When one thinks about embedded finance, the first image that comes to mind might be a mobile payments tool in WeChat, or maybe a bank account for Uber workers. What they might not know is just how much work goes on behind the scenes to make those embedded features possible.
Embedded finance, or the integration of traditional retail financial services into platforms that millions use on a daily basis, has gathered momentum during the pandemic. Start-up entrepreneurs and early-stage investors have redoubled their efforts in this area and – judging by the slew of recent news – later-stage investors and public stock markets have taken notice.
Today, hidden plumbing reinforces the power of embedded finance globally. Companies offering these solutions are actually unsung heroes. Just like you can't take a shower if the pipes in your house break, embedded finance grinds to a halt if you don't have the right plumbing.
These businesses act as the connective tissue between digital apps like WeChat and Uber, on the front end and regulated balance sheet providers on the back end. These companies make it easy and fast for third-party developers to embed financial features into their offerings.
This ‘plumbing’ is required to connect the new generation of customer interfaces and product providers with the regulated balance sheets or capital markets that finance, aggregate and manage risks at the back end. They enable a range of services including payments, banking services, and credit.
The growth of the embedded finance sector has caused a shift in the value of these plumbing services. African startups such as Flutterwave, initially focused on building payments infrastructure for merchants across East and West Africa, are now engaging merchants with e-commerce.
Such infrastructure providers do the heavy lifting on core operating and compliance functions such as sponsoring bank integrations, facilitating customer onboarding, and issuing cards. As a result, financial products that regularly took over 18 months to launch in the past now can be stood up in a matter of weeks for a fraction of the cost owing to the ready availability of the back-end infrastructure already available.
These service providers also allow their clients to focus on providing a better experience to their companies and their clients, focusing on the product and not on building the entire network. This is done by giving them the ability to issue important financial tools such as prepaid cards which in turn gives them access to millions of establishments around the globe that already have the infrastructure to accept payments.
From a business perspective, e-commerce has been one of the biggest beneficiaries of the pandemic economy and the accelerated growth of plumbing service providers. In addition to more consumers shopping online, entrepreneurs and other merchants seized the moment to expand into this space. As a result, platforms wanting to help their clients succeed are embracing embedded financial services.
Shopify, the global e-commerce platform whose footprint is slowly growing in Kenya, created a financial arm to help merchants secure credit. Since getting an accurate loan is difficult for many merchants, the Canadian firm, which now has nearly 500 Kenyan stores hosted on its platform, leveraged its internal data to better forecast a merchant’s future sales.
With that information, the company can offer better-suited loans to lenders in need of financing.
Other examples of embedded finance in E-Commerce include e-wallets and instant payments for merchants, bypassing slow and costly traditional banking channels.
While embedded finance is still a nascent field, we expect many more use cases to come. It's a great opportunity for start-ups, SMEs and large corporations to create more client value, while capturing new revenue lines.
The writer, Efayomi Carr (pictured) is the Principal of Flourish Ventures.