Embedded finance: a retention strategy for marketplaces

We are experiencing the largest fundamental shift in consumer spending since the emergence of e-commerce in the 1990s. A report by OC&C partners predicts that the unstoppable growth of online marketplace spending will equal $2tn by 2025 (excluding Greater China) – that’s 50% of online spending. 

This growth means, everyone wants a piece of the pie. Do you remember when the default choice for booking a taxi was Uber and the default choice for booking a room was AirBnb? Barriers to entry are decreasing and competition is increasing, and marketplaces are seeing a power shift. The bargaining- and buying-power is shifting from platforms to vendors, which has seen platforms offering more and more to keep the vendors on their platform to not lose them to competition. 

Restaurants have multiple channels that compete for their listings: Doordash, GrubHub, Deliveroo, UberEats; Taxi drivers can use Bolt, Gett, Uber, Lyft and many more. For marketplaces, vendors are their true customers – without vendors, they have no inventory to sell. The best vendors will also attract the best end-user customers. Therefore, these platforms need to offer more than a listing site with fancy UX but provide ancillary value-add services to vendors that are contextually relevant, tailored, and offered at the point of need. 

The biggest opportunity for platforms to create stickiness with vendors is to also become their bank, just better. Right now there are two fundamental flaws in the vendor journey. The first is, once a vendor signs up to the platform they need to have a bank account – which they are sent elsewhere to open. Secondly, when payday comes they need to access an additional, external channel, adding more friction to their experience: extra fees, little transparency, and another common problem with traditional banks, a poor customer experience. No wonder only 1% of Americans think banks are crucial to their financial success. Also, no surprise that consumers are increasingly opening accounts and engaging in financial behavior with fintech companies, merchants, big tech companies, and other non-bank providers. Shopify Balance, does exactly this, and tells their vendors to “skip the bank”.

So if you are a marketplace, and you’re serious about keeping your vendors happy, and on your platform – why are you still sending your pay-outs to an external provider? This would be similar to asking customers to withdraw cash from the ATM before they can pay for their goods or service. Sooner rather than later they will take their business elsewhere – where, in the case of vendors, all their financial needs are also covered and they can manage their business, risks, and finances in one place. 

Integrating financial services into the platform is not only the glue to retain vendors, but also an opportunity for additional revenue streams. A broad range of relevant financial services, tailored to the vendor’s needs can be offered such as banking, wealth management, insurance, and lending – All of which currently add complexity to a vendor’s journey rather than peace of mind. The more financial services are offered the more you’re moving into super app territory to serve your vendors will all their needs under one roof.

BaaS providers and fintechs allow platforms to vertically integrate financial services into their platform and close the relationship loop with the vendor, therefore owning it end to end. This will give them access to spending data, the ability to provide insights through data analytics, and the opportunity to play a role in the financial wellness of the vendor. This could include spending, cash flow, and budgeting functions.

Payfare and Rehive are great examples of providers that offer end-to-end white-label apps that are pre-integrated with BaaS providers.

This is a series of blog posts, the next will focus on the value-added to vendors and the range of possible services that should be considered. We will also look at the potential revenue streams for platforms that offer financial services.