Embedded finance represents a paradigm shift in the financial services landscape, seamlessly integrating working capital management into non-financial platforms and ecosystems.

Transcending traditional sector boundaries, embedded finance allows non-financial businesses across a broad spectrum of industries to offer cashflow management products and services directly within their native platforms, applications, and websites, enhancing the user experience while driving additional revenue streams. It enables businesses to offer their products and services more prevalently and reduces the amount of friction in the process. But these solutions don’t just benefit the end user, they also provide a boost for businesses. While customers have received a better, more convenient experience, businesses have seen their revenue increase due to the seamless experience and ease of navigating and purchasing their products.

For example, Amazon has leveraged embedded finance capabilities to offer payment solutions and credit to their customers to streamline the purchase process. Another example is how Uber has integrated payment processing and instant driver payouts to improve operational efficiencies and user satisfaction. Though Amazon and Uber are large, publicly traded corporations, there are still key lessons to be learned from their moves for companies of all sizes. A key part of their success and continued growth is a direct result of the embedded finance solutions they have integrated to make their platforms easier to use.

However, it’s not just large companies that are integrating embedded finance into their platforms. By 2026, it’s estimated that at least 10% of all transactions in the United States will be done through embedded finance solutions, representing trillions of dollars of payments.¹

The benefits of incorporating embedded finance into a company’s offerings can be plenty, such as additional revenue streams, enhanced customer engagement, and increased customer loyalty. Meanwhile, the failure to adopt embedded finance can leave companies at a significant disadvantage — neglecting to incorporate these capabilities risks not only losing market share to more innovative competitors, but also missing out on critical opportunities for growth and customer retention.  

By embracing embedded finance, companies can unlock unparalleled customer engagement and business growth, making it a key strategic consideration in the digital economy.

What Is Embedded Finance?

Embedded finance is a broad term that refers to any financial services that are integrated or “embedded” within platforms of non-financial companies. This enables businesses to offer services like payments, invoice factoring, lending, insurance, or accounting directly to customers as an adjacent service or solution, even if it isn’t part of their core business.  

Companies integrate these solutions through APIs or partnerships with fintech providers, such as Raistone, seamlessly embedding financing offerings into their existing digital ecosystem. In most cases, their  customers have no idea that these services are being facilitated by technology developed by a third party.

Rapid Growth Within Embedded Finance 

There might be no market growing at a faster rate than embedded finance. In 2021, embedded finance accounted for $22 billion in revenue in the United States¹ and more than $41 billion across the globe.² By 2026, those numbers are projected to more than double in the U.S. to over $51 billion and quadruple worldwide to more than $160 billion. In 2021, in just the U.S. alone, there was more than $2.6 trillion in transactions spent through embedded financial services — a mere 5% of all US financial transactions. By 2026, this number will exceed $7 trillion, showcasing the desire for integrated financial services among customers. And yet, this will only represent 10% of the market, a very small piece of the total addressable market. 

These staggering revenue totals include all subcategories of embedded finance, such as payments, insurance, lending, tax, accounting, banking, investing, and wealth management, just to name a few. However, since Raistone operates in the working capital solutions space, we want to focus on the lending and financing segment and the subcategories within it, such as business lending, consumer lending, factoring, point-of-sale, and “buy now, pay later.”

Much like the other subcategories within the embedded finance space, such as embedded payments or accounting, embedded business lending and financing has spiked significantly over the last several years and is projected to maintain its exponential growth. In 2021, there was roughly $12 billion worth of transactions that accounted for $200 million in revenue for businesses within the business-to-business lending segment. However, by 2026, these numbers are expected to more than quadruple — the subcategory is projected to facilitate somewhere between $50-75 billion worth of transactions that will, at the very least, create roughly $1.3 billion in revenue.¹

What these trends reveal is that businesses are increasingly warming up to the idea of accessing working capital through embedded finance channels. This shift demonstrates that a larger percentage of businesses now receive financing through this path instead of the traditional routes, such as directly using banks or lenders. It also illustrates a tremendous opportunity for any non-financial company that can capitalize on these market trends and offer working capital financing solutions to their customers.

Traditional Working Capital Financing Solutions

Obtaining funding through embedded finance channels does represent a change for much of the market. Companies have historically accessed working capital through a variety of solutions, such as loans, credit lines, accounts receivable financing, and merchant cash advances. These funds are primarily sourced from traditional banks, specialized lenders, factoring companies, and financing institutions. 

However, the process of securing working capital through these channels can often be manual, slow, and fraught with complexity. The lack of automation and reliance on traditional underwriting processes means businesses can face significant delays in accessing the funds they need, thereby hampering their ability to react swiftly to market opportunities or operational demands — not to mention the stress and time commitment that comes with managing another business relationship.

Each business partnership has its own additional challenges. These can manifest themselves in the form of time and business resources, as new partnerships require time for onboarding, monitoring transactions, and coordinating joint decision-making. The expansion of relationships can complicate operations, requiring more oversight and potentially diluting focus from core activities. This is where embedded finance excels — it allows the end customer all the benefits of these added financial services, without the hassle of overseeing another platform or business relationship.

Customer Demand for Embedded Lending Solutions

As the amount of working capital supplied through embedded finance solutions skyrockets, and demand from the customer side only grows — what is driving this clamor? Why is this so beneficial for the end customer? Why are businesses finding it helpful to get working capital solutions from a company that is not known for financing?

For starters, customers value the ability to reduce operational headaches, and removing just one operational product they need to use or one business they must partner with can be extremely advantageous to their company resources. Having a one-stop shop or a partner that can supply more solutions for them is not seen as a diluted product — in fact, it’s quite the opposite. They appreciate the convenience. 

Additionally, traditional banking qualifications, often predicated on extensive credit histories and significant asset holdings, pose a significant barrier to these entities. Embedded working capital solutions, however, tend to offer easier qualification requirements, making financial services more accessible to a broader range of businesses. Furthermore, the speed of the approval process has been a critical factor — embedded finance solutions provide rapid approvals, enabling small- and medium-sized businesses to quickly capitalize on business opportunities or address cash flow concerns.  

These solutions also offer diverse financing options, such as invoice factoring, lines of credit, and virtual cards, catering to the varied needs of small- and medium-sized businesses. Integrating technology in finance has streamlined the underwriting and onboarding processes and provided more favorable terms for these types of companies. This technological leverage ensures efficiency and access to funds when they are most needed. Moreover, embedded finance solutions afford businesses greater flexibility and control over their finances, allowing for fewer restrictions and the ability to customize financing solutions to meet specific business requirements. This combination of accessibility, speed, variety, technological integration, and flexibility underpins why customers are increasingly seeking out companies that integrate embedded finance solutions into their offerings.

Another factor benefiting growth has been the natural progression of a new generation of technology-savvy business leaders. According to Forrester, Millennials and Gen Z consist of 64% of business buyers.³ Given their preference for digital experiences and their comfort with technology-oriented solutions, this new crop of business leaders is not only more likely to use automated buying channels than their older counterparts but would presumably hesitate to work with any company that is “behind the times” and not using embedded, automated systems.

Creating an Ease for Factoring Solutions

One subcategory that will continue to be positively impacted by the embedded lending and financing boon is the factoring, or receivables finance, industry.

Companies who have had to wait 30, 60, or even 90 days to get paid have historically dealt with cash flow challenges as the inflow of cash is almost always slower than the outflow of cash — this is a tale as old as time. And for many companies, factoring their accounts receivables and receiving early payments has not only helped them keep their businesses afloat, but has also allowed them to grow them as well.

With the implementation of embedded finance, factoring accounts receivable has become quicker and more convenient, all with the click of a few buttons. It has also allowed businesses to factor their invoices within the systems they already use, reducing the friction typically associated with traditional financing. Why go to a factoring company when your business can factor its invoices through a platform it already uses?

Between 2022 and 2030, the U.S. factoring market is expected to grow at an 8.1% compounded annual growth rate, expected to almost double in size from roughly $153.96 billion in 2020 to roughly $287.61 billion in 2030.²

A lot of this growth is the result of embedded finance and the ease with which companies can not only factor their unpaid invoices, but also be selective as to which accounts receivable they would like to finance.

The Rise of Buy Now, Pay Later

There are many sub-categories within embedded financing — such as traditional term loans, cash advance, factoring, accounts receivable financing, credit cards, just to name a few — but one category has become extremely popular in the business-to-business lending world.

Over the last several years, “buy now, pay later” solutions have flooded the market across e-commerce platforms. And while the biggest movers in this area are on the business-to-consumer side, a growing number of companies are offering a business-to-business BNPL option as well. 

Though many BNPL providers offer a mix of interest-free options and longer-term-with-interest options, BNPL can allow customers to divide their purchases into interest-free installments, significantly enhancing the accessibility of online shopping and fostering increased expenditure. This model enables consumers to select a payment plan that suits their financial situation, with the option to make weekly or monthly payments directly from their credit cards or bank account, rather than paying the entire sum upfront. Such point-of-sale financing has surged in popularity, contributing to improved user experiences and bolstering customer loyalty by promoting repeat purchases.

For businesses, especially in challenging economic times, these financial mechanisms can be a lifeline. With studies indicating that most small business owners possess less than $5,000 for emergency situations, integrating BNPL as an embedded finance option offers a strategic advantage. This approach not only captures potentially lost sales, but also aids in extending the duration of outgoing payments, thereby enhancing cash flow management. In essence, supply chain finance and BNPL products not only facilitate smoother financial operations for businesses but also make shopping more manageable and appealing for consumers, reflecting a significant shift in the landscape of financial transactions.

The Benefits of Incorporating Embedded Finance

Embedded finance offers numerous advantages for both businesses and their customers. With a growing desire to obtain fast, reliable financing, there’s a huge opportunity to capitalize on demonstrated market needs and desires. But there are still many other reasons businesses should shift their mentality and integrate embedded finance solutions into their platforms. These include:

Improved Customer Experience, Increased Customer Loyalty

Embedded finance significantly enhances the customer experience by integrating financial services within the platforms users already engage with. This seamless integration eliminates the need for customers to navigate away from their current platform to access financial services, offering unparalleled convenience and streamlining the user experience. By removing these barriers, embedded finance not only simplifies transactions, but enriches the customer journey, making financial operations more intuitive and less time-consuming. It also is incredibly beneficial for the customer — it doesn’t add any new operational steps for them, and it costs nothing for them to integrate.

According to a recent survey by Capterra, 90% of businesses that have used embedded finance in 2022 reported an increase in customer loyalty.⁴ Improved service quality keeps your customers happy and loyal and attracts new customers who might not have a positive experience with other competitors in the same market.

Increased Engagement and New Revenue Opportunities

Offering financial services directly on a platform can significantly boost customer engagement and loyalty, reducing “churn.” This approach provides users with added value beyond the core offerings, encouraging longer and more frequent interactions with the platform. These services can range from simple payment processing to more complex financial products, creating multiple opportunities for businesses to increase customer engagement all while adding supplementary revenue streams and further monetizing their customer base. Raistone’s net promoter score, which is measured to gauge customer loyalty and satisfaction, has seen a two-quartile improvement since implementing embedded finance.

Businesses can create new revenue streams by offering these additional services all while collecting a percentage of each transaction. By diversifying their revenue sources, businesses can reduce their reliance on traditional income streams and explore new financial products and services that add value for their customers, all while expending very little additional energy to offer these new products.

Increased customer engagement and loyalty can lead to customers buying more of the core product, especially if a platform offers embedded financing solutions. 

According to Capterra, 94% of businesses that offer a form of embedded finance noted an increase in revenue since its implementation.⁴ Simply put, having more working capital to use creates more benefits for platforms.

Increased Engagement and New Revenue Opportunities

Embedded finance enables businesses to gather more detailed data on customer spending habits and financial behaviors. This wealth of information allows for the development of highly personalized products and services, tailored to meet the unique needs of each customer. By leveraging these insights, companies can enhance their offerings, making them more relevant and attractive to their users, which in turn can lead to increased customer satisfaction and loyalty — not to mention the opportunity for additional revenue streams.

Enhanced Security and Efficiency

The implementation of embedded finance solutions offers enhanced security measures for financial transactions, providing both businesses and their customers with peace of mind. These solutions are designed to process transactions efficiently and securely, reducing the risk of fraud and errors. Additionally, embedded finance can streamline payment processes, significantly reducing transaction times and operational costs, thereby increasing overall efficiency and cost-effectiveness for businesses. 

These security measures are also enhanced by the elimination of middlemen and third parties. By having fewer parties involved in the transaction, and less steps needed to fulfill transactions, the opportunities for security breaches or inefficiencies diminish. 

REFERENCES

1. Embedded Finance: What It Takes to Prosper in the New Value Chain, Report By Bain & Company

2. How to make embedded banking work – at scale, Report By Publicis Sapient

3. Younger Buyers Have Changed The Business Buying Landscape | Forrester

4. 5 Embedded Finance Trends that Businesses Need to Know | Capterra

Related Topics

Insights, Accounts Receivable Finance, Whitepapers