Unlocking Growth with Corporate Embedded Finance
By Eduardo Martinez Garcia, CEO & Co-founder of Toqio
The current financial landscape is undergoing a significant transformation, disrupting the long-established dominion of major banks and other large financial institutions. Embedded finance, a concept that has thrived in the realm of digital consumer products, is now steadily infiltrating the corporate domain, poised to revolutionize the financial sector further.
This paradigm shift is manifesting in a multitude of ways, with digital embedded finance increasingly becoming an integral part of corporate digital offerings. Distributor payment processing, lending services for suppliers, and supply chain financing are all becoming commonplace – the versatility of corporate embedded finance knows no bounds. Despite the diverse applications the core objectives remain consistent, including enhancing B2B processes, mitigating risks, and fortifying business relationships.
Corporate embedded finance promises to deliver substantial value over the course of the next decade. A burgeoning opportunity beckons, estimated to be worth an astonishing USD 3.7 trillion over the next five years alone. Remarkably, more than 50% of businesses have expressed a preference for cash flow financing through platforms rather than traditional banks, as per a report by McKinsey. The shift observed in consumer embedded finance adoption is creeping into the B2B landscape, and moving more quickly all the time. Consequently, if the high level of adoption of consumer embedded finance carries over into the B2B space, and it’s certainly expected to, we’re genuinely looking at the next big thing.
Customer experience takes the helm
Customers are no longer passive passengers in their financial journeys; they have emerged as the navigators, steering the industry’s course while financial institutions focus on risk management. Banks and non-banking financial institutions (NBFIs) remain pivotal, but their control of products is waning. Companies, intimately acquainted with their customers and partners, possess a deeper understanding of their collaborative ecosystem. Consequently, they are better equipped to tailor their financial offerings to meet the needs of their business relationships.
Take Amazon, for instance, which has been offering loans to small businesses operating on its platform for years. Amazon evaluates risk based on a merchant’s payment history, sales volume, projected revenue, and other critical data points. This approach enables Amazon to provide additional value to its sellers while securing a foothold in the financing market. The close rapport Amazon shares with its small business partners positions it with substantially less risk compared to conventional banks.
Shopify has also ingeniously woven embedded finance into the very fabric of its offering. While its core service revolves around delivering an efficient, subscription-based e-commerce platform, it also provides payment processing and lending services, among a myriad of other financial solutions. Shopify boasts an extensive reservoir of data, allowing it to make informed decisions about the financial products it can offer to merchants, all while keeping risk to a minimum.
Decentralizing financial services
Historically, financial products have fallen within the purview of major corporations either through partnerships with third parties or in-house service creation. Nevertheless, the rise of digital channels has expedited the decentralization of financial services, and it’s snowballing. Companies spanning various industries, from automakers to retail giants, are recognizing the immense untapped potential in taking control of many functions traditionally handled by financial institutions. While financial institutions will endure, their role is evolving. Their strengths are assessment, management, and specialized services. They must pivot towards analyzing data from a multitude of sources, diving into data lakes to provide genuinely useful risk assessments.
Incumbents aren’t going to disappear
Incumbent banks have demonstrated their staying power and adaptability time and time again, mostly due to being able to leverage their size and relative dependability. They’ve capitalized on their vast customer bases, regulatory compliance expertise, and extensive branch networks to maintain a competitive edge. Additionally, incumbent banks have finally begun to recognize the need to adapt to changing customer expectations and digital transformation.
The future of core banking is likely to strike a balance between fintech disruptors and established incumbents. Collaboration and partnerships between incumbents and fintech startups tend to drive innovation, offering customers cutting-edge digital experiences. Big banks are probably going to find their place in the market modified, and not necessarily in a bad way.
Navigating the path ahead
Incumbents and financial behemoths have long been oriented toward long-term financial products, such as 30-year mortgages. But what about short-term business loans? Consider the restaurateur seeking a swift three-month loan to renovate a kitchen or the farmer unable to repay a loan until the crops are harvested and sold, a process spanning six months or more. For traditional banks, these scenarios represent short-term debts, a situation they tend to avoid. This presents a prime opportunity for companies to tailor products that cater to these specific needs, allowing them to define the space.
The evolution of embedded finance is commencing with payments, as it represents one of the least regulated segments in finance, offering ample room for innovation. Credit, closely trailing payments in significance, holds paramount importance. What’s really exciting is that as corporate giants blaze the trail, they pave the way for others to follow suit. This means that small and medium-sized enterprises will also be able to get involved, making embedded finance more inclusive within a given business ecosystem.
Eduardo Martinez Garcia is the CEO & Co-Founder of Toqio. He is an avid entrepreneur who has set up and run successful global ventures in the UK, Spain, and South Africa over the course of the last 20 years.
