Embedded Finance

Convenient, Efficient, and Streamlined

Whether or not they realise it yet, embedded finance is starting to revolutionise the way that corporates interact with their customers and banking partners. Treasurers have an opportunity to enhance the sale of their organisations’ goods or services while simultaneously adding value to customers through bespoke financial services.

As its name suggests, embedded finance is the process of incorporating financial products, from lending and payments to accounts, cards, insurance, and investments, into a company’s existing (and new) commercial offerings.

It is a value chain from the end customer – be that a business or a consumer – to a platform through which the product is embedded via a software capability, all of which is backed up by a regulated entity.

Katie Ayaz, Customer Goal Lead, NatWest, comments: “Embedded finance is about being where customers or businesses are, rather than expecting them to come to us. That’s the fundamental shift in consumer behaviour. They no longer want or expect to have to come to a bank to obtain financial services. They want those financial services to be part of the experiences or platforms that they are on. It’s all about the convenience.”

Solving pain points

Historically, for corporate treasurers, the financing of companies and the manner in which they settle with customers and suppliers tended to be viewed as separate from the products and services they offered. Now, with embedded finance, this is changing.

Alastair Campbell, Head of Group Strategy, NatWest, reveals: “We’re increasingly observing those two elements being combined in a range of industries. It means firms can enable customers to experience their services piecemeal when needed. That includes payments, lending services, protection services, and even account-related services. Corporates need a bank to work with if they want to offer embedded finance.”

Interestingly, treasurers can interact with embedded finance from both sides of the equation – they may be offering it to their customers or could be using it to support the purchasing department. Either way, there are essential considerations for best managing this new way of transacting.

George Toumbev, Chief Commercial Officer, NatWest Boxed, outlines the possibilities: “Companies that offer embedded finance could find it to be a multiplier for the balance sheet, for example, so treasurers must bring to bear risk management capabilities around pricing, liquidity, securitisation, and managing the asset book. On the flip side, being a user of embedded finance is slightly different because it enables treasurers to solve various pain points, such as freeing up capital or restructuring, for example.”

Embedded finance is about being where customers or businesses are, rather than expecting them to come to us.

A treasurer may historically have viewed the working capital on their balance sheet as a feature of the company’s commerce profile. It was something for the treasurer to manage. What embedded finance offers is the possibility to innovate how treasurers work with suppliers and how companies charge for what they do.

“Companies in the gig economy can start thinking about why they pay workers at the end of the month versus paying them piecemeal for every individual delivery they make,” comments Campbell. “Corporates in the car industry can start selling the car by the hour rather than selling cars once as a fixed asset to their customers. That’s an innovation of the service being offered by the company, which would be looking to the corporate treasury function to be service innovators, not just as suppliers of liquidity.”

Identifying the use cases

While – like most innovations in payments – the retail and end-consumer markets seem like prime candidates to benefit from embedded finance, there are also several B2B use cases for treasurers to consider. These include embedded SCF, merchant cash advance solutions for SME suppliers, and B2B point of sale credit.

Matthew McParland, Strategy Lead, NatWest, adds: “We think a lot about our climate transitions and how we could support customers with their climate transitions – we are not going to be able to seamlessly facilitate those ecosystem participants without embedding solutions, as that activity is happening on platforms. It’s about being where the activities are happening between clients to manage better, more streamlined processes, better access to new instruments, or visibility on liquidity positions.”

One vital area of the climate transition can be found in the property retrofit ecosystem. Refitting housing stock to be more efficient and using sustainable green energy sources could lower mortgage and energy costs for owners and tenants. And while there’s money to be made for everybody in that supply chain, there’s a set of hurdles to overcome to kick-start the process. Embedded finance can play a crucial role in supporting this, as Campbell explains.

“There are experiments that are being looked at where a housing association can put a solar panel on the roof of a block of flats, but it takes an embedded transaction system to share out that solar panel cost. Having paid the capital project to put up the solar panel, they will then all benefit from cheaper mortgages, but to get there, there’s a piece of technology in the middle there that’s running the allocation of that cost and benefits across everybody. That’s an example of taking this technology and embedding it to create an ecosystem that wouldn’t otherwise exist.”

Embedded finance offers access to financial infrastructure or technology stacks that would normally be out of reach for some businesses, companies or treasurers. It’s an entirely new potential revenue stream and channel that can be operated relatively simply.

“The industry is nascent, it’s clearly going to be huge to the point of changing consumer behaviour,” notes Toumbev. “If you’re the treasurer, there’s potentially a lot of value but it’s probably a bit hazy right now. It is about better managing your business’ financials through embedding various tools and capabilities. When it comes to tasks such as managing risk or hedging, treasurers can use embedded financial services for all these things.”

The advent of embedded finance offers treasurers the opportunity to review the customer journey taken by the businesses and consumers paying the firm. This exercise enables the corporate to highlight any pain points and explore how embedded solutions could be used to help improve the customer experience.

“Treasurers should think about what they are looking to offer their customers or their consumers,” advises Ayaz. “Is there a way to use embedded finance to remove those pain points or barriers to entry? That’s the first step. Go out and explore what’s available. What can banks and other third parties offer to enable them to facilitate that without having to build it themselves?”

Toumbev agrees and believes it’s a good idea to start small when experimenting with embedded finance. “I’d suggest that corporates do a limited pilot or a sandbox test.” he notes. “There are different models out there, so once the treasurer understands the pain point they want to address, they can look at the various models to do a control test.”

Understanding what banks already offer in the realm of embedded services can help bring to life some of the potential. McParland highlights one of NatWest’s existing capabilities, FXmicropay, as an example that can help unlock embedded finance use cases for corporates.

“For treasurers thinking about the FX rates they pay on every transaction when doing business abroad, FXmicropay takes a spot rate at the point of transaction,” he explains. “This is a plug-in into the payment rails that exist today.”

Be on the front foot

In summary, today’s digital world is seeing consumers (and businesses) becoming more impatient and demanding than ever. Embedded finance enables treasurers to support their business by enabling a seamless customer journey.

“If there’s a way to think about embedded finance now to address a key pain point or a challenge, its definitely something that treasurers should be considering,” Ayaz comments. “They should educate themselves now, and understand where it could help, today or in the future. It will only become more prominent, so understanding it will ultimately help treasurers and their businesses.”

McParland adds that there is an urgency to understanding embedded finance that treasurers should embrace. “If you’re not thinking about embedded finance, you need to challenge your role as a treasurer because this is effectively the movement of money, cash flows and how treasurers manage their liquidity positions,” he stresses. “It’s going to impact you even if you’re not thinking about it, so you might as well be on the front foot about it.”

As well as the crucial point about how corporates provide services to their customers, embedded finance also challenges treasurers as to how suppliers are managed.

“Areas such as contract labour or subscription services from tech companies or property firms are all potentially embedded finance solutions,” concludes Campbell. “To pay for use, to pay instantly, to pay with security – they are effective credit lines between customer and supplier, whether they’re overt credit lines or simply credit lines because they don’t pay until the end of the month. Thinking deeply about how to manage the accounts payable as much as the accounts receivable may also be important to corporate treasurers in this evolving era of embedded finance.”