Recently, I published an article on Banking-as-a-Service (BaaS) and why it made sense for banks to build out capabilities for their banking services to be adopted by brands (both financial and non-financial). I argued that the potential for banks is huge as it is expected to become a US$3.6 trillion industry by 2030 according to Bain Capital Ventures.

This time I’m focusing on Fintech-as-a-Service (FaaS) driving embedded business lending through single B2B merchants or suppliers. That is, the ability for businesses to leverage the capabilities of able fintechs to offer their customers with business finance at the point of need or before (usually from within one’s own CX or CRM).

While this model could also be fulfilled through BaaS, incumbents still have a poor reputation of providing business finance in a timely and accessible manner. Hence the reasons why alternative/fintech business lenders exist in the first place.

I’m not in this case referring to offering finance through business service providers or marketplaces, e.g. payment service providers, SaaS companies, or other value added services in the business supporting eco-system. These come with different potential FaaS outcomes, especially when data-sharing is considered.

Lessons from consumer finance

The rise of buy-now-pay-later in the consumer world provides a powerful example of what embedded finance at the point of need can do for brands.

Consumer debt ethics aside, B2C buy-now-pay-later providers can proudly point to the fact that implementing a BNPL solution can increase basket sizes for retailers by 20-30%. The concept, although around for years in various forms, has now been delightfully served as an option during the customer’s checkout process and the marketing has been simplified and on point.

Even as merchants must pay for the privilege of offering BNPL (keeping it interest free for customers) upwards of 4-6% per transaction, the benefits have been too good to resist.

Although let’s face it, regulation aside (there are significant hoops to become licenced in B2C finance), underwriting to consumers is easier than extending credit to businesses thanks in part for the need to understand factors such as business servicing capacity, shareholder control, bespoke pricing, industry risk and not to mention the exposure risks associated to loaning out more significant totals.

Therefore B2B lending speed and embedded innovation naturally lags behind B2C. That said, there have been remarkable steps forward over the last two years as more and more millennials and digital natives take over business buying decisions.

Existing B2B finance models

For many B2B suppliers or merchants, a referral programme to a business finance provider is nothing new.

The benefits can be obvious, especially as the alternative is to embark in to the dangers of offering trade terms and all the cashflow and collection troubles that come with it. By introducing business finance, suppliers can get paid upfront and those pesky risks evaporate.

When used effectively in a negotiation, financing offers can also allow suppliers to remove expected buyer discounts. Total order values and loyalty increase (as in the consumer world) and accessible finance even helps a buyer’s businesses become more successful — resulting in increased volumes of purchasing.

Still, referral programmes of this nature have their problems. Even with same day B2B funding available, finance applications can hold up the buying process.

This means suppliers who are keen to leverage the buyers peak interest, antagonising don’t close sales as quickly as they could and run the risk of the of the application declining or extra customer frustration and fatigue.

While the benefits for introducing finance in to the sales process still outweigh the negatives, more improvement in the experience can be achieved.

Enter Fintech-as-a-Service.

Embedded pre-approvals

Imagine a situation as a B2B supplier or merchant where you can provide a pre-approved finance offer straight to eligible businesses through your own CRM.

This level of proactivity provides you with a powerful tool in drawing in loaded sale opportunities from customers who are primed and ready to transact. The advantage over your competition is significant as your customers already know they can painlessly purchase from you once they’re ready for more stock.

A new revenue stream also opens for your business as your FaaS provider hands you commission for each loan a buyer takes.

This example highlights the power of pre-approving customers in a proactive capacity. For this level of FaaS to work a customer permission gate is required, either as part of a customer onboarding/sign-up process or through invitation.

With a white-labelled or co-branded experience, buyers can securely connect via open banking through a third party (FaaS provider) and be reassured that no visibility of this data given to their supplier. Other business data sources (e.g. payment or accounting software) can also be connected at this point.

Through providing these connections through the supplier or merchants portal, buyers can sit back with the knowledge that they will be notified if and when they qualify to purchase goods or services on finance. Once pre-approved, sellers can push a message to their buyer from their CRM system along with any sales pitch or offer they like.

Convincing buyers to give this connection permission in the first place is a challenge that clever marketers and UX specialists will need to overcome.

Embedded at the point of need

Again, we only need to take BNPL as an example of an embedded finance solution served beautifully at the point of need. Buyers, motivated at the time to transact, are more likely to have the determination to apply for finance within the same CX process.

Unlike traditional loan referral schemes that remain disjointed with long and possess awkward handover points, through FaaS, an embedded financial product is especially attractive when done right. It can merely feel as a simple ‘way to pay’ option in the buyer experience. No application forms; no double entry of business data; no waiting.

The challenge therefore is to create seamlessness, integrated and quick decisioning. Again, still a relatively tall order for B2B finance especially the higher the loan total is (despite advances in innovation and same day funding).

The potential for more instant decisioning will need to be enabled through a) improvements in API sharing and open finance analytics to confident business underwriting and b) buyer adoption on online services and platforms.

This later point can already be seen in the growing gulf of funding accessibility between online and manual powered businesses.

For example an eCommerce buyer, generating rich volumes of data through online sales and excessive B2B Software-as-a-Service (SaaS) use has the perfect data points that can be integrated in to support lending applications. In contrast, a blue collar business, with a limited online presence and who only drops a shoe box full of receipts to their accountant every 90 days, will find it more difficult to provide the data required for quick decisioning.

The new normal

Embedded B2B finance is here to stay and serious FaaS providers are emerging.

More and more suppliers and merchants will be leveraging the power of this new technology trend to create a more successful, loyal and satisfied buyer. Through proactive pre-approvals, B2B sales teams can be armed with more empowered conversations and unique advantages over the competition.

Alternative business lenders operating as an embedded finance FaaS will also benefit by leveraging the scale of the B2B supplier and merchant channel, accessing more businesses through wider mass distribution.

Soon, simply plugging in an embedded finance solution in to your existing CRM system will become a painless experience. B2B lending products of the future, through speed of underwriting and integrated data points, will be commonplace as an attractive option during the sales process.