Top 7 Applications of Embedded Finance

Embedded Finance is one of the most effective tools of enabling business, verticalization of software, and monetization. It has fueled innovation and customer-centricity in the financial services space. The speed of adoption of embedded finance by a sector is proportional to the direct value created for the sector. This post walks you through some sectors that are the first to be transformed by Embedded Finance. 

What is Embedded Finance

Embedded Finance is the seamless integration of financial services (such as credit products) into a traditionally non-financial service or product. It augments the current offerings of the non-financial service, or even completely reconceptualizes it. 

Embedded finance bridges the gap between financial services companies and the consumer. It offers lending-as-a-feature that is easily embedded into a digital platform. It is also known as Embedded Credit. It has brought credit to the customers via digital platforms that already have strong relationships with these customers. 

The 3 goals of embedded finance for businesses

Embedding financial services serves one of 3 major purposes for businesses. 

1. Enabling core business by smooth facilitation of financial services - In sectors such as B2B E-Commerce or FMCG, smooth credit enablement directly enables business and grows the sector. For example, merchants with access to credit can make larger orders they otherwise can’t. 

2. Vertically scaling business by including financial services - Including financial services as a product offering vertically scales software businesses. Digital platforms are racing to become the dominant one-stop-shop technology provider in their sector. Vertical markets have a winner-take-all dynamics, and embedding financial services has become imperative. 

Digital Payment was the first step towards the vertical scaling of digital platforms. Payments is now an obvious feature in any digital platform. It prevents users from having to go to a third party to complete a transaction. Other financial services were lagging, but are now catching up fast.

3. Unlocking alternate streams of revenue through financial services - Embedded Finance helps businesses monetize their customer base through commissions. 

As the adoption of Embedded Finance increases, it’s interesting to see how different businesses have applied it for their use cases. Here are some ways in which Embedded Finance is being adopted in various sectors by different digital platforms, and how it is changing those industries.

How embedded credit can benefit different businesses

MSME Sector

The MSME sector holds a large opportunity for embedded finance. According to the International Finance Corporation, the credit gap in India’s MSME market is estimated to be an astounding USD 400  billion. MSMEs contribute 58% of the Indian GDP and employ 120 million people.

The credit needs of MSMEs mirror the volatile business environments they operate in. They need credit on a repetitive basis, with flexible repayment timelines, and quick access to the funds, to deal with fluctuating demand, high cost of real estate, varying inventory turnover times, and supply chain inefficiencies. 

Digital platforms that serve MSMEs are offering in-context credit products such as Buy-Now, Pay-Later options, powered by credit lines, to help merchants deal with their working capital needs and grow their business. They leverage their deep understanding of customers to provide tailored credit solutions that suit the needs of merchants.

B2B E-Commerce businesses

Embedded solution - B2B E-Commerce digital platforms connect MSMEs with a marketplace of distributors and bring benefits of scale to MSMEs. These platforms  are embedding credit products such as the following for their MSME customers. They simplify the entire process of placing orders by offering in-context loans at the point of demand creation and make it much easier for merchants to access credit.

1. Buy now pay later 

2. Merchant cash advance

3. Flexible Business credit lines

Digital Platforms tailor the terms of credit as per the needs of their retailers and approve more customers based on cash flow data and previous order data. They have improved the collections process by introducing more points of contact with the end-user.

Benefits to the end customer - Embedded credit products help MSMEs manage cash flow, stock up in anticipation of high demand periods, order high-value SKUs, deal with various contingencies, and grow their business.

Benefits of digital platforms - Enabling credit increases the business MSMEs do on digital platforms. 

1. Increases the Average Order Value (AOV) on the platform.

2. Increases Gross Merchandise Value (GMV) of the digital platform

3. Increases the wallet share of the platform.

4. Improves the stickiness of the platform.

Read more about how Embedded Finance doubles the customer lifetime value in B2B E-Commerce

Retail-Tech platforms, Merchant Accounting apps

Embedded Solution - Retail-Tech (aka Kirana tech) apps digitise the operations of retailers and MSMEs, starting from enabling online transactions to managing inventory, payroll, cataloguing products and more. These platforms are embedding credit products such as the following on their platform. 

1. Buy now pay later payment options

2. Flexible working capital loans

3. Flexible Business credit lines

Retail tech apps help approve creditworthy merchants that don’t have access to formal credit by leveraging cash flow data, their accounts receivable and accounts payable data that formal lenders don’t have access to.

Benefits to end customer - 

1. Retailers get easy and in-context access to credit that they otherwise visit multiple third parties for. 

2. Retailers fulfill their working capital requirements and grow their business.

Benefits to the digital platform - 

1. Vertically scales the platform, makes it stickier and distinguishes it from the competition.

2. Unlocks an alternate revenue stream for the digital platform and enables them monetize their customer base

3. Increases customer acquisition and customer retention

FMCG Distributors 

FMCG retailers rely on credit to stock up inventory. They have low turnover times, low margins and limited working capital. Retailers manage multiple relationships with various distributors and customers, with multiple running accounts receivable and accounts payable. When retailers don’t have high working capital, and no access to credit, they end up ordering small amounts, which results in logistical inefficiencies, unfulfilled demand, and low business for both distributors and retailers. This, paired with the fast moving nature of goods, liquidity is paramount. 

Credit products that help create liquidity for merchants, smoothens the supply chain.They help retailers do business with ease and invest in growth and enable distributors and manufacturers to push more goods. 

Embedded finance empowers distributors to offer tailored credit to retailers. FMCG merchants need frequent, small ticket size and short duration credit that banks traditionally aren't able to underwrite. Since banks are not able to underwrite at such speeds, distributors are leveraging their relationships with retailers to underwrite these retailers using data on their previous payment history to finance their invoices. For this, they use embedded finance.

Embedded Solution - FMCG manufacturers and distributors use data on previous orders of retailers to underwrite them and provide the following credit products tailored to their specific needs of duration and amount - 

1. Invoice Financing 

2. Buy Now Pay Later payment options

3. Working Capital Loans

4. Loans against accounts receivable

Benefits to end customer- 

1. Retailers can stock up on more inventory and fulfill demand in high demand periods, and do more business.

2. Retailer can purchase high value SKUs and tap into the logistical efficiency

3. Retailers can cater to a broader set of their customers owing to their good SKU mix.

Benefits to distributors - Distributors can grow themselves by enabling more business and making the supply chain smoother (in terms of credit enablement). 

1. Distributors serve larger orders and push higher value SKUs.

2. Distributors do business with more retailers

3. Distributors avail the benefits of logistical efficiencies of serving larger and high-value orders.

4. Distributors don’t need to set up a credit program in-house.They don’t have to set up underwriting capability and collections processes, and assume unnecessary risk.

Logistics Sector 

Logistics Platforms

Truckers receive highly fluctuating demand. This makes it impossible for them to maintain cash flow and plan out their business.

Embedded Finance enables digital platforms catering to independent truckers or fleets and job posters to offer credit to truckers. Truckers use this credit for crucial operations such as fuel financing, vehicle maintenance, vehicle insurance, and buying new vehicles. This drastically improves ease of doing business for truckers and enables them to fulfill more demand. Both truckers and job posters see their needs reliably fulfilled from the platform. 

Embedded Solution - Logistics platforms are enabling the following credit products for truckers and driving partners on their platform - 

1. Flexible Business Loans

2. Fuel Financing

3. Vehicle Insurance Loans

Benefits to end user - 

By leveraging embedded credit, logistics platforms see an 

1. Truckers can fulfill more demand, take up bigger jobs, and do more business

2. Truckers can maintain cash flow and fulfill various working capital needs such as truck maintenance

3. Truckers can invest in growth, expand their fleet.

Benefits to digital platform - 

By leveraging embedded credit, logistics platforms see an 

1. Increases the total business done on the platform. 

2. Improves the acquisition and retention of driver partners

3. Improves the acquisition and retention of enterprises posting jobs

4. Unlocks new sources of revenue for the digital platform.

Read more about how logistics platforms are leveraging Embedded Finance.

Human Resources

Payroll, HR-Tech platforms

Since payday loans are small ticket-size and short duration loans, banks don’t make much profit without charging high fees. Embedded Finance offsets some of this cost. It digitises processes, reduces acquisition costs, and leverages the relationship of the employer with the employee.

Employers have enhanced capability to underwrite their employees. For example, a gig marketplace that connects blue collar workers to jobs has data on the average number of orders a worker fulfills. Employers can also ease collection by integrating with payroll management platforms and using deduction at source strategies.

Embedded Solution - Employers are embedding the following credit products on their employee portals and internal job portals to help their employees deal with contingencies.

1. Salary advance

2. Payday loans

3. Personal loans 

An interesting use-case for embedded finance is gig marketplace platforms offering loans to their blue-collar partners to be able to perform their gigs. For example, a driver for a cab aggregator or a two-wheeler aggregator platform could use credit for purchasing a vehicle. Similarly, plumbers, electricians, beauticians, etc. all need to buy equipment and supplies, upfront for their business.

Benefits to employees -

1. Employees get easy and reliable access to credit to deal with contingencies.

2. Employees don’t have to go to third parties to access credit.

3. Gig workers can invest in their business.

Benefits to employers -

1. Enhances employee morale and performance

2. Talent acquisition and retention.

3. Enabling more business if gig workers on the platform are reliant on credit to take up more gigs.

B2C Apps

E-Commerce is growing rapidly. With most stores now having an online presence, customers are used to the ease and flexibility of online shopping, and having more choice. 

Customers are also increasingly favoring innovative, flexible and transparent digital payment solutions over traditional credit payment options such as credit cards. The credit card penetration in India is low as it is. Repayment options such as  Buy Now Pay Later or EMI at checkout are gaining more popularity. 

Providing seamless instant credit options at checkout has shown to increase business on the platform, increase the average order size and the number of repeat customers on the platform.

B2C E-Commerce 

Embedded Solution - B2C e-commerce platforms are offering the following credit products to their customers at checkout

1. Buy Now pay Later payment options

2. EMI payment options

3. COD to Pay Later Options

These are short-term, small ticket size loans and are offered across all sectors like electronics, white goods, apparel, furniture etc. B2C Platforms are tying up with companies that can underwrite customers based on alternative data. These businesses may also have an existing relationship with customers by maintaining a credit line or having lent to them previously. 

Benefits to end customer - 

1. Credit increases their purchasing power. They can buy higher value products while staying in budget.

2. Customers can avail time sensitive discounts.

3. Seamless checkout experience.

Benefits to the platform - 

1. Increases total business done on the platform. Decreases the number of abandoned carts.

2. Increases sales of high value goods

3. Increases the number of repeat customers.Increases customer loyalty on the platform.

4. Improves the checkout experience of customers.

B2C aggregator apps - ride sharing, cab aggregators, restaurant aggregators

Embedded Solution - B2C apps are increasingly offering the following credit products and payment options to their customers.

1. Buy Now Pay Later 

2. Flexible EMI Payment options

3. COD to Pay Later Options

Customers have the option to defer their payments and have flexible repayment options. They can either do a one time payment of their sum total cost at the end of their billing cycle or opt for flexible repayment plans. 

Benefits for end customer - 

1. Increases the total business done on these platforms

2. Increases number of larger orders

3. Increases customer loyalty

4. Makes the checkout experience smoother for customers.

Benefits for the platform - 

1. Increases the total business done on these platforms

2. Increases number of larger orders

3. Increases customer loyalty

4. Makes the checkout experience smoother for customers.

Embedded Finance is one of those rare phenomena that both deeply change the landscape and are also widely applicable. The potential of transforming industries and helping customers through innovative solutions is particularly exciting to watch. Any product manager or business owner who is looking to grow their business should keep a keen eye on the embedded finance space and leverage it. 

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