From Walmart to Apple to Doordash, companies large and small are launching their own embedded finance products to enable the next wave of growth. Why are companies launching embedded finance products? What is enabling growth in this sector? What can be learned from this trend for businesses to grow?
We sat down with Jessica Zhang, Chief of Staff at Stilt and Founding Team for Onbo, to get her views on the next wave of opportunities and challenges in embedded finance.
Before you read the interview, here is a bit about Jessica.
Jessica Zi Jun Zhang led the development of Onbo, the lending infrastructure that has gained the title of “AWS for lending” in the software world. Her and the team’s efforts have resulted in Stilt raising over $300 Million in equity and debt capital backed by prominent investors, including Y Combinator, Link Ventures, Streamlined Ventures, and executives from Doordash, Stripe, Brex, etc.
She is also the Co-Founder of Oppti, an all-in-one career platform that works with public schools across the country and Fortune 500 companies to help students with internship placements and career development. She also co-founded Building BLOC, a 501c3 Non-Profit Organization that works on giving personal and career development opportunities to high school students. Given her track record, she has been invited as judge and speaker for several entrepreneurship and fintech events.
I got the chance to interview Jessica about the current state of embedded finance and how it is changing the world. Here’s what she had to say.
Q: What is embedded finance, and how do companies benefit from the concept?
Jessica: Embedded finance is when customers have access to financial products and services without having to switch over to an alternative platform. It changes how, when, and where people interact with financial services in areas including banking, lending, insurance, and payments.
There are many benefits and strategic reasons for companies to offer embedded finance, such as acquiring more customers, gaining more insights on customer behaviors, increasing revenue, building customer loyalty, and many others to name.
Q: Can you share some examples and explain how these examples benefit businesses?
Jessica: Some examples include Embedded Payments, which allow businesses to enable different payment options for customers; Embedded Insurance, which allows customers to buy travel insurance while buying flight tickets (as one example); and Embedded Credit, which allows businesses to provide options like working capital financing, or Buy now pay later (BNPL) to customers.
These examples directly add a new source of revenue for businesses because of the commissions they get on each sale of these financial products. Embedded finance also increases the overall user experience and the cart value without friction with BNPL. All the steps can be completed on one platform that increases customer loyalty, experience, and average order size, a win-win for both.
Q: How long has embedded finance been around for? What do the next 5 years look like for this sector?
Jessica: Many of us have seen or interacted with embedded finance products in some form or another, such as airline branded credit cards, payment plans for high-priced items, car rental insurance, and 1-click check-out. In the past year or so, the pandemic helped to push and accelerate a lot more activities online.
Embedded finance has picked up pace in recent years and is projected to grow exponentially. Industry research suggests that embedded finance will grow tenfold in the next 5 years, from around $22B in revenue in 2020 to over $230B in 2025. This opens up new market opportunities for both traditional finance providers and non-traditional financial players as they continue to innovate and improve customer experiences, and work towards better financial products and services for both consumers and businesses.
Q: What would you say can be a disruptive force within the embedded finance and fintech sector in the next two years? Do you see any signs of disruption?
Jessica: One area I follow closely is the embedded lending sector, which I think is ripe for disruption from traditional players. For many years, the lending infrastructures have been fragmented, underinvested and overcomplicated, resulting in products and services that are unreliable, hard to use, and expensive. It was very difficult and almost impossible for non-traditional players to tap into this space, with too many components of the lending stack that were costly and inefficient to do in-house.
For the first time ever, there are toolkits and disruptive technologies like what we do at Onbo that help to remove these complexities. This gives companies an opportunity to offer embedded lending in a cost-effective and competitive manner that aligns with their overall business strategy.
As of today, this sector is not quite there yet, but there are some great innovations tackling this problem, and I’m hopeful to see much better options and growth trajectories over the next couple of years.
Q: With the current market conditions and potential downturn, how should companies navigate and adapt to this environment?
Jessica: The high-level goal remains to be sustainable growth and customer satisfaction, but companies will need to be more nimble and have more flexible strategies to adapt at times of turbulence. When macro environments change, there are always pros and cons for everyone. In the embedded lending sector, the increase in labor and lending costs with slowing revenue demand have imposed challenges.
Meanwhile, due to this, more people and businesses need access to capital, and credit has become an even more important tool to acquire customers and improve user experiences. From a credit and risk perspective, we always remind ourselves and our customers to be extra diligent about underwriting and risk management and also plan for extra liquidity in advance.
For example, on the underwriting end, our suggestion is to start with a small batch, iterate when there are more data points on repayment status, and improve the risk model over time. Ultimately, it’s a fine balance between growth and risk.
Q: What’s a top piece of wisdom you’d share with other leaders and entrepreneurs in the fintech industry?
Jessica: It’s always very important to look ahead and plan for the long term. Fintech is a very fast-moving industry, and sometimes it can be easy to lose focus or priorities. Ensure that your team is ready to adapt to market volatility and changes in the competitive landscape. Be very careful with short-term hyper-growth that may come at high costs of long-term business sustainability. At the end of day, building successful companies is a marathon, not a sprint.
