Embedded B2B finance: The trend explained

McKinsey estimates that the embedded finance market in the United States generated $20 billion in revenue in 2021, with potential to double in size within the next three to five years. Despite the scale of this opportunity, many B2B companies are uncertain about how to incorporate this new form of B2B finance into their payments infrastructure and what it takes to succeed.

What exactly is embedded finance? Embedded finance involves the incorporation of financial services into experiences, platforms, or customer journeys that are not inherently financial. This can include payment processing as well as buy now pay later, or financing options, directly at the point of purchase.

B2B financing, also known as trade credit, plays an essential role in B2B transactions. Buyers depend on credit lines to handle the sizable average orders typical in B2B, which they need to place. However, with the increasing digitization of business trade and the growing complexity of business needs, embedded financing solutions are becoming increasingly necessary within the B2B finance ecosystem as a whole.

To provide insights into how merchants can capitalize on this trend, we sat down with Serena Wong of American Express and Austin Siegfried of Vartana, who cumulatively have over 16 years of experience in B2B payments. Both agreed that B2B financing enabled through APIs, are creating a massive opportunity for companies who want to leverage solutions in the B2B finance space. In this article, we’re breaking down exactly why.

What is embedded B2B financing?

Embedded B2B financing or lending pertains to the integration of digital trade credit into existing systems or platforms of non-financial brands. After all, B2B lending is a complex process that most merchants lack in-house expertise for. And if they do possess it, embedding it into a digital experience for the B2B customer isn't a small feat. Just adapting the online application process, which can involve multiple steps, data requirements, and reviews, into the purchasing cycle can be quite challenging.

Not to say that establishing a credit line for a buyer comes without risks and the overhead associated with accounts receivable. There's a risk of repayment, especially when dealing with small business customers. There's also the matter of scaling when dealing with a large customer base. However, similar to many trends that started in the B2C realm and are now finding their way to B2B, merchants will have to contemplate how to seamlessly bring business financing into an easy payment option at the point of sale. We observed this trend in B2C with solutions like Klarna and Affirm being adopted by nearly all major retailers. In the B2B space, just like with all payment trends, it's crucial to recognize the freshness of digital adoption. Nevertheless, as businesses increasingly expand their online channels, buyers expect more sophisticated choices when it comes to making purchases.

Because, at the end of the day, whether the buyers are consumers or businesses, they want a frictionless and uncomplicated payment experience. And without in-house expertise in financial technology, merchants must turn to third parties to enable the required level of sophistication to provide real-time credit assessments, underwriting, and immediate approvals directly within the checkout or payment experience. But the growing focus on B2B financing encompasses more than individual features or reasons. According to Serena and Austin, three primary factors are propelling this trend forward in the B2B landscape.

1. A GTM strategy for B2B ecommerce payments

B2B financing, often referred to as trade credit, forms a fundamental aspect of any B2B transaction. Businesses have various methods of providing financing solutions. The most conventional approach is via net terms. However, to grant a customer net terms, businesses must engage in a series of meticulous risk evaluations. Hence, the decision-making process is typically not instantaneous for the buyer. Why not opt for traditional banks? Unlike fintech companies, banks tend to be slower in adopting API-first technologies themselves.

On the other hand, embedded B2B financing providers help businesses move fast. “Historically, when it came to large organizations, the mentality was always to build in-house. This was because the speed to go-to-market was so incredibly slow just given legacy architecture, strategic investment, and IT prioritization,” says Serena. Now, with API-enabled B2B financing, merchants can meet the digital requirements their buyers expect, while doing so with minimal development resources.

2. The rise of productization

The complexity of B2B financing lends itself well to leaning on a strong technology provider. This is why Serena describes that there's no longer the default of: “Let's build it.” First, companies will look for a partner and then only if it doesn't work, will they do it in-house. Serena describes that this creates a perfect situation for purpose-built fintech solutions looking to succeed in the B2B finance space– because there is a need for outsourcing every piece of the puzzle, from KYC to fraud detection. 

“I almost feel like the future of payments will be built by non-financial people. It will just be whoever can make the connections. They don't need to have that expertise that traditionally was needed,” says Serena. Instead, they just need to find the right partner. And, with an increasing number of startups dedicated to solving one particular piece of the puzzle, that’s not a hard thing to do. 

3. The consumerization of the checkout: BNPL

The growing number of brands and service providers choosing to function as financiers is also fueling the embedded finance trend. “This became clear when about five years ago, Affirm launched with Visa to expand their BNPL offering,” says Austin. This introduced what would become part of a wider move from brands to offer more value at the time of checkout.

Austin explains that over time, “fewer businesses have depended on sales and discounts. Their intention is that if you offer financing, you don't need to discount the product itself in order to get someone to buy it.” In B2B industries, negotiation centers around payment terms: at what interest rate and on what payment schedule.

Embedded B2B financing is enabling that to move online. Why? It's becoming easier for everyone to white-label. Austin explains that this is because you have a number of background players that are providing financing, and all the brand has to do is plug and play. 

As a result, a far wider variety of merchants can offer financial services. You no longer have to be a big retailer like Sears to offer financial services.

“I think it's super interesting that now you have the option to decide whether you borrow or build trust. There are cases where you don't necessarily want a third party like Amex to take your brand recognition—you want to be the one to offer financing. And, that’s possible today thanks to payment gateways and partnerships that weren't there before.” 

An embedded B2B finance solution

Now more than ever, B2B businesses have a golden chance to go beyond just offering credit card options online, all thanks to B2B finance partners. Buyers in various industries are shifting to digital channels and expecting their payment experiences to be seamless. Among the multitude of B2B payment trends, embedded finance stands out as a potential game changer for businesses.

Imagine this: By giving customers the option to pay later with net terms right at the checkout, digitally, and through their preferred payment method, businesses can do more than enhance the customer experience. They can also boost their buyers' cash flow and provide quick access to credit lines. In the meantime, instead of getting caught up in accounts receivable and credit procedures, businesses can offload tasks like managing capital, collections, and risk. This way, they can concentrate on seeking out new avenues for growth.

Here at Balance, we take on the hard work, enabling businesses to offer top-notch payment services to their customers. And with a white-label B2B checkout, our merchants can promote their brand, not just the lending solution, all while reaping the benefits of customer loyalty and the enduring value that comes with seamless and hassle-free B2B payments.

Reach out to our team to learn more about how Balance can help you stay ahead of the embedded finance trend and leverage it for your own ecommerce growth.