How Embedded Finance enables retail-tech platforms to grow their revenue by 5x

Devashish Mulye   /    Product Manager    /    2021-06-25

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Retail-tech platforms catering MSMEs can leverage Embedded Finance to unlock alternate sources of revenue and monetize their customer base. They can leverage a revenue-share partnership with an Embedded Finance platform to offer tailored credit to  their customers.

How Embedded Credit augments your revenue

Embedded Finance enables the provision of flexible, tailored, and in-context credit. Earlier, industries worked in silos. So in order to access, say a car loan, or automotive insurance, the user would have to sign up and apply on an unfamiliar app, making for poor user experience. With embedded credit, the monetization feature, in this case loans or insurance, is embedded into the platform and at the point of demand creation. This makes for a better user experience and removes the need for digital discovery on part of the user

Unlocks an alternate source of revenue

Embedded Finance enables platforms to offer credit products at the point of demand creation. Digital platforms can make a commission from every loan disbursed on their platform. These revenue-share partnerships introduce a ‘usage-based revenue’, which takes comparatively less time to ramp up as compared to subscription-based revenue. They can help platforms grow their per user revenue by 5X. For example, Shopify Capital enables business loans for merchants on the E-Commerce platform. Instead of charging an interest rate, Shopify requires merchants to pay a fixed cost to obtain a loan. When it comes to repayment, Shopify simply subtracts the money from the merchant’s sales.

Captures market share faster 

Supplementing your subscription with Embedded Credit drives an additional stream of usage-based revenue that drives down the cost of your main offering. Cheaper subscription rates result in more customers, who in turn take more loans.

Increases Total Addressable Market by 10x

Supplementing the enterprise’s subscription-based offering with a usage-based credit product powered by Embedded Finance could increase its TAM by 10x, considering that merchants are always in need of financing solutions.

Creates a flywheel that boosts subscription revenue 

Embedding credit to supplement your core product creates a virtuous cycle - merchants avail loans on your platforms, and use it to grow their business.  As they grow, they are more likely to purchase your subscription, digitize their data, improve business further, and be eligible for larger loans.

Creates a moat

Offering credit that is intertwined with the specific use cases of the business’ TG creates value for users and addresses most of their needs within the platform. Customers will prefer to seek loans from an interface they know, and will use the platform that solves a majority of their problems. The digital platform in turn can leverage the data already available to it to underwrite risk and customize the lending experience to each customer’s needs.

Embedded credit thus becomes critical to their core offering and turns the platform into a one-stop-shop for its users. It remains a critical need even in times of poor business performance, and keeps users coming to the platform even when they deprioritize its core offering.

In other words, moving away from having the ‘best product’ mindset to this ‘value-added ecosystem’ mindset creates an economic moat around the business and its core offering.

How Embedded Finance enables usage-based revenue

Facilitates repeat transactions

Customers check their data on subscription-based platforms, input their own data, check notifications, and so on. With Embedded Finance, the platform can leverage this continued engagement to cross-sell loans at relevant points in the user’s journey. The convenience of Embedded Credit provided in-context and a smooth user experience in turn drives repeat transactions on the platform.

Reduces risk

Through the embedded lender, the digital platform gives the financial institution valuable data on customers. This allows the lender to better underwrite risk and offer lower interest rates to the end user - and the digital platform receives a share of the interest earned.

Conclusion

For end users, embedded lending services allow for lending outside traditional channels, with an improved user experience. For businesses, leveraging embedded credit for monetization generates an additional usage-based revenue stream that ramps up faster than a subscription. This makes the subscription more competitive and allows the platform to capture market share faster. Digital platforms catering to MSMEs must therefore leverage Embedded Finance to stay relevant, optimize costs, and gain a competitive advantage.