Embedded Finance
Hi,
It's Maciej Zieliński again and today I’ve prepared for you a deep analysis on the Embedded Finance world. 🌏
So in today’s issue, we’ll tackle:
❓What exactly is Embedded Finance
🔭The future of Embedded Finance based on Arthemis report
🔥 Top companies and newcomers
Embedded Finance- the future of the economy?
How embedded finance will redefine the global economy? Report from Anthemis brings some light on this issue:
“We imagine a world where finance is embedded deep inside the workings of our businesses and economies, powering the lives and progress of citizens and businesses rather than being a service consumed independently.
Instead of financial services being yet another sector that becomes internet-enabled, it will allow all sectors to become finance- enabled. The result is not just finance on the internet, but rather the Internet of Finance.”
In case you are wondering what is Embedded Finance, I hasten to explain this issue:
Embedded Finance refers to the strategy implemented by non-financial companies that value propositions are significantly enhanced or even transformed by linking financial products and services embedded within. Essentially it’s a solution dedicated to finding opportunities to combine data, process and capital in ways that accomplish the same ‘jobs to be done’.
Actually numerous businesses already have an embedded finance layer in various forms. The report uses Uber and Lyft as examples: users of their services can with just one click both engage a driver and pay instantly at a journey’s conclusion. Furthermore: “As finance embeds itself further into the business environment, new opportunities will be revealed to invest capital creatively and nurture innovation.”
Areas of Opportunity for Embedded Finance
There are several areas in which we should be able to observe a tremendous development of embedded finance solutions in the coming years. I chose the most interesting ones:
Trade and Logistics
Trade has changed immersively during the last 50 years and finance has been at the core of this revolution. Internet platforms created a demand-side advantage, which led to mighty progress in supply-side advantage through IT infrastructure and modern financial “rails,” with far less friction and lower transaction costs.
“Inventory control systems, which have evolved from enterprise resource planning (ERP) and supply-chain management through to intercompany ERP, have now matured. They are combining with financial services such as supply-chain financing to create incentives for shared ledgers that go beyond core banking and software as a service (SaaS) accounting systems.”
Construction and Real Estate
Embedded finance will play a vital role in design, construction, maintenance and insurance, as well as in buying and selling.
Prefabrication and modularity finally became a reality for domestic architecture, mainly thanks to services that can handle and coordinate more sophisticated supply chains. Furthermore using drones in advanced remote imaging, in the near future will allow accurate monitoring of the build process, which is extremely vulnerable to legal issues of delay - fixed contingency costs will be priced and updated far more accurately.
Urban Planning
In the future we will demand from our cities the same qualities as we value most in the design of technology: they will be clean, green and filled by both complex and undetectable smart infrastructure. This will open up a number of possibilities for innovation: from smart parking and traffic-management technologies, to the use of sensors and AI for public safety, to energy and water grid management. All of that means significant space for embed finance services.
Media
There is no doubt that media is one of the most fertile grounds for scalable embedded finance applications. This statement is strongly supported by the fact that media creation and consumption has become a very integral part of our daily lives. The report mentioned companies such as Kickstarter, Spotify, YouTube and Twitch as examples of early adopters that used media as a jumping-off point to establish product-market fit.
“As content creation continues to expand, the media industry must examine new-found friction in legacy business models and gaps in infrastructure, especially in the financial services layer of media. But this evolution also unlocks new forms of media and digital assets, encouraging the emergence of untapped models for managing, securitizing and monetizing these alternative assets.”
Education
Anyone who has ever been interested in studying at the top universities knows that for financial reasons it may not be fun. In the United States alone, education is the second-largest source of consumer debt with a loan debt of about $1.5 trillion. Since 1999 student loans there have grown 511%. Even quick look at those statistics can illustrate how big this issue is:
There are a number of ways in which debt and equity financing, for both education and internships, can address current needs and broaden access in the future. For instance, income share agreements (ISAs), through which a student borrows for school commits and pays back a percentage of their income for a fixed number of years after graduation. The example of a company that upgrades this process by implementing embedded finance solutions is Edly, which created an ISA marketplace that connects accredited private investors with institutions, which already offers students an ISA option.
Energy
Innovative financial services components surely will become an integrated part of a constantly evolving energy marketplace, improving access, alleviating risk and driving better pricing.
By embedding financial services into energy products, businesses can adjust to meet new requirements and risks across a wider spectrum of needs. The Anthemis report brings out an example of kWh Analytics that issues insurance contracts on solar energy assets by leveraging data from solar farms to guarantee a minimum level of energy output.
Top companies and newcomers
Kabbege
Kabbege is an American fintech company that focuses on providing funding directly to small businesses and consumers through an automated lending platform. The company offers quick assessment and approvals for small business loans using machine learning algorithms that pull data from dozens of sources. $100k loan approval in less than 6 minutes? On Kabbege platform it's possible.
In 2019 the company reported it had closed an asset-backed securitisation of $700 million, which had been the largest transaction of its kind for an online lending platform focused on small businesses. Since its founding in 2009 Kabbege has loaned more than $9.5 billion to over 225,000 small businesses.
However, what makes Kabbege stand out is their excellent embedded finance strategy. In 2019, after gaining such great success on the loan market, the company launched Kabbage Payments - a payment processing tool for small businesses which supports faster invoice payments and accelerates accounts receivable. Using it small businesses can generate a unique URL to provide customers with a link to send card payments via text, email or web.
Apparently, it wasn’t enough for Kabbege, because this year they recently launched another product for small businesses - Kabbage Checking, which gives them access to digital banking services such as electronic wallets and bill payments.
Metro Bank and RateSetter
On August 3 Metro Bank - one of the leading retail and commercial banks operating in the United Kingdom announced its intention to purchase peer-to-peer lender RateSetter.
RateSetter will continue to operate as an independent platform under the Metro Bank banner, however, its loans will be funded by Metro Bank’s balance sheet going forward, rather than by retail lenders.
Banks acquiring fintech is nothing new, but due to the coronavirus crisis, we should expect to see that trend increase.
eBay and instalment loans - match made in heaven
Recently eBay partnered with online lender LendingPoint to offer sellers access to instalment loans. Their newest programme lets merchants borrow up to $25,000. The pilot programme is already available to select sellers and will be open to all in the US by the end of this year.
"We're excited to make flexible financing options available that are integrated with our new payments experience," said Alyssa Cutright, vice president of global payments at eBay. "The program with LendingPoint will enable critical funding opportunities for eBay sellers, especially during this time of economic uncertainty."
This venture gives merchants an alternative to PayPal Working Capital, a solution eBay merchants have used for financing in the past. Additionally, two partners announced they planned to provide eBay sellers with more tools in the future:
"LendingPoint's purpose is to accelerate and democratize commerce," said Tom Burnside, CEO and co-founder of LendingPoint, "We are thrilled to be able to use the data and technology we have built into our platform to help eBay sellers achieve their dreams. eBay sellers are some of the world's most dynamic e-commerce players and our Loan Operating System will help them access the financial tools they need to achieve even greater success with their businesses."
Rocket Companies IPO
Rocket Companies standing behind mortgage giant Quicken Loans just went public. The Detroit-based company pretended its initial public offering on the New York Stock Exchange under the symbol RKT. They were offering 100 million shares at $18 each.
Last week, Rocket had marketed 150 million shares at $20 to $22 each, with another 22.5 million shares available for the deal's underwriters to purchase. Despite the decrease, it’s still the seventh-largest IPO of 2020 so far, according to Dealogic.
"It’s unusual, although not unheard of, to have a deal size cut back," said Jay Ritter, a finance professor at the University of Florida "Usually when a deal size is cut substantially, it is because of weak demand. Similarly, they tend to raise the price and increase the number of shares when there's strong demand."
It is commonly believed that uncertainty associated with COVID-19 pandemic resulted in a number of stocks this year debuting undervalued with prices skyrocketing on the first day.
However, due to Erik Gordon, a professor at the University of Michigan's Ross Business School, Rocket Companies size, means the offering is more likely to attract a greater proportion of long-term investors over short-term speculators compared to smaller, more speculative companies.
"I don’t think you're going to see it triple in price, and 10 days later lose half of those gains" he added.
According to a Bloomberg report.“The reduction comes as investors pushed back on the company’s valuation, believing it should be priced like a consumer or financial company rather than a technology business”.
Probably the whole IPO market itself could be shifting somewhat:
"The cut in the deal price, in particular, seems a reaction to the poor performance of larger U.S. domiciled companies which have recently gone public," said Josef Schuster, CEO for IPOX Schuster in Chicago.
In its first day of public trading Rocket Companies jumped 26%. The initial public offering raised $1.8 billion, which is far below earlier estimated $3.3.
I would love to know what your feedback is. If you have any questions, feel free to message me at mz@nextrope.com. 😁