Tom Bentley, chief commercial officer, Vodeno
Curating a smooth customer experience is the end goal for most, if not all, retailers. Every positive exchange between customer and business has an impact on the strength and longevity of their relationship – and ultimately, determines the customer’s desire to return and make repeat purchases.
Brands today are under mounting pressure to deliver seamless, end-to-end customer experiences. Their goal is to make the customer journey and checkout experience as easy and frictionless as possible. This has driven innovation in embedded financial products in order to meet customer expectations: whether that is offering loans at the point of sale (hello, BNPL) or insurance for the asset in question (ie Tesla).
These are just two examples of what embedded banking can deliver, but we have only just scratched the surface of its potential. In a nutshell, the term refers to any non-financial company (retailers and ecommerce players in this instance) being able to offer financial products directly within their ecosystem – other examples include integrated payments, debit and credit cards, digital wallets and the like.
The concept is not new: large brands like Walmart have dabbled in the space before. But the acceleration of API-based technology and Open Banking adoption means that any retailer today stands to benefit from the vast opportunities that are being powered by banking-as-a-service (BaaS).
What’s the deal with BaaS?
Banking was once reserved for banks. Not anymore.
BaaS has opened the financial services ecosystem to players outside of this arena. It allows any brand to embed their own financial products directly into their customer experience by partnering with BaaS providers who facilitate the connection (via APIs) to banks’ internal systems and information.
In the case of Vodeno, we offer a cloud-based platform combined with access to a European banking licence. In this model, we combine our API-based technology and are responsible for meeting the regulatory obligations needed to deliver these financial products. Brands benefit because they can tap into these financial products without huge upfront infrastructure costs, giving them the opportunity to create new commercial models, build a better customer journey and open up the possibility to enter new markets.
At the heart of this success lie new Open Banking policies, which enable data and infrastructure to be shared more easily. Research suggests that, in the UK, the new revenue potential generated through Open Banking enabled SME business and retail customer propositions totalled £500 million in 2018. This figure is set to reach £1.9 billion by 2024.
The benefits for brands who partner with BaaS providers are many, but the ability to increase revenue through sales growth is the most likely to attract attention. Experienced BaaS providers who have access to a European banking license can offer quick implementation with no upfront costs and low business risk. Businesses can focus on serving their customers, while the legal and regulatory requirements of offering financial services are covered by the BaaS provider.
Embedded finance = Customer loyalty
Customer loyalty is vital for those competing for attention in the crowded retail market. The arrival of embedded finance options has opened the door to more direct ways for merchants to engage customers and keep them coming back for more. Recent research from Google drives this point home: a significant 72% of consumers said they are more likely to be loyal to a brand if they offer a more personalised experience with additional rewards and benefits.
In the future, brands will increasingly look to offer lending and payment services directly to their customers as a tool for enhancing customer loyalty, increasing the shopping basket, and gathering valuable insights.
Innovation within credit products is fast-tracking progress in this space. For retailers offering in-app financing, technology now allows for client creditworthiness to be checked and assessed instantly to gauge how likely it is that loans will be repaid in full, and on time. Meanwhile, those that have embedded banking products into their business model will benefit from new insights linking consumer behaviour and their ability to pay, which in turn unlocks new sales opportunities. Armed with these metrics, retailers can focus on improving conversion rates and basket growth with more tailored propositions.
Turning the spotlight onto retailers
Embedded lending has played a starring role in the headlines recently, with customers increasingly benefitting from BNPL options at checkout. A trend that is yet to take off across Europe, however, is the extension of BNPL offerings for businesses similarly on the hunt for suitable and accessible credit options.
Demand for finance from SME retailers is high, particularly against the backdrop of the pandemic. Data from UK Finance shows that demand from SMEs on the whole increased into 2021, with more applications made for cash flow funding than was seen pre-pandemic. As economies reopen and businesses look to realise their growth ambitions, retailers will be looking for alternatives to traditional lending options – and for that, they should look to merchant financing.
Many similarities can be drawn between merchant financing and BNPL; in effect, the former is a buy now, pay later option for SMEs. While it is a popular product in the US, it has not yet received the recognition it deserves in the European market, with very few players offering merchant financing. This picture is likely to change dramatically in the next few years, with instant credit becoming a firm reality rather than a pipe dream.
Merchant financing offers access to upfront funding that retailers can use to produce, buy and sell goods. The capital that was secured is then used to pay off the loan once these goods are sold and profits are realised – in establishing this connection, SMEs are empowered to fully manage their cash flow in line with their turnover.
For retailers looking to escape the constraints of lengthy paperwork chains, burdensome borrowing criteria and low approval rates, merchant financing holds the answers. BaaS providers that offer a quick and easy, fully digital onboarding/verification process – thanks to sophisticated technology underpinning these processes without lengthy financial statements or physical signatures to access the cash needed – is the holy grail in SME lending. Meanwhile, the credit limits will be dictated by turnover history, rather than the historical statements process adopted by traditional banks.
A new generation of SME lenders are being powered by BaaS, diversifying the options available to retailers who want to join the fintech revolution. As merchant financing makes its way into Europe, BaaS vendors like Vodeno will be on hand to support retailers looking to take advantage of the opportunities on offer. With a strategic BaaS partner by their side, ecommerce platforms and retailers can easily take the core components of a modern banking experience and tweak them to suit both their customers and their own needs.
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