Embedded finance must learn the lessons of unbundling and put small business first

The past decade has seen a radical transformation of financial services. Spurred on by record venture capital funding — with more than US$134 billion ($200 billion) invested in fintech startups globally in 2021 alone according to Crunchbase — and with fintech collaboration with banks, this innovation has changed how we bank and transact. 

While the last decade was all about the “great unbundling” — taking individual features of traditional finance and rebuilding them from the ground up as individual companies — more recently we have seen a number of companies pursue “embedded finance”. These companies are taking many of those same financial services, and embedding them directly into a non-financial workflow.

Like Apple adding buy now pay later into the iPhone, Shopify adding business loans directly into its e-commerce platform, or Xero adding a ‘pay now’ button to invoices with Stripe and GoCardless to deliver online payment functionality that seamlessly integrates with our platform. 

This trend is driven by a simple model: consumers and businesses alike want access to fast, simple and accessible financial services. Yet while these embedded finance offerings are convenient and often provide a more beautiful user experience, they can also lead to a major fragmentation of services that can too often result in customer confusion or even delinquencies. 

Having worked in financial services for some time and closely observed industry trends, I have personally seen the impact this fragmentation can have on the customer experience. What starts as an easy way to pay one company can become a series of fragmented payment options in seeking to pay several. 

Individuals and businesses can inadvertently sign up for multiple buy now, pay later options, cards and accounts — some of which can be forgotten and left unpaid. 

Above all, companies offering embedded finance services need to ensure they learn the lessons of unbundling, and put the customer experience first. 

So what can we, as an industry, do to ensure that happens? 

Build connections, not islands, of customer data 

A core benefit of embedded finance is the fact that it’s already part of existing business workflows instead of a separate and distinct experience. That means rather than going to a bank or foreign exchange website to exchange money into the local currency, businesses can do that within their existing corporate travel platform, or access invoice financing loans inside their existing inventory app. 

By delivering financial services inside the existing platforms and workflows they use day-to-day, those services not only become simpler to access — they become a more seamless part of doing business. 

However, these services are only truly seamless when they don’t require businesses to do a lot of heavy lifting. Traditional financial services have historically relied on manually entering new or duplicate data for loan or credit enquiries; a process that increased the time it took to provide and audit customer enquiries, and approve or deny the loan. 

Instead, embedding finance services must also mean these services tie into existing data sources to gather the information needed. Open banking standards like those rolling out in Australia, as well as open APIs on small business platforms, intend to make it possible to gather rich and reliable information based on a business’ health and cash flow, making accurate assessments of small business capital requirements possible without having to go through lengthy and stressful application attempts. 

Creating islands of data that don’t connect with the existing small business ecosystem, or ancillary sources, only makes the experience more difficult to navigate for all involved. 

Ensure businesses can see their finances easily 

The unbundling of financial services over the past decade has led to many customer experiences improving thanks to better mobile apps with intuitive user interfaces. However, what started as one or two apps has quickly become a dozen or more, each providing an individual service with a sliver of information on a business or person’s finances. 

Worse yet, this has led to an “out of sight, out of mind” mentality for some. The more financial services you have, the more likely you might forget to pay that fee or loan debt for the app you used just once. 

The industry must bear these lessons in mind with embedded finance. While the individual experiences could be seamless, I believe it must first be easy for a small business owner to get a quick view of their finances in order to achieve the best outcome. 

Some companies are looking to achieve this by becoming a “super app” — an app that encapsulates several different experiences in one. Others, like neobank 86400 (now part of ubank) have created connections to other apps through APIs and open banking standards to provide a single view of an individual’s bank accounts, mortgages, super funds and more. 

The same can be done for small businesses. Through open platforms, businesses can connect bank feeds from their financial institution to compatible accounting software for a true view of their cash flow. This allows businesses to look at their finances holistically, improving the customer experience. 

The next frontier of finance is a promising one with the potential to help small businesses access a broader range of financial services more easily in the tools and platforms they already use. The benefits — easier access to funding and seamless business workflows — are profound, and will only be truly successful if, as an industry, customers are the first and primary focus. 

Leigh O’Neill is the executive general manager of global financial services at Xero.