The rise of embedded finance has paved the way for a new era of more flexible and efficient financial services. Despite this, many remain in the dark over exactly how embedded finance works and why it’s being talked about so much.
Here Paul Christensen tracks the impact of embedded finance on the financial sector and explains how it can be used to modernise B2B commerce.
Christensen is the Co-founder CEO of Previse, and has extensive experience as a founder, executive, advisor, investor, and lecturer in the fintech sector. Prior to founding Previse, he was global co-head of Goldman Sachs‘ Principal Strategic Investments team, the corporate venturing unit that focuses on market structure-related strategy and investment opportunities.
Previse, founded in 2016, is an artificial intelligence company that has developed an innovative B2B payment solution. Through its state-of-the-art AI and analytical technology Previse is enabling firms to unlock the value in their invoice data, to get their suppliers paid instantly and build a stronger supply chain.
A Quiet Revolution
Embedded finance is one of the most talked-about fintech ‘buzz words’. Dubbed as a major disrupting force in financial services, the embedded finance industry is set to reach a value of $7trillion globally over
the next ten years, changing the way we manage our money entirely.
But what is embedded finance, and how does it work?
Embedded finance is the integration of a financial solution into a business’s infrastructure. This streamlines access to financial services, such as lending, insurance or payment processing, without redirecting the customer to third-party destinations. A service provider can therefore integrate financial services onto its website or app so that the buyer does not have to go through the manual steps of having to enter bank details when accessing a service or product. In other words, this system acts as a bridge between a brand, customer and financial solutions provider.
Most of us interact with embedded finance technology daily without even realising it. From ordering a coffee via the Starbucks app to paying for an Uber or buying a takeaway on Deliveroo, embedded finance has quietly transformed the consumer payment process. Simplicity is now the ‘new normal’, with customers able to seamlessly complete transactions on a single platform.
While embedded finance has helped deliver smarter, more efficient services on the consumer side (B2C), business-to-business (B2B) solutions have not seen nearly the same level of innovation. One of the starkest illustrations of this is the chronic and ever-growing slow payments problem, which keeps many businesses waiting weeks or months to be paid.
With the journey of embedded finance well underway in the B2C world, now is the time to take the premise of ‘plugged in’ financing systems and apply it to B2B commerce. Embedded finance can be a powerful tool in tackling the slow payments problem and accelerating the recovery and growth of small and medium-sized businesses.
A Problem Looking for a Solution
Slow and late payments are a serious burden to suppliers across the board, and stifle small and medium-sized businesses of much-needed cash. A recent survey found that three in five UK businesses are owed money in late payments, while the Federation of Small Businesses lately warned that the late payment of invoices is threatening the survival of over 400,000 British SMEs. The problem isn’t confined to the UK either. A 2021 survey revealed that one-third of US small businesses wait longer than 30 days to be paid.
The slow and late payments crisis doesn’t just pose a barrier to the growth of small businesses, but also the overall recovery of the global economy. Slow payments prevent working capital from reaching all corners of the trade network and strap suppliers of the cash they need to adapt to shortages and rising costs, forcing them to reduce production.
This is a key obstacle preventing supply chains from getting back up and running, prolonging both the duration and impact of bottlenecks and delays.
Embedding Frictionless Payments Into B2B
Embedded finance is the perfect tool to be leveraged by B2B networks in order to turn the tide on slow and late payments.
Machine learning analyses past payment patterns to make probabilistic assessments of the few invoices that are unlikely to get paid, enabling the rest to be paid automatically when they are received. Importantly, this technology can be embedded across suppliers’ payment processes – in the Purchase-to-Pay (P2P) platforms, in the Enterprise Resource Planning (ERP) systems, and in payment processing systems, to get capital to suppliers faster.
Embedding instant payment technology into B2B trade is a win-win for all parties involved. Suppliers unlock cash instantly, providing them with the working capital they need to adapt to rising costs and invest in their business. Buyers pay back on their normal terms and strengthen supply chains in the process by unlocking swathes of small suppliers that would otherwise be precluded from offering their services.
In 2022, it is possible to have goods and services at our fingertips at the click of a button – without having to go through the manual process of entering bank details on third-party sites. While this technology has fulfilled its goal of powering frictionless and innovative payments at the consumer level, business payments are crying out for the efficiency benefits that embedded finance can bring. As economies around the world seek the green shoots of recovery and renewal, the implementation of embedded finance into B2B commerce could go a long way in building stronger and more robust trade networks.