How platforms can maximise the benefits of embedded finance

Embedded finance is the most significant opportunity facing platforms to enhance revenue, retention and growth – here we explore five ways to maximise the benefits of embedded finance and avoid implementation risk. 

For platforms looking to enhance their value proposition, embedded finance is a massive and growing opportunity. Whether you’re a merchant marketplace, a payment provider, or an e-commerce platform, embedded financial services provide a new route to support your customers and help them grow. Integrating financial services into your platform can align seamlessly with existing service models, providing an integrated customer experience that helps merchants capitalise on opportunities and weather challenges in the market. 

However, it’s key to emphasise that embedded finance is not a magic wand. Like any new product launch, it brings its own risks and considerations when planning, implementing and launching. Platforms will need to take a strategic approach to maximise the benefits of embedded finance and avoid the risks of a badly thought out product launch. 

YouLend has worked with industry-leading platforms across a range of industries including Ebay, JustEat and Shopify to develop, integrate and monetise successful embedded lending projects: here we share the lessons you can learn to maximise embedded finance benefits. 

5 Steps to maximise the benefits of embedded finance

Partner with a third-party provider to achieve quick time-to-market

With any new product launch, there’s the question to buy or build your embedded finance proposition. For digital-first platforms, building can be an attractive option since they already have expert technical teams and developers who know their product inside out. And while it’s true that building gives you maximum control over your product, it also adds risk, expense and complexity to the project.

Especially for e-commerce and marketplace platforms, offering financial products is an essentially different type of service, bringing  with it a new range of considerations, including

• Compliance: The threshold for compliance on financial products is steep and specialised. Any business moving into this space must not only ensure they meet all regulations in place but also acquire licensing and accreditation in all relevant regions.
• Product direction: Developing a new product creates a range of possibilities in the wider financial space. While it can be tempting to go broad, platforms will more often benefit from a tighter focus on a core product for their audience. 
• Financing:  Developing a solution brings its own costs, along with additional financial risk when moving into valuable products like embedded lending. Often, platforms can get a better return on investment by investing in their core product and partnering for embedding financial products.
• Time to market and competitive dynamics: In the fast-moving platform market, building your own product can be time-consuming and risky, giving competitors more time to move ahead.
• Opportunity cost and resources:  If a company chooses to build, there is likely another project or feature that they will not be able to do. This can lead to lost commercial momentum. Partnering has the advantage of lowering opportunity costs and ensuring limited internal distraction.
  

Partnering with an established embedded finance provider, companies can immediately benefit from the partner’s data pool and credit risk models to offer more competitive services while also offering lower financing fees for the end-merchant.

Choose the right monetisation model

With embedded lending, platforms have the option to leverage their own capital or use third-party capital. According to McKinsey research, the majority of revenues from embedded-finance lending products (55 percent of $14 billion in the United States in 2021) accrued to the balance sheet provider—the firm bearing the risk of credit default.

However, for non-financial companies this can be a risk in terms of capital and time – financing is capital intensive and demonstrates strong economies of scale, taking on average 24 months to build a track record that enables external financing with covenant light structures and gradual reduction in the cost of capital. While the option exists to use an organisation's own capital, this presents additional levels of risk, requiring careful modelling and controls.

Partnering with a third-party capital network enables organisations to build revenue streams based on connecting merchants and finance providers without taking on capital risk.

Tailor products to your customers’ needs

Embedded finance is a wide-ranging marketplace with a range of potential services, including lending, cards, savings, loyalty schemes, BNPL and payments. As in regular development, any product you add to your portfolio will require integration, servicing and attention to bring to market. The more products you choose, the greater the risk.

Choosing the wrong products for your users risks damaging customer relationships and wasting resources. With this in mind, the right products should be aligned with the specific needs of your customers and the benefits your platform is looking to achieve, such as:

• Increasing long term revenue 
• Improving customer loyalty 
• Enhancing new customer acquisition 
• Supporting merchant pain points
• Increasing customer LTV
  

In addition to the product itself, the form and delivery should be adapted to your customers, including:

• Offering a seamless customer experience
• Alignment with customer business models
• Suitable rates and repayments structures
• Matching customer risk appetite
  

Working with an embedded finance partner, integrated with your core systems, enables companies to deliver a seamless, branded experience, all within a single platform with full control over customer experience and products.

Implement robust security 

Offering financial products introduces a new, higher bar for security and data protection for customers. Failures in this realm can lead to steep fines, lost customer trust and commercial risk. Given the complexity of financial regulation and infrastructure, this can be a daunting task for non-financial businesses to take on.

While partnerships can help add the necessary technical and regulatory expertise, platforms still need to be mindful of their own due diligence. When working with external providers, platforms need to ensure partners can ensure an end-to-end secure journey while also complying with necessary financial regulation. 

The most secure route is working with an external embedded finance provider. This enables platforms to offer a secure, end-to-end service that protects customer data at every stage of the process while benefiting from sophisticated risk models that protect merchants and lenders alike. 

Launch a pilot project with your provider

As in other forms of product development, speed and testing is key. Taking an agile approach can help platforms quickly understand their users' needs and the most appropriate strategy. Rather than investing six months in a complex building project, platforms can use a low-touch project to test customer appetite for new solutions.

Providers such as YouLend enable platforms to get started in as little as 7 days with a fully branded funding page for a seamless customer experience, offering a low-risk pilot opportunity. Once platforms have gathered the necessary customer data, they can further refine the value proposition around users’ needs.

Making embedded finance work for your business

Embedded finance is still a relatively new industry, meaning there are a range of ways to engage with the opportunity. Leaders like eBay have managed to achieve 26% growth in customer GMV through offering embedded finance, with the market predicted to grow nearly 40% this year.

Making the most of the benefits available requires understanding this evolving landscape and the changing needs of merchants – find out the latest embedded finance trends in our latest whitepaper.

YouLend works with a range of leading businesses to help them maximise the opportunity available. To find out how you can make the most of this new technology for your business, book a demo with our partnerships team here and start exploring the benefits of embedded finance for your platform.