Embedded finance providers: The essential guide for platforms

The rise of embedded finance providers seems tailor-made for the platform economy. Platforms such as marketplaces, e-commerce and payments have rapidly gained market share by bundling services for merchants. This provides a convenient, efficient path to digitisation and route to market for new and existing businesses. With embedded finance, platforms can now seamlessly integrate banking services, including lending, bank accounts, and credit cards, into their offerings, creating a seamless user experience.

With success, however, comes new challenges. As platforms become the default partner for online businesses, B2B providers will need to find new ways to attract, retain, and grow customers without significantly increasing costs. That's where embedded finance comes in – understanding embedded finance is key to grasping the future of the platform economy, as well as setting the goalposts for success.

The Embedded Finance Opportunity

Embedded finance presents an opportunity for platforms to not just increase the value they can provide to their merchants, but also increase revenue streams by adding additional products such as lending services. Embedded finance providers enable non-financial platforms to offer financial services that elevate their product offerings, retain more customers, and remain competitive by participating in the increasingly important embedded finance value chain.

The prize for platforms is growing fast, with financial services embedded into e-commerce and other software platforms accounting for $2.6 trillion, or nearly 5%, of total US financial transactions in 2021 and, by 2026, exceeding $7 trillion. Embedded lending alone is expected to reach $32.5 billion by 2032 at a CAGR of 19.4% from 2022 to 2032.

So how can platforms start offering embedded financial services? When looking to implement financial products, platforms have the opportunity to build their own functionality, taking on the development, marketing, and capital risk of financial products. The other option is working with specialist embedded finance providers to leverage their expertise, technology and financial networks to offer these services with less risk, cost, and time commitment – a route being taken by market leaders such as eBay, JustEat, and TakePayments.

Here we explain how platforms can think about partnering with embedded finance providers and how to maximise the opportunity.

What are the growth challenges for platforms?

The platform economy is still growing fast – the latest research shows there is huge potential yet to come. Global retail e-commerce sales have now reached approximately $5.2 trillion and are projected to grow by 56% over the next five years, reaching about $8.1 trillion by 2026.

Meanwhile, the global digital payment market is poised to generate revenue of around $180.2 billion by the end of 2026, projecting a CAGR of 15.4%, and B2C marketplaces are estimated to reach $3.5 trillion in sales by 2024.

In reality, though, the distribution of this revenue will not be equal – customers and growth will accrue to those platforms that can most effectively attract and monetise merchants on their platform.

Platforms face steep competition and high costs when it comes to acquiring customers, with average e-commerce CAC at $274 for SMBs, $1,406 mid-market businesses, while fintechs such as payment platforms shell out an average CAC $1,450 for SMBs, $4,903 for mid-market businesses. With revenues from merchants coming primarily from transaction fees and subscription revenue, recouping costs requires working with merchants long-term and adding value-added products that make it easier to acquire and retain customers.

How do embedded finance providers support platforms?

Embedded financing creates the chance to increase retention while augmenting revenue with additional services through:

• Improved User Experience and Retention: Integrating financial services directly into platforms can streamline the user experience and improve customer survival rates in changing market conditions.
  
  
• Additional Revenue Streams: Platforms can diversify their revenue by earning a share of the finance-related transactions taking place on their platforms, reducing their dependence on fees, advertising, or subscription models for their revenue.
  
  
• Driving Customer Revenue: For businesses leveraging a portion of customer transactions, financing can help customers improve inventory and invest in marketing and product value to improve long-term value.

There is already strong evidence that customers are willing to purchase these services – 41% of SMBs would be willing to source financial services from platforms, with 47% prepared to pay the same or more for these services as from banks.

How to choose between embedded finance providers

For non-financial businesses implementing financial services, these products bring a range of additional considerations for your customer experience, compliance and risk management.

Adding new financial services to your platform is not just a matter of adding new functionality and watching the money roll in – the way you offer, service and monetise these products must be adapted to the needs and habits of your customers. This must also include a robust technical and go-to-market plan to avoid costly, slow, and complex implementation of products.

Your choice of embedded finance provider should take into account the commercial, technological and practical considerations involved in moving into this new field, including:

• Technology synergy: The chosen provider should offer APIs and tools that allow for easy integration with your platform's existing systems, facilitating secure data exchange and a seamless user experience.

• Reliability and Security: Given the high bar for financial compliance, including GDPR and PSD2 regulations, it’s crucial to choose a provider with a proven track record of reliability and security. This includes being compliant with all relevant data security standards and regulations, as well as being able to advise on implementation.

• Financial Products Choice: Your provider should offer products that provide tangible value to your customers, supporting them on key pain points and goals. For example, revenue-based financing is ideal for online businesses, integrating repayments with their existing sales model.

• Scalability: As the platform grows, your embedded finance capabilities may also need to expand, requiring a provider that can scale systems with volumes and transactions.
  

• Capital risk: For lending, your provider may facilitate transactions on your own books or connect your customers with third-party lenders. Ensure your chosen provider gives your customers the right options for their needs, combined with robust underwriting and credit checks.
  

• Partnership and Innovation: Embedded finance is still a new industry – providers should not just be seen as vendors, but as partners, working closely with your platform to innovate and develop new offerings that can keep your business ahead of its competition.

How to benchmark embedded finance providers

Embedded finance providers vary in their approach, and the right one should suit your business, customers, and technological needs. YouLend’s embedded financing platform is designed with digital platforms in mind for a simple, low-risk, value-focused lending experience.

• Quick start: Get started in as little as 7 days with a fully branded funding page for a seamless customer experience.
• Low resource: Implement in a way that works for you, including a no-code hosted option, or full API integration through a secure, tested gateway.  
• Seamless experience: Simple applications and industry-leading APIs enable a >90% approval rate with same-day offers and funding.
• Risk-free: No capital requirements or legal risk – YouLend connects your customers to reliable finance with flexible, user-managed payment terms that don’t push them into debt.

YouLend works with leading global platforms, including Shopify, eBay, and Dojo to help implement embedded lending for business customers across a range of sectors. To find out more about how we can work with your platform, book a meeting with our partnerships team.