B2B financing companies, banking services with embedded finance

Embedded financing is a growing trend in both the business and consumer payment markets. Analysts forecast its revenue to reach $1.91 trillion as the app expands by 2028.

This continued adoption opens up fintech operations to a wide range of market opportunities. At the same time, it forces banks to transform their traditional catbird headquarters domain and provide loans and bill payment services to partnerships with various e-commerce platforms. This disruptive transition spans industries that serve both business-to-business and business-to-consumer transactions.

By integrating a financial task or function into a business’s infrastructure, embedded finance simplifies access to financial services such as lending, insurance or payment processing. It does this without redirecting the customer to a third party.

The embedded finance concept took root years ago in money management operations like PayPal and Stripe. Users can conveniently pay bills and deliver money to individuals and companies without having to go through such matters individually through their bank or postal services.

Banking service as a service

Financial platforms called banking as a service (BaaS) are becoming an integral part of online transactions for both individual consumers and businesses. A dual industry develops around the two processes.

These BaaS platforms allow digital banks – and even non-banks – to integrate various financial services into their online transactions, with the exception of product purchases. They operate with back-end banking functionality; whereas the broader category of embedded finance refers more to front-end access to financial services.

Together, the two are linked to the digital marketplace and efforts to simplify and streamline financial services for consumers and businesses. Although embedded finance and banking seem similar, they differ slightly in that BaaS is required to provide embedded finance.

Invoice factoring

One of the new trends in the development of B2B payment strategies, especially for non-financial companies, is the move towards invoice financing, i.e. factoring.

This solution is not a loan, but a financing strategy where a company sells its invoices at a discount to a factoring company in exchange for a lump sum of cash. The factoring company then owns the invoices and receives payment when it collects from the invoiced customers, typically 30-90 days.

FundThrough is an AI-driven invoice factoring platform that plays a major role in the embedded financing process for B2B payments. The company finances a business based on the amount of unpaid invoices.

Online B2B transactions have three components: suppliers, buyers and the platforms they use. Amanda Parker, director of growth at FundThrough, says each component has its own needs that must be met to ensure a smooth payment process for everyone involved.

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It is a basic requirement of buyers to be satisfied with the payment methods of sellers and how their suppliers provide these services. As for suppliers, customer remittance intervals and delivery processes tend to vary by industry—and selling to B2B businesses with unreasonably long or inconsistent payment cycles can negatively impact suppliers’ cash flow, Parker noted.

Embedded finance, the larger umbrella category, encompasses all the different components of finance in the traditional sense. Embedded financial strategies can be built into any meaningful workflow, Parker explained.

“It can be used directly in the workflow, for example to buy an item, to make a transaction, to create an invoice,” he told the E-Commerce Times. “This includes embedded banking, embedded payments, credit insurance, you name it.”

Embedded Finance Unwrapped

The E-Commerce Times further discussed the inner workings of embedded finance with Amanda Parker. Below is part of our conversation.

What else does the embedded financing process include?

Amanda Parker: It varies and includes a relationship with the client, so it has some relationship with the data source.

Amanda Parker, Director of Growth
FundThrough

Let’s take an example from one of our partnerships. We contact the user’s company within QuickBooks to get information about what their company is, what they do, and identity verification.

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We do something called KYC, which is “Know Your Customer”, so we ask the user a series of questions or ask for a series of documents to confirm their identity.

After that, we confirm that the transaction they requested is legal, their relationship with the business on the other side is legal, and the bank account details are legitimate.

So these are kind of ingredients. This is verification, confirmation, and then sending the necessary funds through various banks.

How does this process work for other use cases?

Parker: Our bread and butter is lending or account financing. In general, embedded financing has many other uses. It has B2C, tax or business-to-consumer relationships and payment assurance. It’s exactly the same, but in a B2B context.

So for us, the use case could be suppliers who want to get paid instantly. Now they can do this with any workflow; whether a transaction, invoice or purchase is taking place.

How does this process benefit consumers, or rather businesses?

Parker: We’re focused on the enterprise, but for consumers and everybody, it’s a seamless integration where they don’t have to leave their workflow. Much more convenient and automated.

You don’t use six different systems to try to achieve something. Now you can do everything within one system. So, if you think about how much finance has influenced or changed over time, consumers can buy essentially anything online.

But B2B is a very fragmented system. So now embedded finance is taking over the B2B space to apply the same kind of frictionless experience that consumers have online in a B2B context.

What factors encourage the transition to embedded financing?

Parker: Frictionless experiences at the consumer level have always been a leader. This is now coming to businesses as well.

Another key takeaway is that as millennials take over more and more of the workforce, they tend to become frustrated with systems and work processes.

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Integrated payments and lending really opens up many new business models for software companies. This significantly improves the experience and makes it more of a consumer experience, but in a business-to-business context.

How is the introduction of embedded financing progressing?

Parker: We’re seeing more and more estimates of the global embedded finance opportunity. [Reportedly] Embedded finance to reach $7 trillion globally in next 10 years.

PayPal and Stripe have been leaders, especially on the consumer side and in e-commerce. Now we’re on the verge of exploding on the B2B side of things, which is very exciting. There is over $100 trillion in GMP (guaranteed maximum price) within B2B. It’s just kind of open for the taking.

I think you’re going to see a lot more of that in the coming years as players emerge and want to help move those funds.

What will it take to drive further adoption?

Parker: I would say one of the key things is the acceptance of the banks. More banks should embrace open banking and banking as a service.

The application programming interface (API) architecture is constantly evolving and getting better. A number of fintech players have stepped up to give banks a run for their money. So I think we’re going to see a lot of innovation in this area in the coming years.

Why are some banks reluctant to enter?

Parker: Banks really want to retain the customer and preserve that experience. They don’t want their customers to switch to another experience. They want to serve all this themselves.

Banks also pay great attention to security. But now we’re investing in it to give our customers the best experience. Consumers link their bank accounts to a wide variety of services. It’s [everyone’s] in to ensure a safe and frictionless experience. This is one of the big areas where we hope to see continued development in the coming years.

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