By Mikkel Sølvsten Velin, Co-CEO, YouLend
In the past decade, embedded finance has fundamentally changed the financial sector. It’s reimagined how all kinds of small and medium-sized businesses access lending, payments, insurance, alongside regulation and compliance products and services. It is also widely acknowledged that embedded finance has the power to fuel equitable financial inclusion. However, until now there has been little proof of this wider societal impact.
Which is why Experian and YouLend have worked together to uncover just how big a role embedded finance could play in delivering equitable finance for all. The Widening Access to Capital report shows that embedded finance platforms attract 12% more financing applications from female-led businesses, and are twice as likely to approve funding for female-led businesses than the UK average, due to their agnostic decision-making model.
The report also pointed to the fact that over half (58%) of SME capital from one of the UK’s largest embedded financing platforms went towards two of the most deprived regions in the UK, serving low-income business owners. And, 12% of funding was issued in London regions with the highest concentration of ethnic minorities in the UK. This means financing is getting to the SMEs that really need it.
Having said that, there’s still more to do.
There are several existing barriers to financial inclusion for those still relying on traditional services, including lack of access to digital financial services, poor banking experiences, complex application processes, and lack of documentation, just to name a few. Traditional finance providers are simply slower to react to the evolving needs of modern small businesses.
The speed of change is a big issue across markets. The Eurozone has a considerable SME bank-financing gap of up to €400 billion, despite a majority (70%) of SMEs depending on banks for their external financing. This leaves thousands of businesses without another viable option for capital.
In this scenario, many SME segments would be underserved by traditional finance providers.
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The issues of underprovision are often exacerbated for minority groups. According to the British Business Bank, female-led businesses are more sensitive to the cost of external finance, seeing the application process and time and/or effort involved as a significant barrier to applying for finance. The organisation also found that for 2020-2022, ethnic minority-led businesses were more likely to be turned down for finance.
So, how does embedded finance address financial exclusion challenges?
Embedded finance leverages typically non-financial channels, such as ecommerce platforms, to provide financial services efficiently. The industry inherently has the capability to leverage holistic digital data to build an accurate picture of a business’ financial health without relying on outdated traditional underwriting methods. This new model enables the sector to extend financing to underserved SMEs and unlock greater financial inclusion.
And, because embedded finance integrates directly into apps, services, and channels where customers already are, the sector can directly address some of the shortcomings in the SME banking-financing gap across the globe – primarily accessibility, understandability, and discoverability.
As the embedded finance industry matures, there’s more available data and information to suggest that the sector is starting to deliver on its earlier promises. The Widening Access To Capital report and other surveys paint a clear view of the progress being made.
No wonder two in five UK small and medium-sized businesses (38%) plan to use embedded financial service products more in the next 12 months. This suggests that the industry is starting to bridge the financing gap in the UK and Europe. In the US, a report from the Boston Consulting Group also found that 64% of SMEs are interested in financial services embedded within a platform. SMEs increasingly rely on the sector to drive performance and growth in a fast and sustainable way.
The wider social implications of embedded finance are only just starting to reveal themselves. The impact will become more dramatic in the coming years, creating new value opportunities and empowerment for people at an unprecedented scale. Equitable financial inclusion is now within reach.
