Today, embedded finance is one of the most influential, seemingly all-encompassing technology trends taking place around the world. It involves non-bank companies and fintech start ups offering financial products and services to targeted customers. Many suggest this is the beginning of a transition to fintech 3.0 where a customer’s experience (with such things as online payments, credit and loans) comes first. To gain a better understanding of this global trend, Flourish launched its Embedded Finance series with a focus on conducting deep dives on the technology trend’s sub-components: Platforms, Plumbing, and Plug-in products.
Venture Partner Ameya Upadhyay kicked off the three-part event series with the Platforms online panel discussion and sat down with Afeef Zaman from ShopUp in Bangladesh, Belal EL-Megharbel of MaxAB in Cairo, and US-based Jimmy Chen of Propel. While each fintech company offers a unique online platform that targets specific customers, the founders discussed the common elements across geographies – limited access to capital, inefficient supply chains, and business models bespoke to their regions yet sharing similar opportunities and challenges in reaching traditionally underserved communities. Here are key takeaways from the panel discussion:
Bangladesh SMEs Get Relief with Online Credit
For those unfamiliar, ShopUp is a full stack b2b e-commerce platform designed for small business owners in Bangladesh – now estimated to be more than 4.5 million and growing. As CEO & co-Founder Afeef Zaman explained, “These shops are the most important contributor to the economy.” A market of this size cannot be ignored.
While Bangladesh was largely offline a decade ago, its ever-accelerating digital transformation and mobile adoption makes the country one of the most exciting emerging markets to invest in right now. “In the last five years digital consumption has almost tripled,” Afeef said. Bangladesh now ranks as the world’s 9th largest country in terms of mobile consumption.
Yet, while the digital transformation continues, the majority of Bangladeshi SMEs still rely on credit instead of cash or digital payments. “Only 10% have access to traditional capital,” Afeef said. This liquidity crunch is a major concern for merchants.
Another industry stressor is logistics. While supply chain management can be a pain to handle anywhere in the world, Bangladeshi shop owners have a particularly difficult situation. Each neighborhood small business owner handles, on average, 40 different vendors. This unreliable and chaotic supply chain cuts out a significant portion of their profits, narrowing possible income. As Afeef noted in the conversation, the entire supply chain needed a makeover.
‘Iron Triangle’ Powers Small Merchants & Cuts Overhead
ShopUp has a steady margin from what Afeef and his team refer to as the “Iron Triangle.” The ShopUp platform provides merchants with an inventory sourcing service, last-mile delivery, and access to credit. By providing these three different services to Bangladesh’s shop owners, ShopUp reduced overhead by a whopping 14.5%.
Reflecting on the company’s transition to embedded finance Afeef said:
When building in emerging markets, you have to look left and right. Things are not built out so quite often you will have to build things yourself.
By reinventing the supply chain, Afeef and his team created a platform and a new system that works for underserved merchants.
Egyptian SMEs Overcome Supply Chain Roadblocks
MaxAB’s Co-founder and CEO Belal followed up ShopUp’s supply chain application with one of his own. In Egypt, big retail and pharmacy chain stores like Walmart, Walgreens, and others only make up 10% of the grocery market. Egypt, like Bangladesh, is largely dependent upon small businesses. In fact, Belal estimated that this dependence is equal to about 90% of the country’s economy.
Yet, while SMEs and corner shops are of paramount importance, the underlying system is built to serve the big merchants. As a result, SMEs face a highly fragmented supply chain with unreliable inventory and partners.
According to Belal, this fragmented system has been established for so long that the majority of shop owners are unaware of how its inefficient practices are sucking away their finances.
Retailers aren’t making money, but they don’t know they aren’t making money.
He explained the three main causes:
- Finding inventory and reliable partners who will consistently source inventory
- Understanding the logistics and finding suppliers who will deliver goods on time
- Managing pricing since an inefficient supply chain increases costs dramatically
If you ask Egyptian merchants to tell you their biggest problem however, they will say “paying in credit,” Belal answered. Again, the situation in Bangladesh is reflected in Egypt. With credit being a top priority for local merchants along with access to working capital.
Online Credit Empowers Egypt’s Small Businesses
The MaxAB team introduced an online wallet so that merchants can easily process all their transactions. With access to capital and the safety of a non-predatory overdraft solution, merchants found they can now maintain their stock properly. This virtuous cycle continues to create better stock management and fewer shipments while ensuring less time wasted on unnecessary processes. In the end, merchants generate more revenue. With the MaxAB platform, SMEs are seeing their incomes grow substantially.
By working with small Egyptian business owners, Belal and his team filled a large gap in the infrastructure. “We focus on the most underserved areas and the most underserved merchants on the outskirts.” These merchants typically don’t have a large cash flow. Consequently, the team has a long-term view of finance and opts for gaining trust rather than making a quick buck.
“How can we use finance to empower the merchant?” is the question the MaxAB team often asks. The answer, Belal said, was building financial products with longevity, taking small margins, and building potential – all within an embedded finance platform.
Single Mothers in the US Are a Focus
One of the most unique applications of embedded finance in the US market right now is Propel’s Providers app. A first of its kind, the app is focused on the one in eight Americans enrolled in the United States food stamps program. Currently, the food stamps program is distributed largely through a card, like a debit card, but as the Propel team discovered, users are required to call a 1-800 number to check their balances. To bring this fragmented system together and provide more financial product offerings, Propel built a mobile fintech app.
Not unlike the other platforms, Propel is tailored to one customer segment. “Propel’s core user is a single mom in the US,” said Founder and CEO Jimmy. This specific user community often lives in cities, makes under $40,000 a year from different income streams, and is severely underserved by traditional finance. Propel’s app is a free resource.
“Employers, utility companies, telecom companies, and grocery stores are the partners who fund our platform,” explained Jimmy. Companies who want to reach and support this specific American consumer pay Propel for advertising services.
However, the high-growth fintech is not an open advertising platform. Jimmy said:
We manually source and design the ads with our team. We only want content to come on if it is genuinely helping our direct customer.
Propel’s hyper verticalization of financial services has already made a tremendous difference in the lives of its 5 million users.
More to Come
While the Covid pandemic accelerated the adoption of embedded finance platforms and the transition to digital-first finance, it also served as a source of inspiration for these fintech entrepreneurs. With the unbundling of financial services, ShopUp, MaxAB and Propel can now target underserved consumer and small business communities and provide financial services built for specific needs. Embedded finance platforms are opening up consumer-first financial products and services.