Embedded finance is on the rise in the corporate and consumer payment markets. Analysts predict its revenue will reach $1.91 trillion as adoption grows by 2028.
This constant acceptance opens up fintech operations to a wide range of market opportunities. At the same time, it is forcing banks to transform their traditional domain of catbird headquarters by providing loans and bill paying services to partnerships with a variety of e-commerce platforms. This disruptive shift extends to industries that handle both business-to-business and business-to-consumer transactions.
By integrating a financial task or function into a company’s infrastructure, integrated finance streamlines access to financial services such as loans, insurance or payment processing. It does this without redirecting the client to third-party destinations.
The concept of integrated finance took root years ago with money management operations like PayPal and Stripe. Users could easily pay bills and remit money to individuals and businesses without dealing with these matters individually through their banks or postal services.
Bank as a service
Financial platforms called banking as a service, or BaaS, are becoming an integral part of online transactions for individuals and businesses. A dual industry is developing around the two processes.
These BaaS platforms allow digital banks – and even non-banks – to integrate various financial services into their online transactions, excluding product purchases. They work with back-end banking functionality; while the broader category of integrated finance is more 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 as a service sound similar, they differ slightly in that BaaS is required to provide embedded finance.
Factoring of invoices
One of the new trends in building B2B payment strategies, especially for non-financial businesses, is the shift to invoice-based financing or 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 cash lump sum. The factoring company then owns the invoices and is paid when it collects from invoiced customers, usually 30 to 90 days.
Finance by is an AI-powered invoice factoring platform with a strong presence in the financing process integrated into B2B payments. The company finances a business based on the amount of its unpaid invoices.
Online B2B transactions have three elements: suppliers, buyers and the platforms they use. According to Amanda Parker, Director of Growth at FundThrough, each component has its own set of needs that must be met to ensure a smooth checkout process for everyone involved.
A key requirement for buyers is satisfaction with sellers’ payment methods and how their suppliers provide these services. When it comes to vendors, customer payment intervals and delivery processes tend to vary by industry – and selling to B2B companies that have unreasonably long or inconsistent payment cycles can negatively impact supplier cash flows, Parker noted.
Integrated finance, the largest umbrella category, encompasses all the different components of finance in the traditional sense. Integrated financial strategies can be incorporated into any workflow that makes sense, Parker explained.
“It can be used directly in the workflow related to buying an item, making a transaction, creating an invoice, for example,” she told the E-Commerce Times. “It also includes in-app banking, in-app payments, loan insurance, etc.”
Integrated finance unpacked
The E-Commerce Times then discussed the inner workings of integrated finance with Amanda Parker. Here is that part of our conversation.
What’s more in the integrated funding process?
Amanda Parker: It varies and includes a client connection, so you have some sort of data source connection.
Let’s take an example from one of our partnerships. We connect to the user’s company in QuickBooks to get information about their company, what they do, and a level of identity verification.
We do something called KYC, which stands for Know Your Customer, so we ask the user a series of questions or request a series of documents to confirm their identity.
Then we confirm that the transaction they are requesting is legitimate, that the relationship they have with the business on the other side is legitimate, and that their bank details are legitimate.
So these are in a way the components. It involves verification, confirmation, and then sending the necessary funds through various banks.
How does this process work for other use cases?
Parker: Our daily bread is the financing of loans or invoices. In general, embedded finance has tons of other use cases. You have B2C, tax or business-to-consumer contacts, and you have payment insurance. It’s exactly the same thing but in a B2B context.
So for us, the use case may involve vendors who want to get paid immediately. Now they can do it alongside any workflow; whether a transaction, invoice or purchase is in progress.
How does this process benefit consumers or is it more of a benefit to businesses?
Parker: We focus on businesses, but for consumers and everyone else, it’s the seamless integration they gain so they don’t have to leave their workflow. It’s much more convenient and automated.
You’re not using six different systems to try to do something. Now you can do it all in one system. So if you think about how finances have grown or changed over time, consumers can basically buy anything online.
But B2B is a very fragmented system. So now, integrated finance is taking over in B2B to apply the same kind of frictionless experience that consumers have online in a B2B context.
What factors favor the transition to integrated finance?
Parker: Frictionless experiences at the consumer level have always led the way. Now, it goes through companies.
Another key thing is that millennials are taking on more of the workforce, they are generally frustrated with systems and workflows.
Integrated payments and loans are really unlocking a lot of new business models for software vendors. This drastically improves the experience to make it closer to the consumer, but in a business-to-business context.
How is the adoption of integrated finance progressing?
Parker: We are seeing a growing number of estimates for the global integrated finance opportunity. [Reportedly] integrated finance will reach a value of 7 trillion dollars worldwide in the next 10 years.
PayPal and Stripe were leaders, especially on the consumer and e-commerce side. We are now on the verge of exploding on the B2B side, which is very exciting. There are over $100 trillion worth of GMP (maximum guaranteed price) in B2B. It’s just kind of an opening for the taking.
I think you’re going to see a lot more of that as players come forward in the years to come and start wanting to help with this movement of these funds.
What does it take to encourage further adoption?
Parker: I would say that the adoption of the bank is one of the key elements. More banks need to embrace open banking and banking as a service.
The architecture of the application programming interface (API) is constantly evolving and improving. A number of fintech players have come out to give banks a hard time. So, I think we’ll start to see a ton of innovation in this space in the years to come.
Why are some banks reluctant to commit?
Parker: Banks really want to retain that customer and retain that experience. They don’t want their customers to switch to another experience. They want to try to maintain everything themselves.
Banks are also very security conscious. But we’re investing in it now to make sure we give customers the best experience. Consumers connect their bank accounts to tons of different services. It’s inside [everyone’s] best interest to ensure a secure and frictionless experience. This is one of the big areas where we hope to see continued progress in the years to come.