This week, Banxware announced its Series A funding of 15 million euros from UniCredit and Fabrick, supported by Sella Investment Bank. Banxware is the first embedded lending provider in Germany and was also a sponsor at our last Embedded Finance Review event in Berlin. I thought to dive a bit into the topic of embedded lending and discuss what companies will be front-runners in adopting it.
Why ‘embedded’ lending?
Small and medium-sized companies need financing to grow their businesses, but applying for and receiving this can be a struggle for many. Extremely speaking, the owner of a company can either walk into a branch and apply for a loan after submitting paper documents, or she can apply for a loan without any additional data input in the software she is already using. I think all of us can imagine that the digital embedded way is much more convenient. But from personal experience, I can tell you that a business owner is much more likely to apply for funding if it’s that convenient. Many company owners are unsure about their possibilities of receiving financing and thus avoid searching, contacting, and submitting a loan application in the first place. Additionally, while the price of a loan matters, it does not even come close to the speed of application and approval. Usually, technology-driven ‘embedded’ solutions can achieve this need for speed.
Where does ‘embedded lending’ make sense?
I guess you figured that I am pro-’embedded lending’ but if you are a regular reader of the newsletter, then you will also know that I don’t think every financial product will be embedded everywhere in no time. I believe embedded finance will be a journey for many industries and just looking at the characteristics of the industries, some are likely to adopt it first before others.
As a rule of thumb, embedded finance is ideally placed when the tool provides a sticky and data-rich service. While this is a general statement, it applies even stronger to embedded lending. And we can see that in companies that are offering an embedded lending product, including some of Banxware's existing clients. There are two groups of companies that are considered extremely well positioned.
Marketplaces
Many merchants sell their products over a marketplace, and in many cases, they have the majority of their total revenue from one marketplace. Therefore, this marketplace knows almost everything about their merchants. Additionally, the marketplace has a strong interest in helping their merchants grow (aka sell more) and usually merchants need external financing options to achieve that. Theoretically, merchants could go to the bank but we all know that is often not a realistic option (remember when Shopify’s CPO said in an interview they didn’t want to offer lending but had no other choice). With financing, merchants are able to ramp up inventory, sell more products, and generate more revenue—a win-win for the marketplace and the merchant.
SME SaaS
With the rise of fintech and other trends, we have seen an explosion of SaaS tools for business owners, from invoicing and cash flow management to vertical SaaS. Many company owners live in the tools they are using and if you want to know anything about the business, you can probably find that data in these tools.
A practical example could be Tidely, whose founder was actually also on stage during our last Embedded Finance Review event in Berlin. They offer a cash flow management software solution and they have embedded Banxware to help their users apply for and receive financing. Such tools can take embedded lending even a step further and make it even more convenient to apply for financing. For example, Tidely is offering an alert system that gets triggered when a customer’s liquidity level drops to a certain level. If eligible, it guides the company owner to Banxware’s financing solution.
I think the space of embedded finance in general or embedded lending specifically, is very exciting and here to stay. I am not naive that everybody will switch from traditional loan applications to embedded lending tomorrow, but I guess we can all agree that the ‘embedded’ approach has many advantages. It is our job to make it work.
