When we talk to organizations that have thus far not gotten involved in embedded finance, we frequently hear key decision-makers refer to it as an efficiency play. And because they see it as a streamlining tool, they often push it to one side, seeing it as nice-to-have rather than must-have.
Such thinking overlooks the enormous growth potential of embedded finance and is one of the reasons its adoption is lagging in the B2B space when compared with the B2C sphere.
Time and again studies have shown that the buy now, pay later (BNPL) services that are commonplace in the consumer space lead to shoppers spending more and therefore businesses making more.
No One-Size-Fits-All in B2B
The obvious question then is if services such as Klarna and Clearpay can have such a huge impact on B2C companies’ growth, can this concept be translated into the B2B world to accelerate growth?
The answer is both yes and no. While embedded finance has the power to boost corporates’ revenues, it may not happen via tools that are industry agnostic.
For the B2B world to succeed in embedded finance, companies need to tailor their offerings to their specific industries. It’s undoubtedly trickier than integrating a ready-made product into their content management system, but it’s also far more powerful because it becomes a differentiator.
Using the unique insights they have into their supplier and distributor networks, organizations have the ability to design vertical propositions tailored to specific industries.
We work with a beverage company that primarily sells beer. Like many other companies in the sector, its growth had been slowing as it competed with many other breweries selling a highly commoditised product. Traditionally, the big lever in such industries has been volume-based discounts, but everyone offers these. What this company has done to set itself apart is build a unique lending product that frontloads the discount. Instead of offering a discount at the end of a period based on the volume purchased, it loans the money interest-free upfront instead, with the caveat the funds don’t need to be repaid if the target is reached.
This recognizes the often cash-poor nature of its distributors and how much more value it has as a partner this way.
If we take it a step further, by offering a fully integrated financial offering to your partners, the potential becomes endless. Imagine you’ve got full data on one of your bars because you’re providing all its POS and payment processing systems. The data acquired by having visibility over all transactions taking place is hugely valuable—it can inform future investment decisions and also provide a useful credit profile of the business.
This data may show a partner bar as being in good health, but then an industrial freezer worth £40,000 unexpectedly breaks down. Good health and having £40,000 lying around aren’t necessarily the same thing and the only way for it to stay afloat will be a loan.
Banks are likely to shy away from such a loan due to the lack of assets available as collateral, or at least be far too slow to grant one quickly enough to allow the bar to remain in business.
But if an organization has an asset financing deal with an equipment supplier, it could underwrite the loan itself—helping to keep the supplier’s business afloat while also securing future business and earning interest through a fee-sharing arrangement.
Bespoke Is Best
There’s also a pharmaceutical company that utilizes bespoke financing arrangements to grow its share of its distributors’ businesses.
Given they aren’t seasonal or even particularly discretionary like hospitality businesses, pharmacies don’t have the same cash flow challenges and levels of uncertainty as bars, so the approach that worked for the beverage company couldn’t simply be copied over.
However, the pharmaceutical cooperative had done some research and realized that modernized pharmacies were selling 15% to 20% more like-for-like than unmodernized pharmacies. They decided to offer interest-free loans to partners to modernize their retail outlets, in return for an agreement that those outlets would increase the percentage of their products stocked. The increase in revenues was far greater than the interest it could have made on the funds loaned out, therefore boosting its own growth as well as that of its pharmacy partners.
In some industries, the main appeal of embedded finance isn’t financing but payments. Consider a drop-shipping provider where production is based in China, while storefronts are spread globally. Given the reliance on an international supply chain, payments can effectively make or break operations.
To ensure consistent revenue flow for its clients, this provider implemented an orchestration platform capable of switching between payment providers based on factors like cost, returns, and other nuances, to keep the system flowing at all times. In logistics, financing will undoubtedly play a role in embedded finance, though likely on a shorter-term basis compared to industries like hospitality or pharmaceuticals.
A perhaps more obvious point of commonality in the embedded finance proposition is the opportunity to earn interest. Acquiring fees are high and funds that sit within this ecosystem are likely to be earning interest while they are held by corporate partners.
In addition, while the means of achieving it may be different, a key goal of any organization designing an embedded finance proposition for its clients is to ensure retention.
It’s clear there are themes that run across industries when it comes to making embedded finance as successful in the B2B world as it has been in the B2C space. But the key to success for corporates is tailoring their embedded finance offering to the specific requirements of their clients’ industries. This will position them far better than rolling out across-the-board solutions such as those used in the B2C world.
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