How Embedded Finance Is Altering The Way Businesses Manage Their Cash Flow

For many years, business finance meant navigating numerous sections within different systems. A company would pay with one system, invoice with a different system, borrow with another system, and so on. Each of these systems could manage only a single type of financial process.

Embedded finance merges financial functions and systems such as payments, lending, banking, insurance, and financial management all into a single system, eliminating the financial systems a business would have to navigate.

This is most notable with small and medium sized businesses. Traditionally, the only financial functions in an accounting or business management system were automation tools to process transactions. Now, business management systems can process all financial transactions.

This trend creates many different tradeoffs. The most notable is how a company manages its cash and how they manage their financial decisions.

An accounting platform can let a business pay an invoice directly from its financial dashboard. A marketplace can let its sellers receive payouts without opening a banking application. A software platform can make financing offers depending on its transaction history, and an e-commerce business can integrate payment and financing services along its customer journey.

Embedded finance, according to Visa, is integrating payments and lending functions into existing services with the ultimate goal that businesses can pay and get paid and access the services easier.

Greater operational efficiency is the end goal of these innovations.

The changes embolden and expedite the shift where financial services become a seamless part of the workflow rather than a separate entity.

Faster payment collections with visibility of transactions are made easier with embedded payments. Embedded payments reduce the number of payment collection steps a business has to go through. Fewer payment collection steps mean payments are collected faster.

Cameron Walker, Manager of the Agent Network at Clever Real Estate, believes that embedded payments can serve industries where transactions involve multiple parties, most notably.

Embedded finance products facilitate financial activities as part of workflow activities. Business transactions are especially complex and time-consuming. The typical real estate transaction, for example, involves many parties, including the real estate agents, the real estate client(s), real estate vendors, and real estate companies. For the discrepant parties, financial transactions and payments can create significant administrative work. Embedded finance products integrated with the real estate transaction platforms can transaction financial data, thus eliminating administrative work. Embedded finance products allow real estate transaction participants to focus on the customer.

Embedded finance focuses on making money movement seamless for users and enabling businesses to have greater control over their financial activities. Aside from payments, embedded finance products include embedded lending.

Traditional lending involves complicated application and underwriting processes. Embedded lending, however, involves financing within a given business's operations. Businesses receive financing offers based on the data captured by the platform and transactions.

Embedded lending underwrites based on data, and providers deliver working capital services via software.

Ali Zane, the CEO of IMAX Repair Firm, sees embedded finance products having the potential to help both consumers and businesses make informed financial decisions.

This is Mango’s perspective on embedding finance.

Embedded finance is bringing financial tools closer to the point where they are needed, and providing solutions in the moment can help lower the number of steps needed to complete a transaction.

Convenience must be balanced by transparency and the ability to make responsible financial decisions.

Embedded Finance and Traditional Credit

This can make a large positive impact on the enterprises that have struggled to obtain traditional credit in the past.

The models built around recurring revenue, such as subscription and rental businesses, stand to gain the most.

Payment collection, deposits and refunds, among other financial functions, can be integrated directly into a platform.

From the operation and the customer experience point of view, this simplifies everything.

Luca Dal Zotto, Co-Founder of Rent a Mac, sees the model as relevant for rental based businesses.

“For rental businesses, payments are closely connected to the entire customer journey. When deposits, recurring payments, refunds and other financial processes can be handled within the same platform, businesses can spend less time managing separate systems and more time improving the customer experience.”

The connection of financial data with operational data has the potential to give businesses visibility to revenue and customer insights.

Finance Data Becoming Business Data

The transactional data that comes with embedded finance has the potential to give businesses significant insight.

When a business integrates its payments, purchases, invoices, financing and other activities within a single business platform, that business can have more insights into its entire operational activities.

Activities of this nature can help businesses to understand customer purchase behaviors and payment behaviors, as well as the needs for cash flow.

From the perspective of Rafael Sarim Oezdemir, the Head of Growth at EZContacts, this data would become important to businesses that are concerned with customer acquisition and retention.

“Financial data becomes much more valuable when it is connected to the broader customer journey. Businesses can better understand not only what customers purchase, but also when and how they transact. That can create opportunities for more relevant offers, better retention strategies and more efficient growth.”

Embedded finance is increasingly becoming a strategic differentiator as opposed to just another payment service provider.

Embedded Finance Provides an Opportunity for New Revenue Streams

Financial services that integrate with non-financial services offered by other companies provide opportunities for new revenue sources.

A software company, a marketplace, or a vertical services platform can provide transaction fees, referral fees, or other forms of fees through financial services and products offered on their platforms.

This provides an opportunity for fintech services to be offered through business channels that have existing customer relationships.

This is how Shahnazari, the CEO of Savvo, can see embedded finance as a way of providing greater value to customer relationships.

“There’s no need for a business to become a bank in order to offer financial services. Businesses simply need to align proper financial products with their customer needs in order to provide an additional value-add service that solves a legitimate customer need. It’s more important to craft a useful financial service offering than just another way to generate revenue for the business.”

There’s a true opportunity here that is closely related to relevance and customer needs.

AI Could Make Embedded Finance More Intelligent

New trends embedded within finance focus mainly on artificial intelligence. AI has advanced to the point where it can analyze, adapt, and learn from transactional data and automate financial processes for users' decision-making convenience. This new technology, when accompanied by other financial service buildouts, can create new ways of delivering personalized financial services.

Kirill Meshyk, Head of AI Data Collection at Unidata, could see high-quality data playing a central role in this evolution.

“AI will give embedded finance a level of intelligence it only lacked before, but excellent data is critical. Financial decisions need quality data that is precise and well-managed. Digital platforms will need the best data collection and validation systems to create the trust and confidence that AI-based financial services need.”

This means there will be a tighter relationship between the adjacent fields of embedded finance and advanced AI.

For small businesses, perhaps the most notable impact of embedded finance could be consolidation.

More entrepreneurs are able to run payments, invoicing, expenses, financing, and other financial tasks in the platforms they're already using.

Hamid Ali, founder and CEO of WordLayouts, saw this as a potential way to lessen the operational burden on small businesses.

“Small businesses don't have dedicated finance teams, so every financial process causes additional work. With embedded finance, entrepreneurs can access much needed financial services in the tools they already use.FMakes financial management easier, and businesses do not have to create complicated systems.”

Because administrative tasks can take up a lot of time that could be used to serve customers and work on the product and business, this is an important trend.

The Threat From Security & Fraud

Embedded finance also means more challenges.

Any sort of financial activity includes sensitive data and offers regulated services. Embedded finance can mean services like payments and lending, banking, etc. This means addressing security, fraud, privacy, and regulatory services.

Embedded finance does not remove the necessity of financial institutions from the equation. It usually incorporates banks and other finance firms along with technology and fintech companies and regulated partners. PwC notes that non-financial institutions can continue to offer the client experience while banks and financial firms provide the back end and regulatory services.

Jacob Bayer, CFP®, and founder of Jacob Bayer Wealth Management, could see the long-term health of the industry improving if the industry as a whole implemented responsible systems.

“Convenience should never replace transparency in regards to finance. With the integration of financial services into everyday business software, companies have to prioritize user understanding and clarity regarding the services and products offered, their associated costs, and potential risks. Technology has the capability to simplify financial decisions; however, it must not remove the transparency around financial decisions.”

Trust will therefore be one of the most important factors in determining the success of embedded finance.

Embedded Finance is Altering the Nature of Business Operations

The alteration is not just confined to interactions with customers.

Financial tools enable businesses to pay suppliers, manage expenses, reconcile transactions, and control cash flow flow, among other things. Embedded banking links banking services and banking functions to accounting systems and enterprise resource planning systems to enable businesses to act on financial information without the need to open multiple systems.

Kur Win Lau, founder of My Reno Service, noted the embedded financial tools could be especially useful to project-based businesses.

“Financial management in projects is tied to the work. Tracking payments, managing expenses, and other financial processes integrated within operational systems allow business owners real-time visibility to the financial state of the project, rather than understanding the financial state of the business after the job is done.”

This connecting of financial data to operational data is perhaps the greatest opportunity provided by embedded finance.

Finance as Infrastructure

The biggest shift could be the view of financial services as disaggregated services.

Payments, lending, banking and financial management will be integrated into the digital spaces in which both businesses and customers operate.

Traditional banks will still exist in an infrastructure built on embedded finance. The partnerships between the traditional banking, fintech, and non-financial sectors will progress in a way in which banks provide regulated infrastructure, fintech companies provide technology, and non-financial sectors maintain the customer's experience.

This model has already begun implementing itself in multiple sectors: retail, real estate, hospitality, transportation, and software.

No longer is the only concern about digital payment systems for businesses. The concern is now whether financial services can become streamlined and incorporated as part of the service provided.

As Ali Hamid, Founder and CEO of WordLayouts, describes in the sample perspective provided, incorporated finance will bring a significant impact for businesses, particularly to medium-sized businesses and smaller enterprises who lack a developed finance department.

Finance, and how businesses interact with money, will involve less financial apps in the future and more financial tools integrated seamlessly into the software used throughout the workday.

Embedded finance combines payment systems, lending, banking services, and financial automation into technology used within each respective business. It integrates money management into the digital work of businesses. Embedded finance, when used to its potential, increases the efficiency of businesses and fosters strong relationships with customers, and reveals potential for business growth and opportunities.