The rise of fintech has made it possible for small businesses of every kind to take advantage of an important new trend: embedded finance. This strategy allows non-financial companies to incorporate financial products and services into their offerings &#151 facilitating sales, encouraging deeper relationships with clients, and potentially adding to revenues.

But is your startup ready to add this dimension?

The growth of embedded finance suggests that it will become an increasingly important part of any well-rounded operation. One recent survey from Plaid and Accenture found that 47% of non-financial businesses are investing in and planning to implement embedded finance, as of 2022. Meanwhile, another data set from OpenPayd suggested that 92% of firms expect to have such options in place in the next five years.

Here, we'll break down the details surrounding embedded finance, how your small businesses can potentially use this technology, and why it is gaining in popularity in 2022. From there, you'll have the information you need to begin considering whether embedded finance makes sense for you.

What is embedded finance?

Think about buying a car. If you don't have a big chunk of cash sitting in your bank account, you'll likely have to take out a loan. You'll need to borrow money and finance the purchase.

When this necessity comes up, do you have to leave the dealership and shop around to banks, spending weeks searching for a financial institution to offer a loan? Of course not. The financing procedures are largely handled as part of the sales process. The salesperson hands you over to the financing folks &#151 usually just a step or two down the hall.

This situation represents the heart of embedded finance. To facilitate your purchase of the car, the dealership streamlines the financing process. The non-bank company (the car dealer, or even the car manufacturer) becomes the hub for banking activities.

With the rise of fintech and banking as a service (or BaaS), this process has expanded well beyond big-ticket purchases like cars and appliances. With Buy Now, Pay Later providers, and other forms of retail financing looking to compete with credit cards, almost any business can fold embedded finance options into their operations.

What are the use cases for embedded finance?

Now that you understand the basic outlines of embedded finance, it's time to see how the strategy could fit into your business. With that in mind, here are some of the general use cases that dominate the industry:

Financing

Consider the car-purchase option again. This represents a form of financing &#151 one of the core uses for embedded finance. However, this can take many forms, including such popular options as Buy Now, Pay Later.

Leasing

Let's stick with car shopping for a bit longer. Leasing offers another potential way to afford a vehicle. It can offer a useful embedded finance option for your business as well, giving clients another way to acquire your products on easily digestible terms.

Insurance

The last time you bought a cell phone, did you pick up the optional warranty? This insurance plan lets you replace or repair your phone if it gets damaged. From the company's point of view, it also represents a form of embedded finance.

Currency/Crypto

Many companies offer expanded payment alternatives. Rather than just receiving money in one currency (like the U.S. dollar), they open the door to other possibilities. This can include the acceptance of cryptocurrencies, such as Bitcoin.

Pros and cons of embedded finance?

As you look at the possibility of launching an embedded finance program, it's important to understand what you're getting into. The strategy can produce value on multiple fronts at once. However, it does come with potential drawbacks.

As such, here are some of the pros and cons of embedded finance:

Pros:

Upsell Revenue Opportunities

Embedded finance offers the potential to unlock new revenue possibilities. These offerings give you another potential upsell at the point of sale, providing the chance to snare additional revenue.

How much of this you can capture will depend on the structure. In most cases, you'll likely start with a third-party provider, who will receive at least a portion of the windfall. That said, the overall industry represents massive revenue potential &#151 a total of $25 billion a year up for grabs, according to one estimate.

Increase Conversion Rates

In most cases, you won't have the resources to capture additional profits through embedded finance. Most small businesses can't finance purchases on their own. Instead, they will partner with third parties to make these options available.

Still, this generates benefits for your business. Providing additional financial support for your customers ultimately makes your offerings more affordable.

Think of the car example. Few people have tens of thousands of dollars available to buy a new vehicle. However, leasing and loan options put the purchase within the budgets of a larger group of people. Even if you aren't dealing with high-cost products, you can expand your potential client base by using embedded finance alternatives.

Build Closer Relationships with Customers

Embedded finance options do more than provide new chances to drive revenue. These products also give value to customers, allowing you to nurture a deeper connection with the people who buy your core products.

The statistics back this up. One study showed that 88% of companies that use embedded finance see an improvement in customer engagement. At the same time, 85% of these firms believe the strategy makes it easier to land new customers in the first place.

88% of companies that use embedded finance see an improvement in customer engagement. At the same time, 85% of these firms believe the strategy makes it easier to land new customers in the first place.

Streamline the Purchase Process

One key sales goal: eliminating reasons for a potential customer to say "no." Another critical objective? Making it easier for them to say "now."

Embedded finance plays into these strategies. An easy, integrated solution that makes your products more affordable reduces friction at the point of sale. This streamlines the process, accelerating your ability to grow.

Cons:

Potential Distraction

You have a core business. By implementing embedded finance solutions, you want to bolster this foundational operation. However, like any endeavor, it can pull your attention away from more central concerns.

Only look into adding these tools if you have the time and money to commit to the process. Don't tie up resources that could be more profitably spent expanding your prime sales effort.

Economic Risks

Categories like Buy Now, Pay Later seemed amazingly appealing when COVID stimulus filled consumer bank accounts. However, as the economy has changed in the post-pandemic world, with inflation cutting into spending power and economic prospects becoming murkier, sentiment has shifted somewhat. Many of the biggest firms in the sector have suffered as their key metrics have shown signs of deterioration.

For you, that means understanding the implications of these offerings to your business. Drill down on the risks and stay realistic about the potential even under more challenging economic environments.

How to get started with embedded finance

For most small businesses, launching an embedded finance effort will involve a partnership. These ventures require deep pockets and broad expertise, supported by rigorous data analysis. In other words, it takes more effort than you can invest on your own.

As a result, your initial steps should focus on picking a strong BaaS partner. From there, you can build out your embedded finance options and evolve your program over time. But, as you look to launch your initial drive into this sector, here are a few steps to keep in mind:

Define Your Goals

Before reaching out to potential third parties, decide which embedded finance options will provide the most value for your customers. Sketch out your ideal structure and use that as a starting point with potential partners.

Research Your Options

Learn as much as you can about the industry. As you go along, target a few prospective partners and drill down on their particular offerings. From there, you can begin fruitful conversations that will help you narrow your field of options.

Listen to Your Partner

Once you start building a relationship with a BaaS partner, stay open to suggestions. Early in the process, you laid out your goals and what you hoped to accomplish. Now that you've begun working with an expert, they can steer you to the most realistic structure.

Start Small

Dip your toe in the water first. From there, you can measure results and track your risks. The added insight you gain will help you get the most out of any future expansion.

Is it time to launch your embedded finance program?

Keeping up with the latest technological trends can help your startup or small business stay competitive in an increasingly digital world. Embedded finance plays into this strategy. Keeping up with this increasingly popular trend can help you close sales and minimize churn rates.

However, it's important to go into the venture with your eyes open. A well-run program will require planning and proper execution. At the same time, you'll want to limit the risks involved. Use the information provided here to start your journey. With an understanding of the basics, you can begin to determine if the benefits of using embedded finance outweigh the drawbacks.