What is Embedded Finance? Explore how it impacts SaaS

Embedded finance allows non-financial companies, like platforms and marketplaces, to offer banking services to their existing user base directly. Banking as a Service (BaaS) providers can give platforms full control of the customer experience while taking care of the banking technology, risk management, and regulatory requirements.

Platforms can integrate financial services seamlessly into the processes they already facilitate for their users, creating one user interface for the customer to manage all their crucial business operations and unlock a whole new revenue stream.

Why is embedded finance important?

The reality is that SMBs are heavily underbanked. The costs of creating tailored banking services for SMBs don’t outweigh the benefits for banks, where many processes still rely on a patchwork of automated and manual processes. On top of that, creating new innovative products is difficult due to their outdated legacy infrastructure.

The result is that money management is a major pain point for many SMBs.

Embedded finance vs banking as a service

Banking as a service (BaaS) is the infrastructure behind embedded finance. BaaS providers (like Adyen) take care of all the licensing, compliance and financial technology that’s needed to offer financial services.

Embedded finance is about offering these financial services for the end user, in-context within the platform they already use to run their business. Solving problems like liquidity, through fast access to capital and earnings,  and streamlined financial management. 

Embedded payments

Embedded payments is the foundation of embedded financial services.

By embedding payments, they become part and parcel of your platform offering. Payments are processed natively without any redirects or third parties, and there’s only one point of contact: your platform.

This is a huge step up from having to refer your users to payment service providers. Rather than giving users another choice to make and another provider to manage, you help them with an integrated payment experience that’s built into your offering.

Embedded payments are becoming a major selling point for platforms. 69% of platform users would move to a platform that offers a more integrated payments experience. Embedded payments are also opening up a whole new revenue stream. Established platform businesses already see as much as 80% of their revenue coming from embedded payments.

Embedded payments pave the way for your platform to offer the financial services your users need to thrive. By having access to the volume of your user’s daily transactions and sales trends, you can start to offer embedded financial products that are tailored to their money flow and create an extra benefit for them to stay on your platform.

Embedded bank accounts

Opening an account at a bank requires a lot more work for an SMB than one might expect. Often, business owners need to go to the bank in person with a stack of documents and it can take days or weeks to activate an account.

With the expansion of embedded financial services, you can add an extra layer to your offering through embedded bank accounts and let users open and manage their business bank accounts directly on your platform. They’ll be able to manage their money where they manage their business, without having to log into different interfaces.

With embedded bank accounts, you leverage the know your customer (KYC) data you already have on your users to open accounts in record time. On top of that, by running payments and accounts on the same infrastructure, payouts become faster and more reliable.

Issuing branded payment cards

If you want to offer a complete embedded finance experience to your users, you need to give them a way to spend their funds. By issuing branded payment cards, platform users get direct access to the funds in their embedded bank account.

An issued physical or virtual card has all the functionalities of a normal payment card, with the added benefit of being able to add spend controls. Because payments, payouts, cash-advances and issued payment cards are all managed on a single platform, your users get instant access to funds.

Issuing branded payment cards is a golden opportunity for your brand to become a part of your users day-to-day by being present for every transaction. It’s also something that your users are interested in. According to our research with BCG, 60% of SMBs are interested in a payment card product provided by their platform of choice.

Embedded financing

Liquidity can make or break an SMBs growth. Whether SMBs need to bridge an uncertain period or need investment to support their growth, getting small business loans from banks is often the last resort. The reason is simple: applying for a traditional bank loan takes a long time, requires mountains of paperwork, and can easily be denied.

With embedded financing, you can offer business financing to pre-qualified platform users directly on your platform while minimizing awkward denials. Everything is automated, from the proactive risk assessment, to the amount a business can borrow, to their repayments.

If your BaaS provider processes the embedded payments, they can estimate how much a user can borrow responsibly and automate repayments without burdening their cash flow. Embedded payments make it possible to automate how much a user repays per transaction.

The need for business financing for SMBs can’t be overstated. 94% of the SMBs that we spoke to for our Embedded Finance Report said they would benefit from access to liquidity in order to grow their business.

Financial management is often one of the least favorite aspects for entrepreneurs in running their business. Helping SMBs with financial services that are tailored to their needs are instrumental in supporting their growth.

Embedded finance eradicates these hurdles. Since payments and financial services are run on the same platform, payouts are instant, reconciliation can be automated, and additional financial services can be added to your users’ needs.

Here are some of the immediate benefits your users will enjoy:

1. Control their cash flow

It can take days for payouts to arrive in a business bank account, depending on the currencies and banks involved. Especially for a business that deals with a high volume of transactions, like a bagel shop, that’s a problem. With hundreds of daily sales of bagels and coffee, it’s impossible for business owners to mentally keep track of how much cash is still coming their way. When ordering supplies or deciding on an investment in a new counter, that’s crucial information.

By running payments and accounts on a single infrastructure, you can eliminate delays and can pay out SMBs hard earned cash on the same sales day making financial services an integrated part of any given workday. They log on to your platform and get immediate access to their business and finances on a single interface.

It also allows you to automate reconciliation. When it’s time to make up the books, users still need to manually sift through payments, payouts, receipts, and allocate tips. If they can manage all their financial services on one platform, they don’t have to reconcile between multiple systems or deal with paperwork.

Instead, everything is already processed in the same place, your platform.

2. Access to capital

When a business owner needs to invest in extra stock in time for high season or replace broken equipment, they might not have the liquidity to do so. With embedded business financing, you can give users fast access to the capital they need when they need it.

Pro-active risk assessments identify which users qualify for a cash advance based on historical transactional data. When business owners log in to your platform, they are presented with business financing options they can actually afford and get funded with a few clicks.

So when the van of a dog walker breaks down, they can minimize damage to their business. By logging in to their bookkeeping platform and getting fast access to funds, they can afford the repairs to their vehicle and keep their business running.

Repayments are transparent and automated with each incoming payment. By holding back repayments instead of expecting set installments, the dog walker’s cash will continue to flow as normal.

3. Make decisions based on financial insights

By embedding financial services into the platform that facilitates the business operations of an SMB, you allow users to make decisions based on reliable financial data.

Many SMBs deal with seasonality, especially clothing store owners. Rather than having to guess how much inventory they need to buy when a big sales period is coming up, or inform them when stock runs low. They can also base how much to stock at the beginning of the season on how much they sold before.

Access to financial data can also help your platform inform your users where to invest at what time. By embedding financial products, you can gain insights into trends in the sector on a larger scale. Which means you can enhance your offering by adding proactive business insights to the mix.

There’s a myriad of benefits of embedded finance, both to your platform and your users. While your platform opens up new revenue streams, you increase stickiness by providing tailored financial services that truly benefit your users day-to-day.

Platforms need to forge the right partnerships to provide reliable banking services to their users that are compliant and flexible. Getting it right the first time pays off, since you only need to do one integration to set up embedded finance on your platform.

If you’re interested in learning more about embedded finance solutions, check out our BCG report.