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Embedded finance, an evolving payment model that creates a more direct route between companies and those they do business with, is increasing in appeal to small and not-so-small businesses for a number of reasons. Priority’s CEO Thomas Priore maintains that as more entrepreneurs embrace this flexible alternative payment model that brings the financial services businesses require from a bank with the unified commerce solutions needed to stay competitive into one platform, the landscape of the small business ecosystem will undergo a powerful transformation. And, it’s already showing tremendous potential for innovation, growth, and enhanced efficiency.
Embedded Finance at a Glance
McKinsey & Company, a top global management consulting firm, explains that embedded finance — “the placing of a financial product in a nonfinancial customer experience, journey, or platform” — isn’t a new practice or concept. “For decades, nonbanks have offered financial services via private-label credit cards at retail chains, supermarkets, and airlines,” they report. However, while McKinsey noted such arrangements “operate as a channel for the banks behind [companies] to reach end customers,” banks are removed from the company/user experience equation.
By putting the traditional middleman, i.e., banks, at the end of the process, embedded finance has the power to streamline the payment process. This, in turn, accelerates cash flow, provides improved access to capital, and results in substantial cost reductions that can help keep small businesses afloat. Embedded Finance is not only a viable model during the uncertain economic times we’re currently experiencing but as a profitable and even preferred model for payments transactions from both suppliers and customers.
“These tools are making engaging with a broader customer set more cost-effective. The more businesses can automate their processes, the easier it is for them to offer services to customers.
Embedded Finance’s Vital Role in Small-Business Sustainability
Thomas Priore believes, for the most part, small businesses will rally in the unsettled months ahead. “…The first thing I would say about small businesses, just generally, they’re scrappy, right? So, there’s a reason why small business… is over 50% of the U.S. GDP. They’re the strength of our economy, if you consider it from that standpoint, so they’re resilient,” Priore said in a recent interview.
Perhaps one of the few silver linings to come out of the pandemic-induced supply chain crisis was that it forced business owners to think outside the box for banking, payroll, and accounts payable solutions. Since the ability to pivot to meet financial challenges will remain a critical factor for the future success of small businesses, its likely embedded payment options may prove to be life-savers for SMBs stymied by the time-consuming, cumbersome red tape associated with traditional payment formats.
“It’s going to become harder to operate a small business,” Thomas Priore warned. “The economy consumers are spending less. It’s going to eventually hit, given the massive increase in consumer debt that is out there… Businesses need to figure out other sources of efficiency and profitability, so they’re moving towards digitizing, payables, etcetera, etcetera.”
How Embedded Finance Will Impact the Emerging Business Landscape
Even as the world economy began to level out, Thomas Priore observed some truly groundbreaking pandemic-fueled financial solutions, and post-pandemic, rather than reverting to old school methodology, these solutions are being adopted as the new normal. “Pandemic-era innovation like mobile payments, digital invoicing and automated payable didn’t get pushed aside as some had predicted, but rather continued to dominate a growth trend that appears to be foundational to the evolution of modern commerce,” Priore said his latest interview.
Priore cited research conducted by McKinsey and Bain (another top consulting firm) that indicates the embedded finance industry is growing exponentially. Bain estimated total U.S. revenue at $22 billion in 2021 and predicted the figure would hit $51 billion by 2026. During that same timeframe, the transaction value of embedded finance is expected to expand from $2.6 trillion to $7 trillion (more than 10% of total U.S. transaction value), while estimates for the B2B payment market are forecast to reach an estimated $33.3 trillion.
“Although leaders are already emerging, the embedded-finance market still has ample white space for new entrants,” stated McKinsey. “We expect it to double in size over the next three to five years. The long-term winners are likely to be those that are already building the table stakes technology, expertise, and relationships needed for a future leadership position,” said McKinsey.
On Priority’s focus for 2023, Priore says,“Our focus for 2023 is to not only support this trend, but lead it, providing a payment platform that combines features of payments and banking providing demand- and supply-side payment rails, but also offers embedded features of modern banking like escrow funds but faster and with less friction than a bank.”
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