Embedded finance, in which financial services are integrated into other business and consumer contexts through the use of APIs and banking-as-a-service relationships, has been boosted by the rise of e-commerce and the Covid-19 pandemic. A phenomenon largely associated with consumer finance, how can it be used in the world of global trade and supply chains? GTR and Mastercard assembled a group of key thinkers in the space to discuss what opportunities embedded finance presents now, and what the future could look like if the concept is adapted to transform B2B finance.
- Parvaiz Dalal, global head of payables finance, Citi
- Anders La Cour, group CEO, Banking Circle
- Shannon Manders, editorial director, GTR (chair)
- Vishal Shah, head of embedded finance, SAP Fioneer
- Claire Thompson, executive vice-president, global trade, enterprise partnerships, Mastercard
- Chad Wallace, executive vice-president, B2B solutions, Mastercard
GTR: Embedded finance has transformed the consumer space and is now gaining traction in B2B. Why now, and what does this mean for global trade?
Thompson: In the years since the 2008 financial crisis, regulation has been an enabler of growth in the B2B market and has facilitated the arrival of more participants. This includes the EU’s Payment Services Directive, which has democratised the availability of data.
That data availability, along with advancements in technology, has facilitated a much better digital service to provide a unique, differentiated, and I would say customer-centric approach. That’s been of benefit to both the providers and customers.
In terms of global trade, advancements in embedded finance are going to be hugely beneficial. It’s not just a back-office streamlining proposition, it’s really about creating a significant commercial opportunity for participants. You’re going to see consolidation, no doubt, but sometimes that’s not a bad thing. It means that the companies that are providing the most value, in the most customer-centric way, are going to thrive. It will provide positive outcomes for all participants.
Enabling the availability and recirculation of liquidity is what underpins this approach in the context of global trade. Forms of embedded finance can help companies release trapped cash, and help banks and fintechs create availability of liquidity and working capital in a new, enhanced way, which will lead to a much more inclusive environment for SMEs in particular.
Wallace: There’s a strong trend of businesses wanting to have similar digital banking experiences to those that are available in our personal lives.
What we’ve seen over recent years is that many former engineers or heads of product are now leading businesses with a strong focus on building a consumer-grade experience in corporate applications. You should have a consumer-grade experience when you go to work, unfortunately sometimes that’s not the case.
I think this is a significant pivot in the market right now and a big driver for innovation.
Dalal: The platform revolution that has taken place during Covid-19 is now at a level that financing needs to be embedded along the flow. It used to be a lot more paper-driven, now it’s all digital.
We are seeing multiple demands from our clients which require us to create an embedded financing solution on the platform, whether it is merchant financing, payment intermediaries or software: digital infrastructure requires a whole flurry of financing infrastructure.
There’s a demand which is driving innovation and thinking out of the box using the datasets instead of just looking at individual counterparty financials when making lending decisions. The banks will need to gear up to deliver that.
GTR: What challenges and opportunities can businesses address with embedded finance? What potential B2B use cases do you see for global trade and the global supply chain?
Shah: As the trade and treasury operations of large corporations get increasingly digitised, embedded finance can unlock new ways of accessing and distributing financial services. However, I think financial institutions and financial services infrastructures need to adapt and respond quickly. As digitisation picks up, the speed at which trade happens will accelerate. Therefore, clients need support from their financial institutions to adapt and further drive their business more efficiently and more profitably.
One of the challenges with the digitisation of trade is that there are too many actors involved. If you think about even domestic trade, not including cross-border trade, we see too many players in the space. When there are so many, you can’t reach a state of equilibrium where everybody is digitally connected.
The only way to reach that equilibrium is to create a system of incentives for everybody to be digitally active on a platform. These could be acquiring new customers, driving business growth, cutting costs, or entering new markets – all of which are incentives that digital platforms need to provide.
Once everyone is digitally connected, all the possibilities of embedded finance will be feasible. I think what is needed now is the creation of a consortium model – or what I would call a shared revenue model, or strategic alliance – which accepts that no one party alone is going to solve the problem. You’ve got to organise your own strengths, capabilities, and be able to deliver this vision of digitising trade end to end.
La Cour: The larger the corporate becomes, the more you get into this trap that now everyone has to be on the same platform. But in some industries, there’s huge opportunities for a big player to actually move out and build their own platform for suppliers, for payments, for working capital facilities. They could build a separate unit that would become its own fintech and could facilitate both trade finance and payments across their ecosystem. I think many Fortune 500 businesses should look into that.
Dalal: It’s a wide canvas, but looking at e-commerce, there are several use cases for embedded finance.
One is merchant financing, which is a big ask because it requires the sellers to have the financing available. It includes deep-tier financing because the first-tier suppliers are not always the manufacturers of goods and services.
Another big use case is point-of-sale financing for B2B buyers, similar to a buy now, pay later structure. I think it is now becoming very apparent that the B2B space also requires the same type of financing we have seen in the consumer space, where buy now, pay later has become prevalent.
A third case is automatic credit decision making, where a financial institution will couple credit decisions along with sales financing. On a digital platform, when a new counterparty attempts to join, there is very little of the information that has traditionally informed credit decisions. There’s certainly a lot of work to be done by financial institutions in this space, but there is a demand from corporate houses.
All of these are needs we are seeing from our clients and the corporate world.
We are investing a lot of time in creating modelling to test transactions to see how successful we are. It requires a lot of structure behind it – on the face of it, it looks like you walk into a platform and you get funding, but behind it there is a whole process of creating a syndicate or structured solution, which at the end of the day has to be cost and time efficient.
GTR: Is there a level of collaboration that is necessary at this point in time, which isn’t yet happening? And if not, what more can be done?
La Cour: This collaboration is already happening.
No-one should try to do everything. They can do some things and partners can take care of others.
We are seeing relationships and collaboration in the market that would never have happened even two years ago. There is a combination of a higher level of maturity in terms of people being prepared to work together and a mentality change in many of the largest institutions. In 10 years this trend will be reinforced a hundred times over.
This is why embedded finance will explode, because everyone will realise that partnership is power. Focus on your end client and then use someone to help you deliver what they want.
Wallace: Whether it’s a banks or fintechs partnering with each other to deliver on a customer experience, it goes back to what people are really focused on and what their core competencies are. How do I maximise the revenue and profitability of my core competencies to create customer value?
GTR: What challenges are impeding the market from reaching the capacity for embedded finance that we’ve talked about today, particularly in the trade space, which has traditionally been a digitisation laggard?
Shah: I think part of the adoption barrier is awareness in the market.The challenge is with people understanding how this is different, better, more beneficial to them than the traditional way of going to a bank in the branch, or through the relationship managers and accessing finance. How is this going to be any different? Why is it going to be better for my business? I think this is where education and understanding become an integral part to enabling change.
We at SAP have learned from past attempts at forms of embedded finance, that customers need to be involved early on. ‘Build it and they will come’ is not an approach that fares well with embedded finance.
As we discussed, collaboration is also crucial.
When participants are working together the problem is in delegating responsibility to one party to say, ‘you are responsible for our go-to-market success’. At least from my experience, I can tell you it doesn’t work. Taking the product to market is a collaborative effort just as much as building the embedded finance offering is a collaborative effort. Dividing all the players into strictly defined roles doesn’t work – you must be actively involved in the engagement with your customers every step of the way.
Dalal: The concept of embedded finance and changes in the assessment of an entire universe of new and large counterparties brings in a completely new risk practice. But the infrastructure in the financial space has to grapple with that and steps need to be taken to create that infrastructure.
The speed at which the whole e-commerce industry is evolving means we now need to change the way financing products are being delivered, whether it is consumer or businesses. And I think that brings the challenge to how to evaluate partners, how to evaluate the large new counterparty? Where do you box your risk? What are the datasets that you will use to evaluate it? And how reliable are they?
These are not tested in the market, so every credit modelling or capital modelling requires historical performance metrics to determine what the probability of default will be. These are real challenges. It’s where I think the industry is grappling to create that infrastructure.
La Cour: I’m not sure embedded finance is being held back, there’s just a longer path to maturity.
If you go a bit up the ladder to the larger companies, it takes a while to adapt. The larger the corporate, the less they want to be part of a failed project. For an SME it doesn’t matter as much, they’re more inclined to test things out and some things might work and others might not. I was asked a couple of years ago if I thought there will be a Netflix blockbuster moment in banking. The answer is no, I don’t. The banks are fully aware of what’s going on. But they’re slow, of course, because they’re so highly regulated.
So I think it will come, not necessarily with a very rapid pace, but when it comes it will be very powerful.
GTR: Embedded finance seems to be a relatively new term in the trade finance space. For an industry that already struggles to innovate, is this a leap too far?
Dalal: Embedded finance is not a new concept, we can see it already in the e-commerce space. The bulk of the growth over the next five years is likely to be in the B2B space, where trade sits. Covid-19 has given us a great lesson: supply chains were shifted from one location to another overnight, and you have to deliver your infrastructure with the new counterparties to plug and play.
Previously, it would have taken two years for us to roll out digital signatures at 52 locations, for example. But we did it in two months, because that was what was needed.
Thompson: We’re seeing a fundamental shift in how trade participants are working together. Consider the freight and logistics side of trade. Historically, it has been notoriously difficult to book your ship, your container and then track that freight. So rather than limited legacy processes, what we see now is more companies looking to use fintech digital platforms that digitise the process of booking shipments and moving goods. But not only that, you can integrate with banking applications, make payments and get access to financing.
GTR: How do you see embedded finance benefiting SMEs and minority-owned businesses, and helping larger organisations build more inclusive and resilient supply chains?
Thompson: Where there is transparency and assurance, there is trust. Through the democratisation of data, banks and fintechs are able to transform their credit assessment processes. And by leveraging integrated digital platforms, embedded finance increases access to, and speeds up the disbursement of, working capital, which SME and minority-owned businesses rely on to run and grow operations.
But I would also say that SMEs are very agile and nimble, and so it creates a more level playing field for SMEs to innovate. Having access to data, whether it’s in a very large ERP application, or a procurement system, enables new ways of doing things. Instead of just looking at whether a company has paid its invoices in the past, there are these rich sources of data that can inform sustainability-linked finance solutions. For example, what businesses a company is trading with, what trade isn’t sustainable, is it possible to build up carbon credits? These datasets build up a sustainability index and a sustainability profile. This is the route to really creating a sustainability angle as well as inclusion.
Wallace: I think there’s a significant number of SMEs that use social media platforms, accounts payable solutions, accounting firms and the like.
As a result, you see this rise of banking-as-a-service or API-based platforms that banks are creating. In my former workplace there is now a fully API-based transaction banking business that they expose to their clients.
What that has been able to do is take data from everywhere, and radically change the credit underwriting models. You no longer need to have a credit score on an SME to determine whether or not they’re credit-worthy, because potentially they’ve been on a social media platform selling their products for the last five years, and we can see those flows. There is power in the combination of API use and technology, the willingness to create an ecosystem across partners, and then the ability to take the data that’s used on those platforms and think about underwriting.
Dalal: Embedded finance will help incorporate sustainability performance into working capital flows in order to incentivise firms to reach green goals.
You need an API-based mechanism to evaluate how counterparties in a supply chain are complying with corporate compliance standards and then treat them correspondingly: if they are compliant, give them better tools, financing and services. Then the rest, which are not reaching those standards, are incentivised and supported to become compliant.
Overall, sustainability is going to stay for a long period of time, it’s not a short-term discussion.
The more you embed your infrastructure to evaluate counterparties on the parameters in which they would like to perform, the better the outcome will be.
Shah: Embedded finance is all about context and personalisation. There are minority-owned businesses, women-owned businesses and businesses who are following good practices around using clean energy sources, using good production processes and using materials from the right places. If we can measure these, it can be the first level of personalisation required for your financial services.
However, I think there is a huge awareness gap amongst suppliers. There are suppliers out there who might be needing working capital, finance and steady cash flow to run their business, but are not aware that this type of embedded finance exists. Or even if they’re aware of it, they might not know how to access it.
I think enough has been spoken about what embedded finance is, now it’s about time we shift gears and ask how we should enable it? The secret sauce will be in the ‘how’, not in the ‘what’.
GTR: Lastly, what should companies be doing to be able to implement embedded finance strategies? How do they prepare for it? What should be their first step?
Wallace: I think the number one thing for corporates and SMEs, regardless of if you’re a CFO, a corporate treasurer, or a small business, is to look to your partners, whether they’re fintechs, banks, or technology companies, and tell them your pain points.
The response from those banks, fintechs, and technology partners should be co-creating how to solve those pain points rather than just selling a product. The best innovation comes out of those conversations. There’s plenty of times at Mastercard where we have come up with new solutions in the SME or large corporate space from just talking to clients, listening to their pain points and understanding their needs rather than just walking into the room and trying to talk about commercial cards or a travel programme, for example.
Those open conversations are the ones that will drive adoption, where relationships are built, and deep understanding and trust is formed between parties.
La Cour: There’s a huge difference between how a large or small business should approach this, but the one common denominator is get something live. Because you learn from it, you understand what it is, and how to actually adapt it to your business.
Dalal: I think the world has changed a lot in the last three years, and there are going to be more major changes. That requires an organisation to be agile and to be able to adapt to the changes. If your products and services are designed in a traditional way, you’re going to fail miserably to meet the client and the market and changes that are happening around the whole ecosystem.
Thompson: I think underpinning what everyone has said so far is the need to, fundamentally, have a digital strategy and define your digital business model.
Shah: Although the question is focused on what companies, corporates and supply chain participants can and should do, I want to take a moment and talk about the people in the room here, from banks and fintechs, etc.
In my view, to deliver embedded finance capabilities there are three things. The first is experience innovation, not product innovation; I think experience is what the focus should be. The second is business model transformation. And the third is product simplification. There are players here who can deliver experience innovation, I look at fintechs and think they deliver great experiences. When you talk about business model transformation, our industry is getting used to changing our business models. With the last issue of product simplification, there are many financial services products and it’s about time we simplify the number of products, and types of products. Instead, make a simple set for people to understand easily. If they’re embedded in the context who cares what they’re called anyway?