Changing the game: Why now is the time for embedded finance to reshape B2B transactions

Embedded finance, the seamless embedding of a financial product into a non-financial space, is making waves across the eCommerce marketplaces and B2B trade platforms. It’s easy to see why – integrating financial services into end-user journeys creates a smoother experience and enables them to access credit, payments or investments without ever having to leave a system they use to conduct daily business. For financial service providers, that results in a greater share of wallet, and increased customer loyalty.

There is a huge market opportunity for companies that can conceive, build and embed financial products that address the pain points of specific users. By 2021, the embedded payments, lending, banking and cards market was already bringing in $22bn of revenue in the US alone. This is expected to reach $51bn by 2026, with US financial transactions exceeding $7 trillion.

A majority of embedded finance innovations have been in the Business-to- Consumer (B2C) world, leaving the Business to Business (B2B) space largely undisrupted. This represents a substantial opportunity for Financial Services Institutions (FSIs) that act first, with enterprise resource planning (ERP) processes particularly Order to Cash and Procure to Pay offering a fertile ground for B2B embedded finance innovation. There are five trends driving the rise of B2B embedded finance.

 1. Growth of B2B platforms and ecosystems

Thanks to the pandemic-induced tech boom and the ever-growing rise of tech-first, millennial decision makers, global trade and B2B commerce becoming increasingly digitised. Today, companies conduct business through a multitude of integrated tools that are becoming digital ecosystems. Banking services should be an integral part of that ecosystem.

 2. Rise of open banking

Regulatory drivers such as PSD2 has led to the rise of open banking and open finance. FSIs can leverage these capabilities to extend embedded finance reach to many companies at scale. This is enabling value-adding but non-banking propositions bundled with traditional banking services, presenting FSIs with an opportunity to enter new markets, serve new client segments and, in turn, create new revenue models in the face of projected declines for banking revenue and profitability.

 3. Reduced trust in financial services

Up until recently, FSIs and banks held a major trust advantage over fintechs and the tech giants. While that advantage remains, it is on the decline and less of a competitive advantage than it once was. This doesn’t need to be to the detriment of incumbent FSIs. With the right collaboration model between traditional banks and Fintechs & Bigtechs, they can turn these emerging competitors into BaaS (Banking as a Service) consumers.

 4. API boom

APIs are nothing new, but the recent acceleration of digitisation and the launch of open banking initiatives has ramped up usage, and put embedded finance within reach of almost any digital business.

5. A new generation of embedded finance

First-generation embedded finance was a repeatable model for all FSIs without any differentiation capabilities. The next generation will allow FSIs to differentiate via tailored propositions and the ability to enhance offerings with their own IP.

Endless Possibilities…

The use cases of embedded finance are virtually endless. An example which will thrive in a B2B context is Request-to-Pay (R2P), a messaging service that allows any biller that processes large volume & low value of bills/ invoices to to switch to electronic billing and payment services. By leveraging existing faster payment infrastructure that allows the payer to make a payment presents a huge opportunity for FSIs to save their corporate clients money and time. Purchase order finance (PO finance), the cash advance that companies can receive after closing a deal with their typically larger buyers, currently involves many manual steps. With embedded finance, purchase orders can be extracted directly from the buyer’s ERP system, pre-qualified by FSI for financing and enabling ease of access to the seller by automating many of the slow manual steps through the platform they use to conduct B2B trade with their buyers.

Adopting embedded finance

To achieve the full potential of embedded finance, FSIs need to adopt a clear strategy and holistic approach. This means leveraging data-driven insights and implementing frictionless business processes for their ERP customers, providing them with the tools they need to navigate the digital trade landscape and realise the benefits of embedded finance in the digital ecosystem.

Ultimately, it’s clear to see that there has never been a better time for businesses to take advantage of the opportunity B2B embedded finance particularly during a time when they’re under pressure to do more with less.