Embedded Finance: a Multi-Trillion Dollar Market Opportunity
Mattias Nordlof is the Director of Product within Tradeshift’s SMB Solutions business unit. Mattias joined Tradeshift in 2021, having worked at many of the world’s top fintech businesses, developing working capital solutions. Today, he is an integral member of the Tradeshift team, who is developing and scaling embedded finance services on the Tradeshift platform.
We spent some time with Mattias to understand more about the history of embedded finance, the benefits it brings to businesses of all sizes, and how embedded finance fits within Tradeshift’s vision to bring economic opportunity to all.
Watch the interview with Mattias and read on for further insights we took from our conversation.
Many people will be familiar with the term embedded finance. For those that aren’t, what’s your layman’s definition? What is embedded finance?
At its simplest, the definition of embedded finance is about allowing non-financial companies to introduce financial services into solutions that they already provide to their customers. People have talked about embedded finance for quite some time, but it really took off when innovative financial services companies started to unlock value by connecting previously internal services through open APIs.
Shopify, for example, is best known for helping small companies set up an online e-commerce presence. They also offer payment processing and access to capital (lending) to their users, and these services are all powered by third-party financial services companies.
Looking specifically at Tradeshift, many of the world’s biggest enterprises use our global network to manage their trading relationships. In any given month, more than 3 million business transactions cross this network in the form of purchase orders and invoices. This gives us a unique, two-sided view of every transaction between a buyer and a seller. It’s a natural extension to take the next step and start to introduce insight and access to capital based on the strength of the data we hold.
By working with established and trusted financial services providers, we have an enormous opportunity to bring value-added embedded financial services directly to every business on the network.
Can you help us to understand the kind of issues embedded finance can help to address?
In today’s uncertain business environment, many enterprises are only one bad month from going out of business. That’s especially true of SMEs. According to a report by JP Morgan, small businesses typically keep a cash buffer of around 27 days. So, if something goes wrong that incurs an unexpected cost, or a customer decides to extend payment terms, it can quickly lead to financial trouble.
Meanwhile, access to capital remains very difficult, with 40% or more of business loan applications being rejected. Even the process of applying for a loan can be incredibly time-consuming and laborious, requiring a lot of supporting documentation and taking up to a month from application through to decision. Now, imagine I’m a baker, and my oven breaks down. I can’t wait for a month to maybe have my loan approved. I need that oven fixed tomorrow.
The secret to embedded finance lies in good data, which helps provide a very detailed and accurate picture of that business and its creditworthiness. Plugging into that data massively accelerates the process of applying for and accessing working capital. It also means these services can be made available to businesses that may otherwise have found themselves locked out through no fault of their own.
Better data also means we can be a lot more proactive in offering services to businesses that are likely to face problems. For example, we might see that a customer is regularly late on paying their invoices at a time where your balance of expenses and receivables suggests you could struggle to make payroll. In that scenario, we could offer to unlock the balance from your outstanding receivables immediately so that you can pay your employees on time.
Given the scale of the opportunity, why hasn’t the embedded finance revolution already taken place in B2B?
The way businesses buy and pay for goods is more complex than in the consumer world, so any innovation in B2B has to factor in this complexity. Added to that, the business world has been a lot slower to move away from paper.
Data is the lifeblood of embedded finance. The B2B world is still a long way from being fully digital, but Covid has definitely accelerated that shift.
Why should we be excited about the future in embedded finance?
The technology and solutions exist now to bring this type of service to market much quicker and at a much lower cost than ever before. I see a huge acceleration in embedded finance taking place over the next 18 months, driven not just by the capability itself but by the overwhelming need for these services.
