Embedded finance

The key trend unfolding now in business finance is B2B marketplaces and e-commerce platforms partnering up with embedded finance players to power their payments or offer credit terms on demand to their customers. Embedding finance options allows these platforms to unlock a lot of great benefits, such as higher velocity of transactions, delighting customers with better variety, alongside driving increased loyalty and basket sizes. It’s an exciting new field and there are a number of different partners you could engage with, ranging from pure start-ups to traditional banks, with fintechs like Kriya in between.

Making the right decision for the long-term is critical. Once you decide to partner and integrate, you want the relationship to stand the test of time – you don’t want to be chopping and changing. And you definitely don’t want to offer credit options to your clients today, then take them away after a couple of months. Here we take a look at some of the key aspects you should be focused on when deciding who to partner with.

1. Maximising customer payment and credit coverage

The number of customers your embedded partner can approve for credit is a key factor when you think about offering new payment methods and credit terms at checkout. The payment options available and, importantly, the risk appetite your partner has, both contribute to this. If you’re partnering with a new player, they’ll likely not have sufficient track record or a tested risk model, meaning they’ll be hard pressed to offer good credit limits. Or if they do try to maximise coverage, they might be doing this in the hope of winning your business at all costs. Over time, they might scale back limits if things don’t go according to plan.

You want to choose an embedded finance partner with deep experience in customer authentication and credit modelling, especially for the demographic and geography of the customers you serve. If you’re selling to small businesses or sole traders, choosing someone who understands and has lent to them in the past is a huge advantage.

You should make sure you avoid partners that just want to finance your best customers – they should be offering a solution to the majority of your buyer base. A good coverage rate is around 80-90% of your customer base being able to make use of payments and credit limits. And if you’re selling in foreign markets, you’ll need to work with a player that can support your international clients.

2. Pricing counts

Different types of fee structures exist, but typically if you’re plugging in embedded payment and credit options, you’ll be paying processing fees for enabling seamless payments or offering buy-now-pay-later and receiving instant payouts. Again, partnering with a more established embedded finance partner means access to a tried and tested model which accurately prices risk. Ultimately you’ll benefit from lower pricing for the risk of your client base. Brand new players with untested models will likely charge you higher fees as you subsidise their credit learning curve.

3. Can your partner scale with you as you grow your business

Typically you’ll want to grow your gross merchandise value (GMV) aggressively. We’re seeing some B2B marketplaces growing top-line sales at 2-3x per year. It’s important to choose a partner who has sufficient capital to scale with you. If you partner with a very new embedded finance provider they’ll likely be without large funding facilities, so you could potentially outgrow them. The last thing you want is a partner putting the brakes on your customer acquisition and sales trajectory.

Always ask how much funding is available from the embedded finance provider and compare notes on your growth plans. Asking whether they have committed funding sources versus uncommitted sources, which are less secure, will be important. It’s wrong to assume banks will always be able to scale with you as they’ll have stringent concentration limits and formal risk committees which might delay your expansion plans. Ask these difficult questions early on to avoid any surprises.

4. How easy is it to integrate and add more features over time?

Integrating anything into your platform takes time. Working with a partner who has the most seamless APIs that allow rapid deployment while minimising the tech work required on your side will ease the process. It pays to prioritise partnering with a tech-led embedded finance partner that has developed sophisticated APIs which can connect into your software (whether you’ve developed it yourself or used off-the-shelf models like Shopify, Woocommerce or CS Kart).

The best partners will integrate once with you in a matter of weeks. If over time you want to add more features, you can easily toggle this from within the existing API menu. This saves you the headache of having to reintegrate every few years. The best partners will also make technical resources available to you to help you during the integration process and be around to troubleshoot any issues on an ongoing basis.

5. Brand and culture always matters, especially when things don’t go according to plan

Your relationship with an embedded partner should ideally be long-term, so checking out their pedigree is crucial. Their team and brand will interact with your customers, so you want to be sure you’re confident they’ll be treated in the best way possible. Ask yourself:

• Do they have the track record in their brand to show-case their commitment in helping businesses access finance and payments?
• What are their customer satisfaction scores like?
• How much payment and credit volume have they done in the past and have they made embedded finance work with other platforms?
• How do they approach things like late payments, collections and returns when they inevitably occur?

The perfect partnership

As you can see, there are some important considerations to make before choosing the right embedded finance partner. Most of the large banks don’t have cutting edge risk models, nor the API technology, and move very slowly. At the other end of the scale, newer tech start-ups are very young companies with little track record, which means you might end up being a guinea pig. Trying to find partners that have a viable track record and history of success, and who have invested in technology and ease of integration, might be the best way forward.