Accelerating Ecommerce Growth with Embedded Lending Services

Ecommerce has revolutionized the way businesses operate and consumers shop. Embedded lending is emerging as a powerful tool to drive growth and enhance the customer experience in the e-commerce industry. This article explores the concept of embedded lending, its competitive landscape, and the various lending options available for both ecommerce buyers and sellers. It also looks at key considerations for designing embedded lending services for ecommerce marketplace platforms.

What is embedded lending?

Embedded lending refers to integrating financial services, particularly lending products, within non-financial platforms such as ecommerce marketplaces like Amazon or Shopify. It allows customers to seamlessly access credit or financing during the checkout process or as part of their shopping experience.

The competitive landscape for embedded lending is rapidly evolving, with various players, including traditional banks, fintech startups, and e-commerce platforms, vying for market share.

The market for embedded lending in ecommerce is substantial. According to the Coherent Market Insights report on the embedded lending market, the sector is projected to experience significant growth over the next decade. Here’s a summary of the market sizing:

• Current Market Size (2023): The global embedded lending market is valued at approximately $7.72 billion USD in 2023.
• Projected Growth: The market is expected to grow at a CAGR (Compound Annual Growth Rate) of around 12.3% from 2023 to 2031.
• Future Market Size (2031): The market size is projected to reach $23.31 billion USD by 2031.

This growth is driven by the increasing adoption of embedded financial services in ecommerce, particularly with solutions like Buy Now, Pay Later (BNPL), revenue-based financing, and other credit products integrated into the ecommerce checkout process. On top of this, and according to success stories from SellersFI, embedded lending services can often double gross merchandise value for ecommerce sellers when seller financing is used to procure inventory ahead of the holiday sales peak season.

Buy Now, Pay Later (BNPL) as an embedded lending use cases

By offering flexible payment terms, BNPL makes it easier for customers to manage their finances. Here’s a snapshot of BNPL options commonly used by ecommerce buyers.

• Affirm: Allows customers to split their purchases into 3, 6, or 12-month installments. Affirm typically provides transparent interest rates, with some retailers offering 0% APR for certain transactions.
• Afterpay: Enables customers to make purchases and pay in four equal, interest-free installments every two weeks. It’s a popular choice for fashion and beauty retailers and doesn’t charge interest if payments are not made on time.
• Klarna: Offers multiple BNPL options, including paying immediately, paying later (within 14 or 30 days), or splitting payments into installments. Klarna is known for its seamless user experience and is commonly used by both large and small ecommerce stores.
• PayPal Pay in 4: Provides a BNPL feature called “Pay in 4,” which allows users to split purchases into four equal, interest-free payments. This option is convenient for those who are already familiar with PayPal’s ecosystem.
• PragmaGO: A leading CEE company providing accessible financial services for micro, small and medium-sized businesses. Cooperating with top companies like Allegro and Shoper.
• Sezzle: Permits splitting a payment into four interest-free installments over six weeks. It’s popular for shoppers looking to manage smaller purchases without interest charges, and it provides easy sign-up and approval processes.
• Splitit: Allows customers to pay interest-free installments using their existing credit or debit card. It is unique in that it doesn’t require a credit check and can work with major credit cards.
• Quadpay (now part of Zip): Lets users split their purchase into four payments over six weeks, with no interest if paid on time. It’s now integrated with Zip, a larger global BNPL provider.
• Zibby: A BNPL service targeting higher-ticket items, it grants customers the ability to finance purchases through weekly or monthly payments. It often includes interest charges and is used by furniture and electronics retailers.

These BNPL options are gaining traction because they allow shoppers to break up larger purchases into manageable payments, often without interest, if paid on time. However, they can also come with late fees if payments are missed, and interest may accrue after specific periods. Such services are increasingly being integrated into ecommerce checkout pages, since they are easy and convenient for shoppers to use.

Embedded lending options for ecommerce sellers

Embedded lending options for ecommerce sellers provide financing solutions that integrate directly into their platforms to help with inventory expansion, financing ongoing operations, covering costs of advertising campaigns, and other business activities when growing business online. Below is a summary of key embedded lending options used for these purposes:

Merchant cash advances (MCA) / revenue-based financing (RBF)

How it works: Sellers receive an upfront lump sum of capital, which is repaid through a percentage of daily or weekly revenue. The repayment is flexible, as it adjusts based on the seller’s sales performance.

Use cases: Often used for inventory, operations, and advertising, as repayments are tied to revenue and can scale with business performance.

Examples:

Square Capital: Provides MCA based on sales made through Square.

PayPal Working Capital: Offers advances based on sales made through PayPal, with automatic repayments tied to daily revenue.

Lines of credit

How it works: A revolving credit line that sellers can draw from as needed, with flexible repayment terms and the ability to borrow and repay multiple times.

Use cases: Used for ongoing working capital needs, inventory purchasing, and covering operational or advertising expenses. Interest is typically paid only on the drawn amount.

Examples:

Kabbage: Provides lines of credit for ecommerce sellers, which can be used for anything from inventory to operational expenses.

Term loans

How it works: A fixed amount of capital is provided upfront with fixed interest rates and set repayment terms (usually months or years). These loans are often used for larger, one-time expenses or expansion.

Use cases: Financing inventory, scaling operations, or investing in advertising and marketing campaigns.

Examples:

Lendio: Facilitates term loans for ecommerce sellers, helping with inventory financing and business growth.

OnDeck: Offers short-term loans for ecommerce businesses to finance operations, inventory, or other needs.

Supplier financing / trade credit

How it works: A form of embedded financing where businesses extend payment terms to their suppliers. A seller may receive financing to cover their supplier invoices, allowing them to pay later while securing goods up front.

Use cases: Primarily used for financing inventory and working capital, as it allows sellers to stock inventory without immediate cash outflow.

Examples:

Taulia: Provides dynamic supplier financing, offering flexible payment terms between buyers and suppliers.

C2FO: Allows ecommerce sellers to extend payment terms to suppliers or receive early payment from lenders, helping with inventory financing.

Accounts receivable financing (AR financing)

How it works: Businesses receive funding based on their outstanding invoices. A lender advances funds against unpaid invoices and collects payment directly from customers.

Use cases: Useful for bridging cash flow gaps, financing operations, or purchasing inventory, especially when invoices are due in the near term, but capital is needed upfront.

Examples:

Fundbox: Offers AR financing, allowing ecommerce businesses to get funds against their outstanding invoices.

BlueVine: Provides factoring services for ecommerce sellers, advancing capital based on unpaid invoices.

BNPL implementation in Amazon

Amazon has strategically embraced Buy Now, Pay Later (BNPL) services and expanded its financial offerings to both buyers and sellers. These initiatives are aimed at boosting ecommerce sales, improving customer purchasing power, and fueling growth for third-party sellers on its platform. Here’s a breakdown of how Amazon is leveraging these financial tools:

1. BNPL to boost sales for buyers

Amazon has integrated BNPL options to enhance the shopping experience for buyers, thereby making it easier for them to complete purchases, especially for higher-ticket items.

• Increasing affordability for buyers: By offering BNPL services, Amazon allows customers to split large purchases into manageable installments, typically without interest (if paid on time). This flexibility increases the likelihood of buyers completing purchases, especially for expensive or discretionary items like electronics, home goods, or fashion.
• Targeting a broader audience: BNPL appeals to consumers who may not have the full amount available upfront, especially during times of economic uncertainty or when consumers are prioritizing their cash flow. The service helps to capture more customers who may have otherwise abandoned their shopping carts.
• Partnerships with BNPL providers: Amazon collaborates with providers like Affirm and Klarna, which enable customers to choose payment plans (e.g., paying in 4 equal installments). This integration is seamless, appearing directly at checkout, which reduces friction and boosts conversion rates.
• Customer retention and loyalty: Offering BNPL increases customer satisfaction and loyalty. Customers who find flexible payment options are more likely to return to Amazon for future purchases, which drives repeat business.

2. Financial products for sellers: MCA, line of credit, and term loans

Amazon also offers various financial products to its third-party sellers to help them scale their businesses. These embedded lending services support sellers by providing flexible capital to finance inventory, marketing, and other growth activities.

Merchant Cash Advances (MCA)

How it works: Amazon offers MCA through its Amazon Lending program. Sellers can access a lump sum of capital based on their future sales, which is repaid through a percentage of daily sales revenue. This revenue-based repayment structure aligns with the seller’s cash flow, making it easier for businesses to manage.

Use case: Sellers use the funds to finance inventory, expand product offerings, or invest in marketing. The repayment model, tied to sales, allows sellers to pay back based on their revenue, making it less stressful during slower sales periods.

Impact on seller growth: By providing flexible, sales-based financing, Amazon supports its sellers in maintaining cash flows and meeting demand without requiring large upfront capital. This boosts inventory levels, product assortment, and overall business growth

Lines of credit

How it works: Amazon also offers lines of credit through partnerships with lenders like Goldman Sachs and Bank of America. Sellers can access a revolving credit line – borrowing and repaying as needed. This allows for continuous access to funds without the need to apply for new loans each time.

Use case: Sellers use the credit lines to manage operational expenses, stock inventory, or expand marketing efforts. With easy access to capital, they can act quickly when new opportunities arise, such as purchasing trending products or participating in Amazon’s seasonal sales events.

Impact on seller growth: The revolving nature of lines of credit provides sellers with financial flexibility and enables them to scale operations rapidly. This helps sellers improve product availability, reduce stockouts, and optimize their performance on Amazon’s platform.

3. Term loans

How it works: Term loans are a traditional form of financing where sellers receive a lump sum of money to be repaid over a set period with fixed interest rates. Amazon’s term loans, offered through Amazon Lending, are typically used for larger, long-term business needs.

Use case: Sellers may use term loans to finance large-scale investments, such as expanding their inventory for a peak sales season, launching new product lines, or funding significant advertising campaigns.

Impact on seller growth: By offering term loans, Amazon enables sellers to invest in long-term growth initiatives that can significantly boost sales. For example, sellers can increase their inventory before peak shopping events like Prime Day or Black Friday, ensuring they don’t miss out on high-volume sales.

Overall impact on Amazon’s ecommerce growth:

• Increased sales volume: By offering BNPL to buyers, Amazon encourages more purchases, especially for higher-priced items, which can lead to a higher average order value (AOV). For sellers, financial products like MCA, lines of credit, and term loans empower them to manage their cash flows, invest in inventory, and grow their businesses, which in turn drives more sales on Amazon’s platform.
• Seller success: Providing sellers with access to capital helps them scale more efficiently and remain competitive, especially in a crowded marketplace. As sellers grow, they generate more sales, which benefits Amazon by increasing its transaction volume and overall platform activity.
• Customer retention: BNPL options improve the shopping experience for consumers, making it easier to purchase from Amazon and increasing customer loyalty. The ease of financing also encourages repeat purchases, particularly for big-ticket items or holiday shopping.

In summary, Amazon is leveraging embedded BNPL to enable consumers to buy, while offering MCA, lines of credit, and term loans to sellers to boost growth, manage inventory, and fund marketing efforts. These initiatives create a win-win situation: buyers have access to flexible payment options, while sellers have the financial tools they need to scale and thrive. This dual strategy helps Amazon grow both its customer base and its vast marketplace ecosystem.

Key considerations for designing embedded lending services

When designing embedded lending services for an e-commerce marketplace platform, several key considerations come into play:

• User experience: Ensure a seamless and intuitive user experience, making it easy for customers to apply for and manage their loans.
• Product features and pricing: Tailor product features and pricing to meet the unique needs of e-commerce buyers and sellers, considering factors such as loan amounts, repayment terms, and interest rates.
• Data sharing: Establish clear data-sharing models between the e-commerce platform and the lending provider to facilitate credit assessments and risk management. It’s important to find the right balance between a method of sharing data with downstream solution providers, the amount of data shared, as well as ways of anonymizing and sampling data, to ensure both parties provide needed value for the benefit of sellers and buyers of the marketplace.
• Licensing restrictions: Be aware of lending licensing restrictions in various states or jurisdictions and ensure compliance with regulatory requirements.
• Mitigating risk losses: Implement robust risk management strategies to mitigate potential losses, including credit scoring, fraud detection, and collections processes.

If you are an ecommerce platform looking to enhance your customer offerings and drive growth, embedded lending solutions can be a game-changer. Contact us using this form to learn more about how our tailored lending solutions can benefit your marketplace business.