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Who are the leaders of embedded finance?

June 21st - 2021

June 21st 2021 –

First came the internet, then cloud computing, followed by mobile and now fintech is creating the fourth technological wave, and the emergence of embedded finance is helping it.

That’s according to Matt Harris, a partner at fintech investor Bain Capital Ventures. He wrote a landmark essay in 2019 that predicts the embedded finance sector could be worth $3.6 trillion over the next decade in the US alone.

The idea behind embedded finance is that any brand can offer financial services to its customers without actually providing the funding or software itself.

It is already established within payments, such as automatically paying for an Uber through the ride-hailing app or, more recently, being able to set up a buy-now-pay-later agreement through fintechs such as Klarna directly on a retailer’s website.

The customer never leaves the retailer or provider’s website and can be offered financial services such as payments or insurance in one place, embedded in the background by a fintech.

Harris predicts that this could change the role fintechs play, with customers using their services without even noticing and benefiting from an easier way to transact. 

It is a strategy that is also increasingly being applied to lending. For example, Shopify Capital offers advances to users of its e-commerce platform. There is no need for users to send loads of documents or go through a lengthy application required by a bank.

Instead, the necessary company information and sales data are already on the Shopify platform, making it easier for a lending decision to be made. The end-borrower only deals with Shopify Capital, despite the funding and software actually coming through embedded finance provider YouLend.

Embedded Lending Is Still In Its Early Days

Fintechs such as YouLend and Capify provide both loans and revenue-based finance, but others, including Liberis, a55, and Uncapped, focus on the latter. Alternative lender Iwoca also provides its small business loans through embedded finance partnerships arranged on its dedicated platform called OpenLending.

It set up one of the first embedded finance partnerships in 2017 when it started providing its loans through current account challenger Tide. Funding Circle has also said it plans to test an API for partners to offer its business loans this year.

Advocates of embedded finance cite the readily accessible customer data that should make lending decisions faster. Manuel Silva Martinez, general partner at fintech venture capital firm Mouro Capital, which already backs South American embedded finance lender a55 and Warsaw-based Uncapped, said embedded finance would “dramatically change” the data that traditional lending relies on.

“Banks have traditionally underwritten loans on stale and often outdated data, typically describing ‘stock measures’ of the borrower such as cash at hand or size of inventory,” he said.

Silva Martinez said embedding lending on other platforms such as payments processors or e-commerce providers creates new ways of understanding creditworthiness such as payment flows, client concentration and payment times.

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