years, with the pandemic pushing adoption into overdrive. It was perhaps not a particularly big leap for consumers when one considers store credit cards and loyalty cards had already been around for many years before digital options hit the market.
But as is the case with many finance trends, the B2B market for embedded finance has not developed as rapidly as the B2C market.
One of the main barriers to entry seems to be a lack of internal knowledge. Implementing embedded finance requires expertise across business operations and many companies lack the internal capability to execute such complex projects effectively.
The other barrier is often risk aversion. Many companies resist change, often preferring the status quo. Embedded finance projects are still considered to be an innovation project and as not having enough success stories to justify the investment.
A missed revenue opportunity
However, our own experience points to the potential being just as high on the B2B front as it is in the B2C sphere. A pilot programme we put in place for a major European brewery suggests 30% in net new revenue could be achieved once its embedded finance proposition is fully rolled out to its partners.
Indeed, a white paper published by Juniper Research in April pointed to B2B as having strong potential when it comes to embedded finance. Juniper predicts annual embedded finance revenue will reach $228.6 billion by 2028, 148% more than the $92.2 billion it expects in 2024, and it expects greater acceptance within B2B use cases to be a contributing factor to this growth.
But there’s not just upside being given up by not getting involved; there’s also downside, especially if your competitors are jumping on this emerging trend.
With a major global pandemic and multiple wars leading to soaring inflation and lagging economies, it’s little wonder the average consumer is struggling with the cost of living.
In many areas of business, markets such as the UK and Europe are saturated and products have become commoditised. Thus, many brands struggle to differentiate on anything other than price and it becomes hard to build or sustain loyalty.
This in turn pressures the margins of small businesses and feeds through to the large corporates that supply them.
Boosting loyalty
Hospitality businesses such as pubs have been among the worst hit by the macroeconomic situation of the past few years, so it’s unsurprising our brewery client began to think about how to ensure loyalty among its large SME network.
One of the challenges it identified was a lack of access to suitable financial services among its client base. Financial institutions can struggle to provide finance that caters to the ebb and flow and seasonality of a hospitality business. The corporates that supply them, on the other hand, have in-depth knowledge of industry patterns and are often better placed to provide tailored financial packages. They can also provide more cost-effective payment processing solutions, a known pain point, especially for merchants that sell low-value items.
Embedded finance has much wider applications than the hugely price-sensitive hospitality industry. Pharmaceuticals and telecommunications are other areas we see great potential, but embedded finance can be used by all sorts of corporate businesses.
Using data-driven insights from embedded finance platforms, businesses can create customised financial packages for their merchant clients, whatever industry they are in. These packages, tailored to the specific needs and business cycles of both the corporate and the merchants, are almost always more attractive than standard industry terms.
Shopify is a great example of a business that has looked at its target market – budding entrepreneurs and small businesses – and created embedded finance solutions that cater to this market.
In doing so, it has not only ended up generating more than 75% of its revenue from merchant solutions, but it has also ensured a loyal client base.
And that’s why corporates need to take note and start thinking about how embedded finance can help their business do the same. Otherwise, they risk being in the same position as the merchants they supply – competing only on price and always at risk of being undercut.
