Embedded finance: the ‘menu conundrum’

By Nikolai Hentsch, Co-founder & COO, AREX

Think for B2C, execute for B2B. 

 It’s a useful principle that’s now playing out in the latest fintech trend – the rapid growth of embedded finance for SMEs.  

Together, APIs and banking-as-a-service have led to the creation of a ‘menu’ of new and exciting financial products and services for consumers, offered by non-financial institutions,[1] and investors are taking note. For example, RailsBank, a platform for developing embedded financial products, recently raised $70m in funding to grow its offerings.[2] Everything from retail to hail and ride apps are offering their customers more than just a taxi or shopping experience. 

That ‘menu’ approach to financial choice for consumers has well and truly crossed over into the world of B2B. You need only look at eBay’s move into lending. The ecommerce giant has partnered with an embedded finance platform to offer loan services to its 300,000 UK SME sellers.[3]

Other examples have and will continue to come in the form of choice around payables, receivables, cash management, loans, payroll, customer relationships, and perhaps even M&A transactions. The choice, at the simple click of a mouse inside of the humble bookkeeping system, is becoming vast.  

Research by Lightyear Capital estimates that embedded finance will grow to £164bn in revenue by 2025, a significant >10x rise from £16bn in 2020.[4] 

As every company becomes to some degree ‘fintech’ though a range of financial offerings, and a growing number of embedded finance providers emerge, the sector can expect investors, advisors, and consultants to take an increasingly active part in funding and shaping things to come. 

It’s a new world for SMEs, who will face a growing number of platforms and offerings from non-traditional finance providers. The challenge for them will be navigating the ‘menu’, to avoid the pitfalls that start-ups and scaling companies really could do with avoiding.

Like all good analogies, the ‘menu’ one isn’t perfect, but it’s useful when looking at the pitfalls SMEs could fall into when looking at embedded finance options.

The first: taking a luddite approach. It’s the person who picks the same thing on the menu every single time. That looks like sticking with spreadsheets, familiar tools on the laptop, paper notebooks, haphazard filing on the shared drive, guesswork, and sticking to what feels familiar. The outcome is more time on admin, more margin for error, and going slower than your company and clients want. These new options are emerging for a reason. If businesses simply discount these options which are available to them, such as invoice financing, they could be missing a trick which could help them to run their business.   

Another potential trap lies in the ‘try everything’ approach. The equivalent of piling the plate up with a bit of everything, taking too much, and ending up with waste. With embedded finance, these options could prove too easy - click a button and your cashflow problems could be solved. Without proper consideration and research, companies could find themselves tied into long term deals, or not realise that the app click right next door would give them better returns. We’re already seeing this in the world of SaaS, with companies taking out subscriptions to SaaS platforms that are not needed, are duplicate, become dormant, are not suited to the size or sector of the business, and come with autorenewal contracts that leave a sting if left unchecked.  

The third pitfall is taking your time, but picking the wrong thing. It’s the person who looks at the pictures of the food but doesn’t read the menu. SMEs have their specialisms, but picking the right financial service or product – especially in a new and growing market – might not be one of them. Not taking outside advice, only relying on personal contacts with good will but without deeper insight, or making decisions in silo could lead to a useful service but the wrong one for your business.

For businesses potentially baffled at the choice in front of them on the plate, the right approach to the world of embedded finance is certainly to review the market, talk to providers, and think about what the business really needs and not just what feels ‘modern’. But, it’s equally essential to take advice from the right source.

In the restaurant, that often comes in the form of the waiter. In this case, it's the accountant, who knows the founder and other leaders in the business, understands the pressures on the finances, and will have a deep familiarity with the SME financial market. It’s the accountant who can be the bridge between your business and the world of embedded finance.

Yes, that does mean your accountant needs to be up to speed. Increasingly, businesses are expecting accountants to be more than number crunchers. One recent survey by Sage found that 82% of UK accounting professionals agree that customer expectations have widened to include services such as advising on relevant finance and accounting technologies.[5]

So, when you next open your handy cloud accounting software, think menus and waiters. Carefully review the market and embedded finance providers, but make sure you’ve got yourself sound financial advice who will help you navigate and make the right choices. It’s about giving your business more options when it comes to financial management. Just be sure to avoid those menu pitfalls.