Revolutionizing Small Business Finance: The Rise of Embedded Finance

Embedded finance is having a moment. While those of us in fintech marvel at all the technological innovation enabling its different facets, the reality is that embedded finance is helping people in very real ways.

Today, Pipe announced the launch of their Capital-as-a-Service (CaaS) offering, marking a significant development in the realm of embedded finance. This new offering is set to have a dramatic impact on small businesses nationwide.

The Persistent Challenge in Small Business Lending

It's disheartening that despite over a decade of focus on the lending space within fintech, the small business lending problem remains unsolved. Millions of small businesses still lack access to capital due to the inability of lenders to effectively underwrite heterogeneous small businesses, especially those with thin-file or bad credit owners. Although fintech lenders have made progress, the problem persists.

The Emergence of Pipe

Enter Pipe, a company that has been making waves for nearly five years by primarily providing capital for SaaS companies. With successful ventures and significant funding, Pipe stands out as a unicorn in the fintech space.

In November 2022, a pivotal change occurred within Pipe. Fintech veteran Luke Voiles, formerly of Square Banking and Intuit, took the helm as CEO. Leveraging his expertise in small business lending, Luke initiated a shift in Pipe's focus from SaaS to embedded finance, culminating in today's groundbreaking announcement.

The Pivot to Embedded Finance

Under Luke's leadership, Pipe has pivoted towards offering embedded finance solutions. Today's announcement unveils three launch partners: Priority, Infinicept, and Boulevard.

"The key is design and focusing on the user journey. Each Pipe client will have a very different user journey, which is why Pipe’s head of design is involved very early on in the process. You want to surface this capital offering at the point of need or at the place where the user visits regularly. Every step in the user journey needs to be considered to ensure success." - Luke Voiles

Boulevard, one of the launch partners, experienced remarkable success during a recent pilot with Pipe, achieving a 5% conversion rate within the first two weeks. This underscores the importance of thoughtful design and user-centric approach in embedded finance offerings.

How Pipe's Capital-as-a-Service Works

As a white-label product, Pipe's CaaS enables clients to launch new lines of business without the complexity of creating a lending division. Pipe handles the entire process, including underwriting and risk management, and shares the economics of each transaction with its clients.

Unlike traditional installment loans, Pipe's model functions as advances repaid by small businesses through customer payments processed by Pipe's clients. By integrating into the payments flow, Pipe ensures repayment whenever the end small business makes a sale, thus expanding the underwriting window.

Scaling Opportunities

This model provides Pipe with scalability previously unattainable in the SaaS-centric business model. With the potential to generate hundreds or thousands of advances through a single partner, Pipe is poised to capitalize on the rise of vertical software companies, which could emerge as the new community banks.

With the capacity to finance up to $1.2 billion a year in advances and plans for whole loan sales to further scale operations, Pipe is positioned to address the pressing need for accessible finance among small business owners.

The Future of Embedded Finance

For small business owners with thin files or no credit scores, accessing affordable finance has been challenging. However, with the advent of embedded finance solutions like Pipe's CaaS, real options are now available, signaling a promising future for small business finance.