Embedded Finance for SMB Software: Implementation Strategies and Partner Models

As financial infrastructure and partnerships advance, embedded finance has emerged as a topic of discussion among many SMB software platforms. Now that mature infrastructure and numerous partner options are available, the issue for software companies is not whether it makes sense to implement embedded finance models, but how to do so.

The guide below discusses the issues of choosing the right partnerships and approaches to embedded finance for SMB software platforms.

Partnership Models for Embedded Finance 

SMB software platforms can access embedded finance infrastructure through several partnership structures. The right model depends on the platform's size, technical resources, and strategic goals.

Integration Approaches

The technical integration method influences both the service launch process and subsequent maintenance. The platform has several options.

Two common approaches are API-based integration and embedded integration. API-based integration offers flexibility in user experience design but requires more development effort. With embedded integration, SMB customers perceive the financial service as an inherent component of the product. Embedded integration is a faster way to launch the service, although there are limited opportunities to customize it.

Regulatory and Compliance Framework

The regulatory aspect of embedded finance has implications for the partnership arrangement and operations. Typically, the software platform does not have a financial license. It is up to the partner, which could be a bank, BaaS provider, or payment processor, to be responsible for the various regulatory elements based on the nature of the arrangement and the legal jurisdiction.

The software platform's compliance responsibilities need to be clearly outlined in the partnership arrangement. These would include disclosing certain information to end customers and determining what information needs to be gathered from customers during the onboarding process.

Building a Sustainable Embedded Finance Strategy

Implementing embedded finance is more than technical integration. Several strategic considerations must be taken into account when planning such an implementation. First, the software platform usually checks whether the financial service meets existing customers' needs before implementing it. Second, the economics, including partner revenue share, platform costs, and transaction volume estimates, have to be modelled in real terms before implementation. Third, the customer experience has to be incorporated into existing software workflows, not added as an additional service. Fourth, the compliance framework has to be created in advance.

Frequently Asked Questions

1.How is full-stack BaaS different from modular integration?

In full-stack BaaS, all services come from one partner. In modular integration, various partners are involved, depending on the use case for payments, lending, and banking services.

2.How much time does an embedded finance implementation take?

This varies by company depending on integration complexity, technical requirements, compliance processes, and partnerships.

3.What are the continuous obligations of the software platform?

Compliance disclosures, user experience management, first-line customer support, and coordination with the partner on operational issues.

4.How does a platform decide on a partnership model?

The choice depends on the available development capacity, target speed to market, desired level of control over the user experience, and the number of partners the platform wants to work with.

5.What are the common challenges faced in embedded finance implementation?

Some common challenges in implementing embedded finance include underestimating the integration effort, ambiguity about compliance roles, and going live without an economic model.

Conclusion

Embedded finance is an approach that enables software providers to incorporate certain financial services into their products. The technology and ecosystem are now in place, and some SMB software providers are investigating the use of embedded finance as part of their product development strategy. The issue that needs to be addressed by software providers is finding the most suitable approach for embedding financial services into their products. There are many factors influencing implementation results.

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