Platforms Target SMB Lending

The embedded finance market is projected to grow significantly, with some estimates suggesting it could reach $454.48 billion by 2031, representing a compound annual growth rate of 23.84%. Another forecast predicts the market could reach approximately $1,732.53 billion by 2034. This growth is driven by increasing demand from SMBs for streamlined payment processes and better access to financing. Vertical SaaS companies are particularly well-positioned to offer embedded lending by leveraging their deep industry integration and access to customer cash flow data. For example, Toast Capital provides loans to restaurants from $5,000 to $250,000, using the restaurant's sales history and other data points to underwrite the loans. Repayments are then collected as a fixed percentage of daily credit card sales, which means payments flex with the restaurant's sales volume. Shopify Capital is another prominent example, having provided over $5.1 billion in funding to its merchants since its inception in 2016. Merchants who received funding through Shopify Capital saw an average 36% greater increase in sales in the six months following the funding compared to their peers. Financial services, including lending, have become a major revenue driver for platforms like Shopify and Toast. The move to offer these services is often enabled by a Payment Facilitator (PayFac) model. Instead of becoming a full PayFac, which involves significant cost and compliance burdens, many platforms opt for a "PayFac-as-a-Service" (PFaaS) model. This allows them to partner with a provider that manages risk, compliance, and processing, enabling a much faster time-to-market for new payment and lending products. To manage the complexities of these expanded financial offerings, platforms are increasingly turning to AI. Artificial intelligence is being used for intelligent payment routing, which analyzes transactions in real-time to select the most cost-effective and successful processing path. AI-powered machine learning models are also crucial for fraud detection, as they can analyze vast datasets to identify and flag suspicious patterns far more effectively than traditional rule-based systems. The push for faster access to funds is also driving the adoption of real-time payment settlements. For SMBs, immediate access to funds from sales can significantly improve cash flow management and reduce the reliance on high-interest working capital loans. This is particularly important for businesses with tight margins or seasonal fluctuations. Real-time payments also enhance the customer experience by enabling instant refunds and payouts.