Embedded Finance: One of the Keys to Online Business
E-commerce has skyrocketed during the last few years, and a study by Stephanie Chevalier, an E-commerce research and editorial expert at Statista.com, shows that retail e-commerce is forecasted to grow exponentially over the next 3 years.
However, that growth is not by chance, since several reasons explain the increase. According to a study by KPMG in 2017, convenience is the key reason, since the ability to shop 24/7 and saving time top the list.
One of the main enablers of this growth is not shown and is related to financial processes. For a business to sell online, the payment process is essential. Customers must be able to pay for products without fear or insecurity. According to the same KPMG study, a main reason not to buy online is when the product is considered too valuable, so the buyer is not comfortable buying expensive items or does not trust online security.
That is where embedded finance comes in. Embedded finance is the ideal tool for e-commerce since it enables several financial processes key to the success of an online business sales that is secure for customers and easy to use for businesses. Let´s view some examples.
The first example is Embedded Payments, allowing customers to pay for their goods without leaving their chosen online shop. Oftentimes, people don´t even realize they are using embedded payments, like Uber, for example, where you simply fill in your credit card data once, then payments are made automatically. The fact that paying through embedded payment is easier and more friendly is encouraging companies to adopt embedded payment. A survey done by OpenPayd showed that 83% of European brands have concrete plans to offer embedded payment to their customers within the next five years.
When OpenPayd asked those brands why they were implementing embedded payment, the main reason was customer demand, followed by improvement to the customer experience, and finally the possibility of having new revenue streams.
Another example is embedded lending. Embedded lending gives merchants the possibility to access loans simply by showing their businesses are growing. These loans are crucial to finance growth, especially in terms of inventory. The criteria for embedded lending is not FICO as with traditional banks. Instead, embedded lending uses the merchant's sales stats to approve loans at a lower rate in comparison to traditional banks. That is why thousands of small merchants are paying more attention to digital financial platforms. A study by Accenture shows 41% of SMEs are interested in banking services offered by digital service providers, especially credit, since 64% would be interested in credit cards, and 34% in loans.
Embedded lending also allows merchants to offer their customers credit or “buy now, pay later” options, a methodology that has been growing for the last few years, especially among millennials and generation Z consumers, according to a Cornerstone Advisors study.
Not only payments, but embedded finance also facilitates additional services, for example, embedded insurance. One reason for shopping online as shown in the chart above is the convenience of having everything in one place, and embedded insurance is no different. For example, car rental customers can insure a car using the same online platform through embedded insurance. Also, when buying a new mobile phone, you can select a package that includes theft protection. That is why embedded insurance is set to grow exponentially worldwide according to a study by Simon Torrance in the-ntwk.com.
Online marketplaces will continue to grow, and in my opinion, financial technology is at the heart of that growth. Without embedded finance, financial processes related to paying, lending, or insuring would have been an e-commerce weakness. Instead, embedded finance has been crucial for growth, and will be more critical as online marketplaces evolve. That is why most companies are planning to offer embedded finance services to their customers according to OpenPayd’s survey, with 92% through embedded banking, 83% through embedded payments, 28% through embedded insurance, and 23% through embedded lending.