Traditional financial institutions are facing new competitive pressures from sources beyond the emergence of FinTechs. The rise of neobanks and the opportunity for companies to apply for bank charters in markets like the U.S. has opened up the banking market to the potential for new, younger, more agile rivals.
Increasingly, those rivals are operating in the small business banking arena, a market that has been historically underserved by legacy financial institutions. While the challenger bank ecosystem continues to evolve, there is a new competitive paradigm emerging as opportunities in embedded finance position traditionally non-financial businesses as possible peers to banks.
“There is a major concern that an incumbent comes around that is not financial in nature but still wants to offer financial services, and that that will eventually kill the banks,” reflected Banxware CEO Jens Roehrborn. “That whole discussion has now been taken over by the fact that open banking enables platforms to offer financial services without having to become financial in nature. It creates a win-win situation.”
In a recent discussion with PYMNTS, Roehrborn outlined the value proposition of embedded finance for non-bank players, their small business customers, and even the banks themselves as business owners elevate their demand for a better banking experience.
The Value Of Data
The value proposition for non-finance companies to integrate financial services within their own platforms is clear: companies like online marketplaces or other service providers can monopolize the customer relationship even further, allowing their small and medium-sized business (SMB) clients to access financial products they need without having to migrate to another service provider’s portal.
But when it comes to small business lending specifically, marketplaces like Amazon and eBay are particularly well-positioned to address the credit gap that legacy banks have not been able to fill.
“The platform knows the small business better than the bank does,” said Roehrborn. “It has the most recent transaction data, and based upon that, it can fulfill the merchant’s needs best.”
Roehrborn noted that these portals typically understand the unique nuances of a small business’s operations and its industry, able to take into consideration seasonality or business models with a greater level of understanding than a large financial institution that services a broader range of businesses would have.
As a result, not only marketplaces but any B2B business with access to rich data about its small business customers — like enterprise resource planning (ERP) or accounting providers, for instance — have the opportunity to capitalize on that information and use it to evaluate the qualifications of a small business borrower.
“Everywhere where there is a substantial amount of historic transaction data makes sense to introduce lending and increase customer lifetime value and customer retention,” he added.
A Trusted Experience
For the small business borrower themselves, embedded finance not only offers an opportunity to access capital when a traditional lender falls through but provides a more seamless and holistic experience from an already trusted business partner. Though platforms like online marketplaces or SaaS firms may not be considered financial service firms, they already have a hand in a small business customer’s finances through facilitating the transactional side of their operations.
According to Roehrborn, that means the threshold for a business to overcome any reservations about accessing financing from a company not typically thought of as a lender is already quite low.
Further driving the value proposition is the opportunity for small businesses to consolidate finances and operations within the same platforms they already use to sell, like online marketplaces, or other portals they’re already using to run their business.
“It’s the one-stop-shop,” he said. “In one cockpit I can see: when is my next distribution, when is it due, how many units of merchandise did I sell today, the holiday season is coming up, am I eligible for a loan?”
Ultimately, with the ability for intermediaries like Banxware to facilitate the application, underwriting and payout workflow to be much faster than a typical lender, the end-user experience for the small business borrower is significantly elevated.
An Evolving Landscape
With the small business lending arena continuing to evolve through the rise of alternative lenders, neobanks, growing efforts among legacy financial institutions to digitize and, now, embedded financing opportunities, service providers are facing greater pressure than ever before to strengthen the value proposition for small businesses.
While many of these discussions often focus on the opportunity for FinTechs to disrupt banks’ lead in the space, embedded financing is also driving the conversation about the opportunity for traditional lenders themselves to benefit from this trend as the providers of finance being issued to an SMB under another service provider’s name.
The opportunities in embedded finance are vast, with Banxware itself exploring the value of facilitating integrated commercial credit card issuance for other platforms. It’s only one example of myriad solutions the embedded finance model can offer. And whether the banks, FinTechs, or non-finance businesses ultimately come out on top, the real winner of embedded finance, says Roehrborn, is the end user.
“It’s all driven by convenience, to boil it down to one major point,” he said. “I think banks are going to have a wake-up call very soon as they realize that major platforms, which already own the merchant relationship, can provide full banking services.”