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Business-to-business software as a service (B2B SaaS) is expected to account for over 80% of the software market by the end of this decade. If that tells us anything, it is this - everything businesses need to operate will become a utility (something like a lego block). Be it people management, customer relationship or accounting and finance, if it doesn’t fall under the purview of the core business, it is likely to be subscribed to. The SaaS model also hints at the disintermediation of central authorities - such as a human resources department or accounting function - repurposing these as auxiliary entities embedded in a business model.
In this context, business finance also becomes embedded, where SaaS providers enable business clients with financing options, without explicitly involving a central authority (read a bank). In fact, by the time SaaS takes over the software market, embedded finance will have generated over $7 trillion in revenue, fairly surpassing today’s valuation of top 30 banks.
One of the most prevalent embedded finance use cases - embedded lending - can help SaaS providers uniquely and more intimately mine client accounts, unlocking alternative revenue streams and significantly boosting transaction values.
But embedding lending on their platforms will need senior leadership buy-in that calls for a compelling business use case.
Offering financial services requires a license and constant interfacing with regulators. Since they cannot be the ones financing loans, SaaS players could become distribution channels for licensed entities. There are several hoops to jump through here, such as partnering with a lender for capital, onboarding a technology stack that analyzes available client data to pre-qualify clients or even ensuring clients get the best deal from the lender.
Most importantly, a SaaS business with 80,000-1,00,000 customers and in operation for at least six months is best suited for embedding loans on its platform. This will ideally help the SaaS platform accrete enough data (financial, behavioral) to underwrite clients accurately and make lenders confident of its client base. In the end, it’s all about economies of scale, since a platform could make as much as 3% on the total amount loaned through it. It would be prudent to assess the customer base and their unique financial needs.
It’s work, and will require investment in terms of resources and time. Here’s a checklist of five things a B2B SaaS player needs to assess before jumping on the embedded loans bandwagon.
Five-point checklist to establish a business case for embedded loans
We outline five questions that SaaS players need to answer to vet the business use case for embedded loans:
Why aren’t businesses transacting?: Helping clients conduct business by digitizing integral operations is one part of the story. Enabling them to transact is entirely another. This is the cold start problem, where SaaS players are able to enroll new clients on their platforms, but they remain dormant accounts. If the majority of clients fall under this bracket, a SaaS provider could help alleviate client inertia by offering loans, embedded right into the platform, that address liquidity concerns and spur transactions.
What hinders subscription to premium plans?: The SaaS model works on premium plans where businesses get more features and richer experience. Premium plans play an important role in the business viability of a SaaS model - balancing customer acquisition costs with customer lifetime value. The model works by offering a standardized set of features to all business users or even offering them the entire suite of features for a time period, and then slowly influencing them to pay for better features or continued access. Most often, SaaS players see a tapering in adoption of premium plans as early adopters move fast, and the late adopters need more incentives to make the shift (see figure). Embedded loans is one way to address this last-mile conversion gap.
Take for example, Shopify - a leading online storefront provider for merchants - has a full-grown embedded finance stack offering working capital loans (Shopify Capital), embedded payments (Shop Pay), microloans (Shop Pay Installments powered by Affirm). These finance offerings were built in over a period of four years, accruing a 69% jump in revenues in 2020, starting from 45% in 2015.
How to give the core feature a shot in the arm?: For SaaS providers offering accounting and finance solutions, such as supply chain finance or payroll automation, the core offering can be augmented with embedded loans. For instance, the SaaS platform for invoicing can embed loans into the customer journey and assure the likelihood of more transactions. Similarly for payrolls, the SaaS provider can offer advances on salaries, embedded right into the platform for employees, enhancing customer experience and stickiness.
Who’s getting the capital?: Since they cannot disburse funds on their own, SaaS providers need to partner with licensed lenders. Decisioning becomes crucial in the overall customer experience and data will play a greater role in accurately assessing the clients’ creditworthiness. This will directly influence repayments, and the SaaS provider needs to balance collections with customer experience - ensuring the clients are not hounded and the lender is able to collect the dues.
Who’s underwriting?: There’s a technology stack at play here that needs to plug seamlessly with the existing platform/solution. A SaaS player will need to identify a fintech partner to provide the underwriting infrastructure that communicates seamlessly with the SaaS player’s database and the front-end to embed intuitively into the customer journey. Data security and privacy protocols must be built-in, explicitly adhering to user consent and regulatory guidelines around data storage, processing and usage.
Get the wheels rolling
As cloud-native businesses, B2B SaaS providers understand the intricacies of introducing a new feature in an existing product. The best way is to release the innovation to a small cohort of loyal customers and test it for market relevance. Same holds true for embedded loans, where SaaS players can offer loans to a sample of their business customers and analyze the appetite for it. It’s easier to scale up or down at this stage when the stakes are not too high. FinBox - an embedded finance leader with a full-stack lending platform - can help SaaS providers kickstart their embedded loans journey. Our API-first approach to innovation and a cloud-native architecture ensures easy integration, maintenance and updation of the technology suite. We also bring on board long-standing partnerships with leading industry lenders to address bespoke capital needs.
Our credit intelligence and risk assessment suite is backed by continuously-learning artificial intelligence models, trained on alternate data and 5,000 unique parameters that make it India’s most comprehensive credit assessment engine.
With us, six lines of code is all it takes to embed lending! Click here for more.