Embedded finance is already bringing significant disruption to the consumer market. So why is business finance lagging behind?
This is the narrative explored here by Sonovate‘s co-founder and co-CEO, Richard Prime, who delves into the success of embedded finance, and what the industry can take from that journey to better the business financing journey.
Sonovate itself is a tech-driven financing platform for businesses to access and manage their funding requirements through its app or via its API. Created to make it easier for businesses and individuals to run and manage their working lives, to date, the platform has funded over £2.5billion in over 40 countries.
The pandemic has shifted the needs and expectations of consumers when it comes to accessing finance, and indeed the way in which they do so. Over the past two years, embedded finance has flooded the consumer market, with services such as Afterpay and Klarna – which now has more than 150 million customers worldwide and is present in 45 markets – changing the way millions of consumers think about payments and credit and offering a frictionless, faster and simpler shopping experience.
The advent of open banking and consumers finding financial services exactly where and when they need them has raised the bar for the business world. Embedded finance can help businesses to simplify their finances and vastly improve efficiencies over the entire payment process. It’s another reason why embedded finance and banking-as-a-service are among the most exciting new trends transforming this space.
While it’s happening at speed on the consumer side, innovation lags behind when it comes to business finance. In 2016, the Competition and Markets Authority’s retail banking market investigation identified a number of competition problems with banking services for small and medium enterprise businesses. While regulation has solved certain pain points, there is still a disconnect between the mechanics of current business finance solutions and what businesses require from their funding to be able to grow.
A recent global Accenture survey of 2,500 small and medium-sized businesses in 10 markets confirmed a growing interest in embedded finance solutions, with over 40 per cent willing to pay for embedded finance solutions from digital platforms. In the same survey, around 85 per cent said they used digital services in their day-to-day operations.
So, with a clear appetite for embedded finance solutions from businesses, why isn’t this audience being served as it should? What, if anything, can we learn from the consumer space?
With embedded finance skewed towards the consumer, businesses are still not seen as a separate group with distinct needs, despite those businesses being just as willing as consumers to utilise third-party solutions.
Even the smallest business has more complex needs than a consumer and there is a strong appetite to automate this admin. In particular, businesses with freelance and contract workers are crying out for access to simple, flexible finance on-demand to grow and pay their workers on time. The growing market of influencers and content-creators is also a major opportunity for businesses to use embedded finance to meet the needs and expectations of younger consumers who expect to get paid immediately.
At present, the lending market is still highly fragmented which makes it difficult for businesses to navigate the complexity of finance solutions available. Historically, lending to the small business sector has been perceived as higher risk, due to the inability to pay and creditworthiness can be hard to assess due to asymmetric information and perceived lack of data.
Traditionally it also has been difficult for companies to move away from their banks because they found it too troublesome to change financial providers, but open banking — and, ultimately, open finance — is changing all that by freeing up the system, making it more transparent and giving customers more flexibility and choice.
By relying on networks instead of centralisation, open banking can help financial services customers securely share their financial data with other financial institutions to facilitate more transactions. Invoice financing has also been perceived by businesses as difficult to implement and expensive. But if done correctly, the cost of financing is an investment that will yield returns.
What can business lenders learn from the consumer space? Platforms such as Klarna know that the key is to start with the user, putting their needs at the heart of the solution. Ongoing investment and enhancement are also critical.
Business lenders need to provide funding that’s accessible when it’s needed, not before, and not after, when it’s too late. Adding financial capabilities such as complete cash flow management will also increase the overall effectiveness and add value for the client.
Just as consumers expect a frictionless experience when using their favourite apps, businesses want access to finance to scale and pay their workers easily. They need faster lending decisions and tech-driven solutions to improve processes. This is where fintechs are coming into their own: providing tech-driven finance to help businesses unlock working capital and ensure their workers get paid on time. Put simply, the fintech ecosystem offers less friction and superior user experiences than traditional players.
The acceleration of digitisation strategies in many industries means that the options and opportunities for business finance have and will continue to grow. Lenders now need to step up. Those that move first will be able to secure partnerships and unlock significant growth opportunities to serve the business community.
Business performance is a critical factor for post-pandemic economic recovery, with access to finance a necessary tool for growth. We must act now to close the gap between B2B and B2C and make it easier, faster and more seamless for businesses, delivering next-generation solutions to access finance.