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It’s all about grabbing the largest share of the pie.
Online marketplaces started off as horizontal lead generation platforms - hosting suppliers across industries and matching them with customer segments. They played into the discovery part of the funnel, where supply-side entities met with demand-side outfits and then the rest of the funnel conversion happened offline. Take for instance, Craigslist, the marketplace for everything from rooms-to-rent to laptops.
These marketplaces thrived on what is now called network effect. A phenomenon where the total value of all the players on the platform is exponentially higher than the value of an individual user or just the platform. To capitalise on network effect, marketplaces aggregate diverse suppliers and customers to become a stronger whole than individual parts.
This hit a wall when the network effect of these marketplaces was commoditized, i.e., the value of one marketplace was hard to differentiate. Think of eBay or Craigslist - the same people can list or buy the same products on either of these platforms without trade offs.
The only way for an online marketplace to succeed over long term is to create a captive user base. The breakthrough was to add so much value to a network that it disincentivized the switch to a competing network. This could be done in two ways:
Add verticalization: Create niche in a particular industry by fostering industry-specific networks
Get closer to the transaction: Instead of being a channel of discovery, own the transaction by bringing capabilities online, such as financing, insurance, payments or owning the supply chain etc.
So now, posting a room-rent ad on Craigslist becomes less exciting than hosting the place on AirBnB because it reduces the friction in the conversion funnel since now people specifically looking to rent or lease out properties meet targeted, specific cohorts. Also, AirBnB offers multi-million dollar insurance to both guests and homeowners for accidental injuries or damages, further incentivizing its network.
And hence, embedded finance is the next pitstop for businesses creating a roadmap for the future. It creates defensibility against disruptors, helps lock-in stakeholders on both sides and rakes in benefits that a traditional, lead-generation platform would not.
How embedded finance adds lock-in value to online marketplaces:
Deeper network effects
With embedded finance, the incentive to shift onto another network diminishes since the platform delivers value beyond discovery. It's now easier to pay, apply for in-context financing, insurance or banking right at the point of sale without third-party intermediation. The seamless transactions bump up order value and volumes, further deepening the network effect.
Embedded finance helps businesses attract more suppliers and customers since transactions are seamless and incentivized for repeat use. This plays into the buyer psychology that aims to minimize single-point dependencies (such as a single supplier). The supply- and demand-side fragmentation, i.e., a diverse cohort on both sides, leads to market consolidation where the platform becomes the go-to marketplace for everyone.
With rising transactions and more interlinkages, the network will achieve a critical mass or the point where the activity generates value that supersedes the individual contribution of any one supplier or customer group. The critical mass ensures the marketplace stays top-of-the-mind for players on both sides, leading to higher user stickiness and greater brand loyalty. This can even make supplier and customer cohorts gravitate from other adjacent marketplaces.
Evolve as an ecosystem
The fragmentation of participating groups (suppliers and customers) forces open the network to players that were not originally targeted - evolving the marketplace into an ecosystem bringing into its fold ancillary networks, where it orchestrates delivery across the value chain from origination, transaction to sales and post sale.
Bolster the SaaS play
As the marketplace achieves critical mass, it becomes easier for the business to pivot to a SaaS model, where the platform and its features are built in as workflows, offered free of cost, feeding into user experience and ease of use. This further builds on brand equity and customer loyalty. Instead, they can now monetize transactions.
New revenue streams
Embedded finance solves the chicken-or-egg problem for platforms struggling to onboard players and ensuring the onboarded ones transact. By positioning the business as enablers that address liquidity problems through in-context credit or inherent trust issues with embedded insurance. This could generate new revenue streams with commissions on each insurance or loan plan opted for through their network.
(We will be taking up these points as separate blogs. Keep an eye out)
Embed finance with FinBox
Getting started with embedded finance can seem daunting since it requires capabilities and integrations with system or approval gateways that lie outside an organization.
FinBox Embedded Finance is a full-stack technology suite that enables any non-banking digital platform to offer instant credit to its users, without having a bank as an intermediary. Our intelligent risk engines and proprietary credit assessment models abstract the complexities of a lending pipeline - working with alternative data and weeding out instances of fraud earlier when it matters most.
Our adaptive journeys are purpose-built for small businesses and our vibrant partner ecosystem of financiers ensure your customers can avail of credit - right when it’s needed.
We bring on board:
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.
90% faster time to credit
50% higher average order value
Three-times higher approval rates for small businesses
We can help you get these dividends by kickstarting your embedded finance journey. Get in touch with us today.