Making cash the rightful king through embedded finance

Remember that scene in Star Wars: A New Hope where the heroes are trapped in a trash compactor with the walls on all sides slowly closing in?

If you’re a business leader in an MSME in 2024, it can feel a lot like that. Apart from handling day-to-day issues such as managing cash flows or hiring manpower, MSMEs are also facing external cost pressures. One of them is inflation, as suppliers pass on higher costs, alongside other price increases. Meanwhile, countries like Singapore and Malaysia raised consumption taxes earlier this year.

These pressures have made cash flow a key concern for many MSMEs in Southeast Asia. The solution is usually to obtain financing from sources like banks, but the problem is that many smaller businesses often struggle to qualify for financing because they lack a track record and collateral, making them riskier prospects.

As a result, the global MSME financing gap now stands at US$5.7 trillion.

Even if they could access financing, it’s also gotten more expensive to do so. A report by the Singapore Business Federation found that 83% of businesses in the country have been affected by interest rate hikes and an increase in the cost of funding.

Embedded finance could provide a solution to these issues.

New opportunities for MSMEs

In a nutshell, the key advantage offered by embedded finance is the ability for digital platforms, such as ecommerce sites, to directly offer access to financial services to MSMEs, such as merchants and sellers on their platforms.

All of this can be done without going through a separate channel. Need more cash to pay off an invoice? Take an invoice financing option embedded directly in the ecommerce platform.

Why are digital platforms a good staging ground for embedded finance? Over the last few years, MSMEs have been “making more use of digital platforms to implement their business strategies,” according to a report in the Journal of Business & Industrial Marketing. This has benefited areas such as ecommerce, supply chains, and procurement.

For example, small businesses now make up 85% of the cross-border ecommerce market in Asia Pacific.

“This is just one of many signals that businesses are moving into the digital realm, leveraging the power and scale of digital platforms for growth. As such, financial services will also have to evolve, meeting MSMEs where they’re doing business digitally,” says Randall Lee, head of strategic partnerships at Anext Bank.

Randall Lee, head of strategic partnerships at Anext Bank / Photo credit: Anext Bank

Another reason why embedded finance works for digital platforms is that they have access to MSMEs’ real-time operational data such as sales numbers and order sizes. This allows the platforms – and by extension, the embedded finance providers – to leverage deeper data-driven insights, helping them evaluate creditworthiness and extend financing to businesses that would not be covered by traditional institutions.

Apart from financing, there’s a host of other capabilities available through embedded finance, such as payment solutions, savings, and investments. Put together, these could unlock new opportunities for MSMEs.

“This not only democratizes access to financial services but also supports the growth and sustainability of small firms,” says Lee.

Everything you need

Another key benefit for MSMEs lies in the “embedded” of embedded finance – in other words, having seamless access to the right financial services directly within the platforms where they conduct business, precisely when they need it.

In embedded finance, the financial services incorporated by digital platforms are tailored to their respective services and industries. The technology also allows these platforms to leverage alternative operational data to anticipate and provide financial services directly to MSMEs through the platforms themselves. This frees up time that business owners would have otherwise spent on finding and understanding suitable financing products.

Further, the timeliness and and ease of accessing said financial services allows MSMEs to capitalize on time-sensitive business opportunities. For instance, based on its past activity on the digital platform, a business may qualify for higher credit in advance, allowing it to stock up for seasonal orders.

This not only democratizes access to financial services but also supports the growth and sustainability of small firms

Embedding these services into platforms is made possible through modular APIs, which give them the power to customize or pick the financial services that their businesses need the most.

Such was the case when Anext worked with DeliveryChinatown, a Singaporean food delivery services platform used by over 700 F&B companies. Seeing that its users needed loans to expand their business, DeliveryChinatown incorporated Anext’s APIs to provide this capability.

“We recognize that financing is key in helping our customers expand operations. Partnering with Anext Bank enables our customers to access and manage financing directly through our platform for easier day-to-day business management,” says Alex Tian, CEO of DeliveryChinatown.

Win-win

While embedded finance solutions are great for MSMEs, there’s something in it for the platforms as well.

First off, adding more solutions means they’re catering to more MSME needs.

“By availing financial services, these platforms can enhance user experience and engagement, while enabling them to stay competitive in a rapidly evolving digital landscape,” says Lee.

Second, embedding financial services and making them more convenient to access means a much smoother experience for MSMEs – another win for user stickiness.

“As an MSME, the last thing you want to do is jump through hoops looking for solutions,” adds Lee.

Photo credit: Shutterstock

Last but not least, integrating embedded finance solutions through APIs takes much of the burden of security and compliance off the digital platforms while ensuring a high level of trust.

“For platforms that partner with us, they can be assured that they’re working with a digital bank regulated by the Monetary Authority of Singapore,” says Lee. “This ensures that all our financial services adhere to the highest standards of anti-money laundering, compliance, and security. In the complex and highly regulated world of financial services, maintaining trust is paramount.”

Further, the modular nature of APIs and their plug-and-play capabilities mean that they’re easy to integrate, so that platforms can quickly bring embedded finance services to their users.

“Even platforms with limited in-house technical expertise can quickly and efficiently embed our solutions,” says Lee. “In some cases, we’ve seen that the shortest time to launch a basic embedded financing solution was as low as six weeks.”

“By making the process as simple as possible for our small and medium-sized partners, it also gives Anext the confidence to look at larger, regional platform partners. This will empower us to embark on the next phase of scaling access to financial services for MSMEs globally.”

Show me the value

Embedded finance solutions are a step in the right direction for many MSMEs, especially with the challenges they face today. The fact that platforms can benefit too means that it’s more likely that the entire digital ecosystem can evolve side-by-side.

However, adopting the tech can seem like a significant undertaking for some platforms, due to the concerns over costs and capability. In this area, embedded finance providers like Anext will need to clearly showcase their value propositions.

“If we can deliver fast integration and cost efficiency, as well as ensure the solutions are easy to use, we’re going to have a much better time convincing the industry,” says Lee.

Anext Bank, a Singapore-based digital wholesale bank regulated by the Monetary Authority of Singapore, is on a mission to make financial services accessible and effortless for MSMEs. Adopting an open and collaborative approach, it believes in joining hands with industry partners to provide MSMEs with simpler, safer, and more rewarding financial services.

At the Singapore Fintech Festival on November 6 to 8, Anext Bank will showcase its embedded finance innovations and technological capabilities to scale financial inclusion and share insights on how it’s advancing inclusive financial services for the diverse global MSME community. Find out more here.

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This content was produced by Tech in Asia Studios, which connects brands with Asia’s tech community. Learn more about partnering with Tech in Asia Studios.