3 steps to embed financing into your product or service
What's The TL;DR
Embedded Finance Benefit
s: Offers potential for scaling businesses, increasing revenue, and enhancing customer engagement by integrating financial services into non-financial products or services.
Step 1 - Assess Needs
: Identify target market and analyze product/service to determine which financial features (e.g., lending, payments, insurance) to embed based on customer needs and usage.
Step 2 - Select Platform
: Choose the right embedded finance partner considering their compliance, technical support, and revenue opportunities. Partnerships should be evaluated for their scalability, regulatory compliance, and support services.
Step 3 - Overcome Challenges
: Address scalability, regulatory compliance, data security, and system integration challenges. Strategies include adopting a modular approach, leveraging APIs for easy integration, and selecting partners like Pipe for seamless implementation.
: Utilize modular approaches and APIs for efficient and scalable embedded finance solutions, ensuring compliance and security.
Access to financial services is critical for small businesses. And increasingly, those small businesses are looking for easy-to-access financial tools right inside the platforms they use every day. Products like Square Banking and QuickBooks Capital are raising the customer expectation bar, but it’s not too late to take advantage of this shift.
If you're looking to scale your business, increase revenue streams, and deepen customer engagement, embedded finance could be the solution. In this article, we'll walk you through the steps to embed finance in your product or service in a way that benefits both your business and your customers.
Step 1: Assess your business needs
Before you can embed finance in your product or service, you have to assess your needs. There are a variety of embedded finance options out there, and not all of them will be relevant for your business and your customer base. Here are some things to consider:
Identify your target market
Anyone starting a business needs an understanding of their target market. Fortunately, if you’re considering adding embedded finance to your product or service, you likely already have a well-established customer base and a good understanding of their needs. Now, you just need to step into their shoes.
Embedded finance encompasses everything from lending and revenue advance products, to payment processing, to insurance. The products that will add value for your customer base will depend on whether they’re businesses or individuals and where they are in their financial journey. For example, if your customer base are small businesses, they likely need access to working capital, and an embedded capital product would be a high value-add for them.
Analyze your product or service
Speaking of your customer’s journey, the next step is to figure out where your customers’ needs intersect with your offering. What financial needs do your customers have at the specific point where they’re interacting with your product or service? Analyzing how your customers use your offering will help guide your choice of which financial services to embed.
Returning to our earlier example, if you’re a payment facilitator serving small business owners, what can you do to make your merchants’ lives easier? As they go about their day-to-day operations, concerns about payroll, inventory, and other costs are top of mind. Providing them with access to embedded capital allows them to run their business more efficiently without ever having to leave your platform.
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Determine financial features to embed
Now that you’ve thought about your target market and analyzed how they use your product or service, you can determine which financial features to embed.
It's important to prioritize the financial features that will have the biggest impact on your customers and your business. Consider the cost and feasibility of implementing each feature, as well as the potential ROI.
Finally, don't forget to test and iterate on your financial services offering. The data you collect from your embedded finance customers can allow you to continuously improve and optimize your offering, identifying new opportunities to serve them even more.
Step 2: Choose the right embedded finance platform
Choosing the right embedded finance platform is crucial in ensuring the success of your offering. Financial partners play a vital role in providing the necessary infrastructure and support to help your business grow.
When selecting a financial partner, it's important to consider a range of factors that will impact the success of your partnership. Below are some things to keep in mind as you evaluate potential partners:
Types of financial partners to consider
There are various types of financial institutions to consider when embedding finance in your product or service. These include banks, fintech companies, and other financial service providers. Each type of partner has its own unique strengths and weaknesses.
For example, banks may offer a broader range of financial products and services, while fintech companies will likely be more agile and innovative in their approach and offer more tech and engineering support to help you build out your embedded offer. It's important to evaluate each potential partner to determine which will best meet the needs of your business and your customers.
Evaluate potential partners
Regulatory compliance is one critical element of an embedded partnership. Many financial services require you to jump through regulatory hoops to protect consumers and businesses. This can be a huge lift for you if your partner doesn't take care of regulatory issues on your behalf. It's important to partner with an institution that is fully compliant with all relevant regulations and has a robust compliance program in place. At Pipe, our team handles all the regulatory hurdles for our partners, so they don’t need to allocate any resources to stay fully compliant.
Tech and engineering support are the next thing to consider. An embedded offering allows you to build financial products right into your platform, but a build that goes smoothly and feels natural to your customers takes the right tech team. This is a major advantage for fintech teams, who can typically provide a much more seamless turnkey offer along with more support for customization. For example, while Pipe’s UI is based on hundreds of tests and proven optimizations, our team also supports and enables partners to customize their UI to match their own platform.
Finally, consider your revenue opportunity with a partner, which goes beyond just sharing in revenue. Compare how embedded partners help you with acquiring, onboarding, and supporting your customers. While some offer only a single channel (like email) to help you increase activation for your financing offer, others offer a suite of marketing and promotional services. The more customers you can activate on your embedded offering, the bigger the impact on your customers and your revenue. You’ll also want to take the long view, considering the future roadmap and how an embedded partner can build out new offers with you, as well as scale with you and your customers as you grow.
Establish a strong partnership
Once you've chosen a partner, it's essential to strengthen that partnership. This involves clear communication, regular check-ins to assess performance, and a willingness to work collaboratively to address challenges and opportunities as they arise.
Regular communication is critical to maintaining a strong partnership. Schedule regular check-ins with your partner to discuss performance, identify areas for improvement, and share feedback.
Another key to a strong partnership is a willingness to work collaboratively. Be open to feedback from your partner and be willing to make changes. By working together, you can build a strong and successful partnership that serves your customers and grows your GPV.
Step 3: Overcome common challenges with implementation
While embedded finance offers many benefits, such as increased convenience and accessibility, it also presents several challenges companies need to address.
Scalability and flexibility
Embedded finance has great potential for scalability and flexibility. As long as you choose a partner who can scale with you and look to the future with you, you’ll be able to grow your offering exponentially.
Scalability depends on how much financing your partner is able to provide, and what size of businesses they can serve. As a capital partner, Pipe works with small businesses, all the way up to mid-market, allowing us to scale with your customers as they grow, as well as scale with you as you add more customers.
Embedded finance involves providing financial services which are subject to various regulations and compliance requirements. Companies need to ensure that they are able to comply with an state financing disclosure laws which may apply to capital products, along with any other state and federal laws and regulations, such as anti-money laundering (AML), OFAC, and know-your-customer (KYC) regulations. Failure to comply with these regulations can result in significant penalties and reputational damage.
Staying current with regulatory changes requires ongoing monitoring and communication with regulatory authorities and industry associations. Your financing partner can help you with this, as they’ve got their finger on the pulse of changes in the industry. Regulatory disclosures and AML/OFAC checks are built into Pipe’s embedded capital, handling KYC and other processes automatically, so there’s no added burden on your team and no unnecessary friction for your customers.
Data security and privacy
Another challenge in implementing embedded finance is ensuring the security and privacy of customer data. Financial information is highly sensitive and valuable, making it a prime target for cyberattacks and other forms of fraud. Companies need to ensure that their security measures are robust and comply with applicable data security and privacy laws, such as the Graham Leach Bliley Act and various state privacy regulations.
Companies also need to communicate clearly with their customers about how their data is being used and protected. This requires transparency and trust-building measures, such as clear privacy policies and secure data storage practices.
Integration with existing systems
One of the biggest challenges in implementing embedded finance is integrating it with existing systems. Financial systems are often complex and highly regulated, making it difficult to integrate them with non-financial systems seamlessly. Companies need to ensure that their IT infrastructure can handle the increased complexity and any potential security risks associated with embedded finance. Let’s take a closer look at overcoming implementation challenges.
Key strategies for a frictionless implementation
Embedded finance is a rapidly growing sector, and companies are increasingly looking to offer financial products and services to their customers. However, implementing embedded finance can be challenging, with complex technical requirements, regulatory hurdles, and security concerns. Here are some strategies you can adopt to overcome these challenges:
Adopting a modular approach
One strategy for overcoming implementation challenges is to adopt a modular approach to embedded finance. This involves breaking down the implementation into smaller, more manageable components that can be developed and tested independently. By doing this, companies can reduce the complexity of the implementation and allow for greater flexibility and scalability.
For example, a company could start by offering a single financial product, such as a revenue advance, then gradually add more products and services as the implementation progresses. A modular approach also allows companies to iterate on each component independently, making it easier to address issues and make improvements. This approach helps companies identify needs and areas of potential growth so they can expand their offerings wisely.
Pipe uses an iFrame-style solution called Accelerate. It plugs in easily, offering a turnkey revenue advance product with no need to build anything. This allows companies to offer capital to their merchants right away, taking advantage of a fully tested user experience, and gathering data on what those merchants may want next.
Leveraging APIs is another strategy for overcoming implementation challenges. They enable companies to build and deploy embedded finance offerings quickly and efficiently while ensuring scalability and flexibility. By using APIs, companies can avoid the need to build complex, monolithic systems from scratch.
For example, a company could use an API to access a third-party payment processor, rather than building its own payment processing system. This would allow the company to focus on its core competencies, while still offering a high-quality capital product or service to its customers.
Fintech companies are creating solutions that bypass these layers of complexity. At Pipe, we use a simple API to embed an offering without complex integrations and without deploying software on your end. This not only eliminates many potential integration issues but also allows you to go to market with a capital offering in just a couple of days.
Example: Payfac Pro's implementation
Let's consider PayFac Pro, a [fictitious] payment facilitator looking to embed a capital offering into its platform to enhance its services for small business customers. They already have a great reputation and a well-established customer base made up mostly of small and medium-sized businesses in online retail. Recognizing the need for these businesses to have easy access to working capital, PayFac Pro decided to embed a financial service into its platform.
PayFac Pro begins by assessing the specific needs of its customer base. The company understands that these businesses often face cash flow challenges due to the time lag between purchasing inventory and selling it. Seasonality is also an issue for some. To address this, they consider embedding a capital offering product like Pipe, which would provide immediate funds to businesses based on their projected future sales.
Next, they evaluate potential financial partners to provide this embedded capital offering. The company seeks a partner that has scaling capabilities and robust regulatory compliance. PayFac Pro also prioritizes partners offering product, design, and engineering support to ensure seamless integration of the financial service into its existing platform.
After selecting the right partner, PayFac Pro focuses on integrating the capital offering into its platform. This integration is designed to be user-friendly, enabling businesses to apply for and manage their financing directly within PayFac Pro’s existing interface. The process is made efficient and secure, with minimal disruption to the daily operations of the businesses using the platform.
By embedding a capital offering like Pipe, PayFac Pro enhances its value proposition to its customers and opens up a new revenue stream. This move also positions PayFac Pro as a more comprehensive service provider, deepening customer engagement and loyalty. The embedded capital feature empowers small businesses with quicker access to funds, aiding their growth and stability, and in turn, contributes to PayFac Pro’s growth as a preferred payment facilitator in the market.
Embedded finance is a powerful tool to help you serve your customers and grow your own business. It can increase usage on your platform, improve brand loyalty, and help your b2b customers grow their own businesses. By following these three steps and leveraging a few key strategies, you can make the embedded financing process quick and painless, so you can start reaping the benefits right away.
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