Commerce and finance are converging

Commerce and finance are converging. Could you benefit?

In this paper, we look at some of the many forms of embedded finance in Southeast Asia and ask what this trend could mean for the future.

The term ‘embedded finance’ describes a simple idea – the integration of financial services into a non-financial business.

It’s often used to describe the offering of financing options at the point of sale. This could be as simple as an e-commerce site’s checkout offering a buy-now-pay-later (BNPL) option (see our BNPL Philippines and BNPL Africa guides). Or it could involve offering the customer a loan to finance their purchase of a motorcycle at a bricks-and-mortar dealership.

But embedded finance is not restricted to the consumer interface. It can also apply to the relationships between manufacturers, wholesalers, B2B traders and retailers. For example: offering deferred settlement options to encourage businesses to stock or promote a particular brand of cigarettes, refrigerators, farm machinery, or anything else.  

Wherever two or more bodies are involved in the commercial supply chain – manufacturer, wholesaler, conglomerate, retailer, microbusiness, consumer – there exists the opportunity for embedded finance to play a part in cementing relationships, developing partnerships, and securing customer loyalty.

The benefits of embedded finance

  • People and businesses are more likely to buy if there are more ways to pay.
  • Customers don’t have to go elsewhere to organise their financing, so businesses don’t have to worry about the customer finding their way back to them.
  • It improves customer retention.
  • It increases the lifetime value of the customer.
  • The financing itself may generate a new revenue stream.

What’s driving the trend for embedded finance?

As always, it’s mainly about customers. This is the Age of Instantly in which consumers have come to want and expect everything ‘now’, whether that’s access to information or lunch delivered to their door. Offering payment options at the point of sale feeds the need to buy without delay. For merchants and retailers in smaller and newer markets, embedded finance is a way to differentiate themselves from the competition. In mature, fast-moving, highly competitive environments such as e-commerce, it’s more a case of ‘adopt or die’ because the competition will be on board with the latest embedded finance products.

Further up the chain, the drivers are more about the need to build stronger relationships.

Pioneering fintechs are also driving these changes. Nimble, creative, and unencumbered by legacy practices and ideas, fintechs are constantly devising new product opportunities and the area of embedded finance is bursting with potential.

Who’s embedding?

Almost everywhere you look around the world, embedded finance is blurring the lines between financial and non-financial businesses:

  • For decades, the world’s biggest motor manufacturers such as Ford and Toyota have been offering financing at the point of sale.
  • The world’s largest retailer Walmart (bigger than Alibaba, bigger than Amazon) is setting up its own fintech arm to deliver “tech-driven financial experiences” to its customers.
  • Grab, Southeast Asia’s ‘superapp’ facilitates the delivery of people, food, and groceries on request. From simply embedding payments, Grab’s finance activities have grown by partnering with various fintechs to offer BNPL, loans, and insurance.

But even at more modest levels it makes sense for retailers to add value to their proposition by offering BNPL for low-ticket items or credit on mid-price goods such as motorcycles.

Case study: Unistar Credit and Finance Corporation

Unistar Credit and Finance Corporation is the in-house financing arm of motorcycle retailer Transcycle and Powercycle which has more than 250 branches across the Philippines. Thanks to Unistar, Transcycle can offer its online and in-store customers the option of paying by instalments.

Emboldened by its success, Unistar is looking to broaden its finance activities, offering business loans to micro, small and medium enterprises (MSMEs). And it’s longer-term ambition is to become a fully-fledged fintech:

“We are quickly transitioning the organization from a traditional financial services business model to a fintech business model. This would not only enable us to quickly respond to the ever-changing economic landscape of the country, but to also provide a more bespoke service to the hyper-segmented population.”

Case study: Adamco’s Life Made Better programme

Originally a manufacturer of hand tractors, today Adamco sells a wide range of agricultural machinery through its 16 branches. It is the Philippines’ largest rice combine harvester dealer and boasts a 50% market share.

Adamco created an embedded finance product – the Life Made Better programme – to support small farmers who would otherwise not be able afford the equipment they needed at the time they needed it. Financing is arranged partly in-house and partly through financial institutions owned by the Ropali group which Adamco is part of.

The partnership approach

For most retailers, setting up their own financing arm is unappealing and impractical. But partnering with a fintech or a financial institution (FI) opens up much simpler routes to embedding finance.

Conversely, there are great opportunities for financial institutions to expand their business model in a relatively straightforward way by partnering with retailers. For a good example, read our case study on Zurich Finance Corporation’s partnership with the Venture Motorcycle Sales Corporation in the South Luzon area of the Philippines.

And embedded finance doesn’t necessarily have to be about giving people access to deferred payment schemes – it may simply be about offering consumers a wider range of payment options. In the Philippines, the mall, supermarket, and department store operator Liberty Commercial Center has partnered with PayMaya to allow people to pay with the PayMaya app.

What does good embedded finance look like?

Regardless of who’s providing the finance – retailer, FI, or fintech – the key benchmark for embedded finance is that it should be as seamless as possible from the customer’s point of view. Ideally every aspect of the financing can be undertaken at the place of purchase and at the time of purchase.

This should never be at the expense of transparency.  It’s vital that customers understand who’s providing them with the financing and what the terms are.

And, of course, it needs to be compliant with whatever regulations apply. For retailers who don’t wish to take on the regulatory burdens which may be involved in offering financial services, this is where partnership models come into their own.  

Supporting embedded finance with technology

At Oradian we are sometimes contacted by companies asking us to help them with their embedded finance programmes. Although they have experienced the benefits of adding financing to their trading activities, they have found themselves struggling with the administration and management involved.

Those with small operations have tried to keep things ‘simple’ by using spreadsheets. Larger businesses have tried adapting their accounting system or enterprise resource planning (ERP) platform such as SAP or Oracle. This is understandable – such systems are expensive and organisations want to get the most out of their investment.

But these approaches are rarely satisfactory because these tools are simply not designed to handle the complexities involved in lending. Organisations taking this route swiftly come up against a stream of obstacles. For example:

  • They are unable to configure a variety of loan products.
  • They can’t link seamlessly into credit and trust score applications in real time.
  • Rescheduling loans and recalculating interest rates turn out to be a nightmare.
  • Keeping track of missed payments and other problems is difficult.
  • Remediation when things go wrong is difficult and time-consuming.
  • It is difficult to incorporate a range of repayment channels efficiently.

These are just a few examples. Put simply, ERP and accounting systems are rarely capable of supporting the complex business processes involved in loan management.

The loan management system option

Because loan management systems such as Instafin are purpose-built, they effortlessly handle the many stages involved in a loan cycle which is both robust and flexible:

Loan process diagram

A good loan management system will be able to handle loan rescheduling, loan top-ups, loan merging, write-offs, and bulk moratoria.

Only a purpose-built loan management system can deliver the full range of potential business benefits:

  • Rapid onboarding and loan origination
  • Happier customers
  • Generating new customers
  • Fewer loan defaults
  • New and better products
  • More efficient operations
  • Increased productivity
  • Real-time management
  • Fraud reduction