“2022 is going to be the year of embedded finance. Every company is going to be a fintech company, and this will be driven by partnerships.” Sabih Ali, MarketFinance
With Buy Now Pay Later (BNPL) increasingly embedded in the consumer shopping journey it’s clear that for consumers traditional banks no longer hold the reins when it comes to granting loans. As proof of this, UK consumers accessed £7bn in interest-free loans from BNPL loans in 2021 alone, and 2020’s BNPL transactions were up around 60% from the year before.
But what about the UK’s SMEs, which account for 98% of the UK economy? Many are still being held back by traditional banks when applying for or trying to access a loan. Applications involve reams of paperwork, with banks taking up to eight weeks to approve (or reject) the loan request. Given that cash flow is the lifeblood of SMEs, the wait has a crippling effect on the ability for them to run their business. It’s this stagnation that has given rise to a new breed of Lendtechs, offering solutions that give SMEs access to loans that are almost as seamless as the experience enjoyed by the individual taking out a BNPL loan when making a purchase on Amazon or IKEA.
A refresher on embedded finance
Embedded finance enables any company that wants platform payments, lending capabilities or other specialized financial services to natively embed pre-built solutions from financial partners via an API integration.This means financial services can be integrated into almost any industry, including a growing number of non-financial websites and apps that operate globally. They are all household names: Etsy, Amazon, Shopify, and Sidekick to name just a few.
A new way of lending with embedded finance
In this instalment of our embedded finance series, we’re highlighting how embedded finance is transforming the way SMEs access loans. We explore recent trends in Lendtech, and how the sector is helping SMEs, with MarketFinance’s Head of Strategic Partnerships Development, Sabih Ali.
Anil Stocker and Ilya Kondrashov founded Fintech business lender MarketFinance (originally called MarketInvoice) in 2011 to deliver invoice finance on a digital platform to help entrepreneurs grow their business, and were the first Fintech to offer SMEs both invoice financing and business loans beside each other. Since 2011, MarketFinance has funded invoices and loans worth over £3 billion, and are an approved partner of the UK Government’s Recovery Loan Scheme.
As Head of Strategic Partnerships Development at MarketFinance, and as a former software consultant, Sabih Ali has first-hand knowledge of the power relationships and best-in-breed technology have in helping ensure businesses are efficiently served in the world of lending.
MarketFinance, launched to serve the underserved
After the 2008 recession, the risk appetite of traditional lenders and banks fell off a cliff. This meant that SMEs, the engine of the UK economy, were without ready access to lending or funding, despite the Bank of England giving banks access to low-interest money to lend to SMEs. Even with these incentives, the stock of bank lending in November 2011 declined 6.1% compared to 2010. In 2011, bank lending to smaller SMEs with less than £1m turnover showed even more of a decline. It was this inequality that motivated MarketFinance’s founders to launch their Lendtech business, driven from the start to focus on the underserved SMEs who found it hard to access the working capital they needed to drive growth. For context, in 2014 50% of the UK’s SMEs applying for a loan were rejected by traditional banks for not reaching their required criteria.
For SMEs, cash flow is a constant concern. According to Gov.uk, in 2020 25% of UK businesses reported late payments as a threat to their survival. This is the highest level in Europe. SMEs were hit hard as a result of COVID-19, with 42% applying for a bank loan in 2020.
Says Sabih, “SMEs are the backbone of the UK, and are vital to the success of this country’s economy, yet 82% of businesses in the UK fail due to cash flow issues. The time from requesting a loan to being approved takes too long with a traditional bank. Our digital platform helps SMEs quickly access funding and have working capital. But what’s key is we provide cash flow at the point of need to an SME, so they can just get on with running their business. We keep it as seamless and as easy as possible for them so they can focus on serving their customers. This is the essence of embedded finance.”
Removing the friction for SMEs
Banks can take months to approve, or reject, loan applications. Time is the biggest source of friction for SMEs who can go under while waiting for an outcome. A report in early 2021 by the Centre for Economic Performance predicted that 15% of UK SMEs were in danger of closure as access to funds and loans dried up post-COVID.
Offering loans since 2011, MarketFinance cuts that time to approval from months to hours. They do this by using data they’ve accrued over offering financing for almost ten years to form a more accurate and nuanced picture of the SME. This helps them make smart, fair, accurate, and quick decisions for their customers – and provide them with solutions and products they didn’t necessarily know were available. Says Sabih, “When people want to free up cash flow, they need it immediately, not in six or eight weeks’ time. We are more agile than traditional lenders, and so can offer them the right financial product for them in hours. We do this by removing as many steps as possible in the decision-making process.”
MarketFinance is now going one step further, and is actively looking to embed lending within the day-to-day cycle of running a business, to offer lending options at the point of need. Sabih explains, “The likes of Klarna have paved the way here: we want to bring that consumer-like experience to SMEs. So when a business owner is looking into their cash flow on their banking app, a MarketFinance button appears offering bespoke, relevant ways to finance any gaps in cash flow. Or when purchasing items from a supplier, an embedded BNPL finance option is offered, just like it is when shopping on Amazon.”
To achieve their vision of embedded lending solutions, MarketFinance is developing partnerships with banks, fellow Fintechs, and accountancy software platforms. Says Sabih, “The future of Fintech and embedded finance is going to be built around how partnerships between all our companies work; enabling each other to grow services and market share for all of us, and ultimately offer a better service to B2Bs. This will be more akin to what we are already used to in the consumer world.”
60% of industry experts ranked ‘improving customer experience’ and ‘reducing time spent engaging with financial products and services’ amongst the top three benefits of embedded finance in a recent piece of research conducted by Savanta on behalf of Currencycloud.
When the sleeping giants awake
Sabih notes that when banks really do wake up and smell the coffee and fully embrace embedded finance, they are naturally going to start with banking, because that’s their field of expertise. He explains we are increasingly going to see traditional lenders start digitizing the services they already provide. If there are gaps in this area, he predicts that in order to save money and time, banks will look to other partners rather than create it themselves. Says Sabih, “For banks, embedded finance is going to mean embedding other Fintechs to better serve their own customers. This trend is being driven by the challenger banks who have proved that there’s a consumer appetite for their agile solutions.”
Sabih Ali quote: “I see established players over the next three years digitizing more of their existing products and services: making apps and putting them on to mobile, and gradually thinking ‘how do we plug it in with other partners?’“
A consumer-eye view of embedded finance
Business owners are really just consumers who own a business. Monoliths like PayPal and Amazon know this and are offering loans to SMEs embedded at point of purchase. PayPal Working Capital has already issued over £400m in loans to UK-based SMEs**. It’s embedded lending in action: for example, PayPal offers business owners loans when making stock purchases on eBay, and who pay through PayPal. They are able to predict the merchant’s ability to repay the loan through data accessed over the course of their spending history on eBay.
What’s trending in lending
You don’t have to look very hard to see how the trends are shaping up for embedded lending. Consumers are increasingly expecting an embedded BNPL option in payment, and Stripe and Klarna’s October 2021 partnership offering BNPL to online businesses highlights that embedded lending shows no sign of slowing down.
Stephen Lemon, Co-founder and VP of Strategic Partnerships at Currencycloud states, “BNPL is red-hot at the moment. Card schemes Visa and Mastercard are acquiring people and investing in Fintechs because they can see writ large that it’s not just about card payments now.”
Sabih adds,“In B2B you’ll see BNPL options happening more and more from a lending point of view, where a buyer may want to defer and spread payments out over time, spreading costs out as projects evolve.”
Alternative data: the future lending alternative for SMEs
Sabih sees using alternative data as a golden opportunity for lenders in the B2B space to make better, holistic decisions for their customers, and predicts that it is one of the main trends that will take off in the next one to three years. Because they hadn’t been in business long enough, by December 2019, over 3.5 million* SMEs were virtually invisible. They lacked the data trail used by traditional banks to assess their credit score. Sabih concurs, predicting this will be the main trend in lending – and it will be key in the B2B space.
Alternative data is already widely used in the online consumer space – for example when a site recommends credit cards to you, these are based on your web activity not necessarily your credit score. Sabih points out that alternative data is already something we see in the B2B Fintech lending space, and that it will evolve quickly and be a point of differentiation for Fintechs. He explains, “If you’ve just set up as an SME, how do you prove you’re credit worthy? This is the embedded angle. If a Lendtech is embedded in social media, or into accountancy software, and then can analyze these large alternative data sets, it means even though an SME hasn’t got a large trading history, the Lendtech can see their ecommerce activity has been growing, so they can then give them a larger loan than a traditional bank could for a start-up.”
Revolution or Evolution?
MarketFinance’s Sabih is firmly persuaded that embedded lending is an evolution not a revolution. “Think of PayPal ages ago, Klarna now, banking apps like Starling – the signs are clearly that we are heading towards embedded finance, embedded lending. It’s slowly disrupting traditional industries, it’s disrupting the way we work, but that is evolution. In three to five years, this will all be normal for us.”
B2B applications are likely to grow beyond ecommerce, with solutions such as lending and insurance increasingly likely to be embedded into other business-facing products.
“MarketFinance has advanced over £3.5bn to SMES in the last ten years. We look forward to that figure growing rapidly in the next ten.” Sabih Ali
In 2014, HM Treasury announced plans to match SMEs whose loan applications were rejected by traditional banks by working with challenger banks and alternative finance options.
*AmplyFi Insights July 2021 **AmplyFi Insights July 2021
Before joining MarketFinance as Head of Strategic Partnerships Development at Fintech Sabih Ali had 11 years’ experience working for software start-ups and SaaS companies, where he saw cloud-based services go from being a remote possibility in 2012 to a fully evolved market by 2017. Seeing that it was partnerships between cloud service providers and software companies that drove this, Ali joined Market Finance to develop the strategic partnerships between these entities.
Continue to explore Currencycloud’s series of interviews on the real-world possibilities of embedded finance
- Embedded finance: Cross-border transactions with Currencycloud’s Co-founder and Chief Evangelist, Richard Arundel, and Product Director Piers Marais
- Transforming global business with embedded finance: The HUBUC story with Co-founders Hasan Nawaz and Ignacio Javierre
- Embedded Lending in Action: The Potential of Buy-Now, Pay-Later with Vice President of Marketing at Mambu, Laurel Wolfe
- What embedded finance means for banks with Alex Reddish, Chief Commercial Officer of Tribe Payments