embedded finance
small businesses
digital credit
digital lending

How embedded finance brings defensibility to business

Vasavi Sinha   /    Content Lead    /    2022-02-10


(This is a follow-up blog in our series on embedded finance. Read the previous blog here.)

The winner who takes it all is usually the one to ensure everyone wins. Let’s break this down. 

For an online B2B marketplace, the question to ask should be: ‘how can I enable businesses to grow?’, and not exactly: ‘how to rake in more profits?’. That’s how untapped market opportunities become clearer.

Case in point, an MSME aggregator servicing small businesses with online inventory. The aggregator would typically struggle with the cold start problem, i.e., getting businesses on its platform to transact. The monetization, at this point, comes from orders placed on its platform. But if businesses are unable to transact due to sectoral issues, such as liquidity crunch or supply chain, the monetization model fails. 

Take another example of a bank. With idle reserves of low-cost capital but information deficiency, the bank is unable to extend credit to new-to-bank or new-to-credit customers, or to customize an already commoditized product (a loan). This hampers its growth and leads to protracted periods of muted profitability. 

This is where networks come into play. More specifically, complementary networks. If we consider the bank and the MSME aggregator as separate networks operating in isolation, then their combined value would increase exponentially as compared to either ones. The bank could provide credit and the MSME aggregator provides data, leading to in-context credit to small businesses, the largest cohort of credit-invisible entities in India.

The coming together of two networks (aggregators and credit providers) will lead to a spurt in transactions. The multiplier effect will trickle down to both the aggregator and the bank - creating economies of scale, a more defensible monetization model, higher customization to beat a saturated market and last, low barriers to entry and exit.

We discuss how embedded finance (the coming together of a non-banking entity and a bank) can create a beachhead for players across the network.

Network pay-offs with embedded finance

Here are five ways embedded finance can amplify the network effects while bringing incremental value adds to complementary networks: 

Build demand-side economies of scale

The way to achieve scale is usually about building supply-side economies. But this model fails to sustain in the long run if the demand is not materialized into transactions. For platform aggregators, cracking supply and logistics is one part of the problem, which also replicates in case of banks with their low-cost capital. Embedded finance triggers demand-side economies of scale since it incentivizes transactions with seamlessness, ease and speed of credit, offered at the point of sale. This helps get past the chicken-and-egg problem, or the cold start issue, by getting businesses to transact - leading to higher order volumes, and values. The monetization lever shifts to the transaction volume, and not just the value of the standalone platform or bank.

Bring back focus on engagement and not just growth

A direct consequence of solving the cold start problem will be higher engagement. Businesses that were inert on the platform earlier, would start placing orders, even repeatedly. The focus then shifts from customer acquisition to customer activation by addressing liquidity hurdles, inline with customer expectations. The seamless customer experience, delivered by embedded credit into customer journeys, makes the platform the go-to place for other businesses. Growth follows as an outcome of higher engagement, riding on customer advocacy. A much better way to source new customers than advertisements.

Lower barriers to entry and exit

The coming together of two complementary networks lowers barriers of entry and exit. Small businesses that were earlier underserved in the formal lending context can now avail credit on conducive terms. Similarly, these small businesses could have switched to a competing aggregator if terms were slightly different (assuming financing was never available on either of the aggregator platforms). However, with embedded finance, where liquidity issues and credit requirements are bridged seamlessly on the platform, the reasons to exit become inconsequential.

Create parallel data networks and alternative infrastructure

Embedded finance will enable credit distribution to credit-starved sectors due to limited data available with credit bureaus. By now availing small-ticket, short-term credit through the aggregator platform, these small businesses will create a data footprint that can be sourced to approve future loans. This can trigger an alternative data network with time, which can be overlaid with traditional credit assessment mechanisms. Working with fintechs in the space, a supporting infrastructure to underwrite new-to-bank or new-to-credit customers will come into being, radically transforming the way credit is applied for, underwritten, disbursed and managed.

Foster deep vertical integration

Embedded finance can lead to vertical consolidation, i.e., helping the aggregator onboard a supplier majority in a given industry owing to the demand pull. This will trigger deeper vertical integration, better customization, and a more focused product portfolio. The aggregator can also subsume other networks operating in a similar space and multiply the network effects substantially to both supply and demand side.

Double down on network effects with FinBox Embedded Credit infrastructure

FinBox is a leading provider of digital credit infrastructure, helping MSME aggregators roll out instant credit to their customers. Our lender network caters to varying risk buckets, ensuring higher approval rates and faster turnaround times.

FinBox brings:

  • In-context application process wherein the customer completes the one-time loan application within the application.

  • Payment at checkout, powered by the FinBox software development kit, that allows the customer to avail of various credit options, such as buy-now-pay-later, overdraft facility or credit line.

  • Instant disbursals empowering the customer to make the purchase with real-time fund transfer to the platform.

 Start your embedded credit journey with us today!