One of the most important trends that is shaping the banking industry is embedded finance. Recently we’ve seen everyone from Apple to American Express and more start to utilize embedded finance to improve customer acquisition and customer retention.
The problem for bank leaders is that these embedded digital financing deals often bypass or sidestep the traditional banking relationship, leaving lenders out of the picture if they’re not careful. If you’re not utilizing embedded finance in your business, you’re at risk of falling behind the competition, since more banks are now looking for ways to turn embedded finance into a strategic advantage of their own.
But first, let’s look at how embedded finance can be defined. The simplest definition is when a provider offers financial products and services to its customers through APIs and platforms. Take, for example, an e-commerce platform partnering with a company such as PayPal or Stripe to allow customers to make purchases easier with embedded technology during the check-out process, without leaving their website.
That’s the classic example of an embedded finance use case.
In today’s digital world, customers expect a seamless experience, with fewer clicks and financial products that automatically recognize who they are and take advantage of existing data to shape a more personalized offering just for them. If financial institutions are willing to offer these capabilities it will lead to more transactions and increased loyalty. While customers increasingly utilize their smartphones for transactions, and businesses look to streamline their financial processes, embedded finance helps to deliver on both counts by creating a more frictionless shopping experience.
Additionally, customers not only want things that are simple to use, but they also want things that they can control. Embedded finance helps the customer understand in simple terms how much data will be shared, when it will be shared, and for what purpose it will be shared. Because the financial solution is embedded in the tools, they are already used to using online, it also means they have a greater sense of control over when that data is being used in the first place. Added peace of mind never hurts conversion rates.
Embedded finance helps the customer understand in simple terms how much data will be shared, when it will be shared, and for what purpose it will be shared.
So, is embedded finance a win, win....win? The question that remains for bankers is: can they still win in this new embedded finance world, or are they being outmaneuvered by other players?
A strong example of embedded finance being used by a long-term lending company is American Express. American Express wants to keep its customers in their ecosystem, rather than allowing them to jump from place to place. With that in mind, American Express has invested heavily in partnerships that allow them to keep their consumer and small business clients in their ecosystem.
How is Amex doing this as a traditional credit card and banking service provider? Think of when you go to a small business, and you see them promoting the use of American Express cards on location. That small business is very likely using a POS service with American Express as the primary processor. Then, rather than wait for interchange clearance for their funds, they can draw down a line of credit from their Amex business account in real-time, using the cash to enhance operations in their store and attract new customers, which starts the cycle all over again.
Furthermore, embedded finance like what is going on in the Amex example saves time and money for business clients. Businesses are online more than ever, so bankers need to respect that all clients, whether business or consumer, will expect online financial tools. There has been no shortage of alarm raised by bankers about the trend of customers moving away from physical bank branches and going online to accomplish what they need. Embedded finance takes it one step further, putting finance directly into a client’s other day to day activities.
So, what are banks supposed to do, especially those that don’t have the same deep financial pockets as Amex or PayPal? Perhaps the best step today is to prototype embedded finance for your institution sooner rather than later.
Typically, in an embedded finance environment, the customer acquisition cost is lower than if a lending institution is trying to acquire customers online or even through branch networks.
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And the reason is very simple.
With embedded finance, you are offering customers important financial services at the point in time when they are doing certain critical business activity. That could be running payroll, managing payments, or balancing their books. It’s opportunistic and timely when they need a service the most, and you are there providing a seamless workflow.
Additionally, there is a network effect to embedded finance. The more data you obtain, the better the financial products you can build. When interest rates are at a record high, it's very important that there is flow of data in a digital format for underwriting purposes, another great benefit that comes from embedded finance. This helps lower the cost of funding, increase the amount of money that can be offered, and build multiple product sets tailored to different kinds of customers, which typically are very difficult to build if you don't have an integrated way to access data.
Our approach at Biz2X has been to find embedded finance partners and build an ecosystem that banks can access. We want to be there for the small business owners wherever they are, whatever activity they are doing to run their business. A great example is that we have a partnership with the leading U.S. payroll company.
We want to be there for the small business owners wherever they are, whatever activity they are doing to run their business.
We’ve created a whole embedded finance experience where with the click of one button people can not only apply for financing, but also give us all the required data to receive a qualified lending decision, which takes away the time and effort they would typically need to fill out that data. This also leads to better pricing and terms, increasing customer loyalty even further. Products such as this are bank-underwritable thanks to the technology that we’ve created to interpret all the various data signals received from embedded finance partners, synthesizing them into metrics that lenders can rely on.
Since Biz2X is the technology that powers Biz2Credit and the Biz2Credit CPA Business Funding Portal, this same embedded finance experience is, for the first time ever, available to accounting firms that are seeking SBA loans for their small business clients. Above all, business owners are extremely busy people, and they rely on their financial service providers to help them secure the best financing possible.
With Biz2X being able to provide this embedded finance experience, not only are we helping the borrowers, but the platform introduces these customers to SBA-licensed lenders they might not otherwise find.
We have a lot of lenders who use our platform today who give multiple product offerings to business clients they have received through the CPA network we’ve established. These products include SBA loans, lines of credit, term loans, and commercial real estate backed products. Typically, it has been a very paper intensive and expensive process. Rather than continuing in this way, banks can utilize embedded finance and offer more of an end-to-end digital experience to their small business clients just like they normally do for consumer finance as well.
All in all, embedded finance is here to stay, and to stay the preferred choice for their customers, banks need to find ways to “integrate” embedded finance into their existing strategy. Whether you feel your bank is ready for this trend or not yet, the need to add embedded financing offerings is only going to increase in the weeks and months ahead. Your best course of action is to take a hard look at how embedded finance could be used at your business now, before too many early movers have captured the market.
To learn more and suggestions on how to get started with offering your bank’s financing products through embedded installations, talk to a Biz2X financing platform expert about your bank’s unique needs.
