This episode explores why embedded lending is emerging as the next big frontier after embedded payments in Europe and North America. Charlotte Al Usta (Flagship) and Luke Trayfoot (YouLend) discuss how lending delivered through platforms can finally fix SMBs’ chronic access-to-credit problem by leveraging real-time data instead of slow, paperwork-heavy bank processes. They dive into key use cases like revenue-based financing and working capital, the role of banks vs. fintechs, the complexity of scaling across European markets, and why most players will pursue embedded lending via partnerships rather than building in-house—plus how AI and better UX will shape the next five years.
Do not hesitate to reach out to Charlotte al Usta, Charlotte@Flagshipap.com with any comments or questions.
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Embedded fintech has long been synonymous with payments acceptance, but with embedded payments now maturing across Europe and North America, the next major wave is already taking shape and we're only at the beginning. We're talking about embedded lending, delivering capital directly to SMBs through the platforms they rely on every single day. In this episode, Charlotte Al Usta from Flagship sits down with Luke Trayfoot from YouLend to break down why lending is a natural next frontier after embedded payments, how real-time data is transforming SMB credit access, and what platforms, PSPs, fintechs and even banks need to get right to win. Tune in if you want to understand where embedded finance is headed next.
Charlotte Al Usta (00:56)
Hi everyone and welcome my name is Charlotte Al Usta, principal at Flagship. And today I'm excited to welcome our ever first guest onto our podcast series, Luke Trayfoot Global Head of Strategic Partnerships at YouLend. Luke has spent the last 15 years in fintech and most notably in senior commercial roles at the likes of Hyperwallet, PayPal and Mangopay with a very strong focus on embedded payments and is now leading the embedded lending at YouLend. So Luke, welcome. And can you perhaps tell us a bit more about YouLend?
Luke Trayfoot (01:29)
Sure, thanks for having us Charlotte. Yeah, sure, so YouLend is an embedded lending provider. We operate 10 markets today and consistently growing in those markets. But fundamentally we're offering an embedded lending proposition which allows platforms, marketplaces, payments companies, fintechs, banks to offer lending to their SMB cohorts of businesses.
Charlotte Al Usta (01:51)
So perhaps just to set the scene very quickly. So today we'll be discussing obviously embedded lending. And so we'll be sharing our thoughts on why we see lending as a next big opportunity after payments and how it's effectively reshaping ⁓ access to finance for SMB specifically. And perhaps before we deep dive into the topic and also for the audience benefits, Luke, can you perhaps define how you think about embedded lending?
Luke Trayfoot (02:16)
I think fundamentally it's about how do we get capital or how does a platform, how does any business get capital to their customer base. so traditionally that was always a path for banks and banks would be the capital providers to those businesses, large, small, asset heavy, asset light.
And so embedded lending has changed that landscape quite dramatically. And so we look at it in a couple of different proponents. One is that we have various different product sets that allow these platforms to incorporate this offering into their service. But then it goes far greater than that.
The ability to provide liquidity for that capital is very, very important. We have a diversified portfolio of capital providers that allows us to do a couple of things, widen the eligibility, improve the offers that we can provide and the size of those offers, both on the smaller end and the larger end. But when you look at sort of the operational side of launching a lending or a capital program.
it's significantly different to say payments and so embedded lending allows through partnership allows business to go and offer those services out so everything from how you handle an inquiry to how you make decisions and underwriting and then processing that servicing them and then the renewal.
Lastly, would like to say, I think data is the collateral in this whole space for embedded lending. That's where it's fundamentally different that we're looking at a real-time view on businesses to be able to lend to those businesses, which is fundamentally different from years gone by. And so with the emergence of technology, internet, and what these businesses are using as their financial everyday tools, with the data enrichment that comes with it allows for a quicker decision; easier access, less paperwork, less friction, all at the point of need.
Charlotte Al Usta (04:00)
Yeah, absolutely. And I'm looking forward to double click into all of that. I mean, like the data point especially is like a really important one, right? I think just taking perhaps like, you know, a step back, I think what is really interesting is effectively when we look at the broad embedded finance opportunity, payments is obviously one of the most mature products, still a lot of opportunity to be captured specifically in Europe, UK, where it's like less mature.
I think what we also have observed is effectively embedded lending accelerating across geos. And so that was effectively quite obvious in the survey that we conducted earlier this year, where we conducted around 100 platforms. so 36 of them were already, or had started offering embedded lending. 37 were planning to offer embedded lending in the next 12 months.
And so that was really the use case after payments and before others such as, know, banking, payouts, insurance that really came out as a next big opportunity. Why do you think that is and what is effectively driving that shift or that acceleration?
Luke Trayfoot (05:05)
Yeah, I think it's a few things. Firstly, it does depend somewhat on the customer cohort that you might have as a platform. But when you look at what's the driving force, I think it's simply that a lot of these businesses do not have access to capital through any other means. Or if they do, it's a very slow and sort of incumbent type journey.
And so your options are the bank, your options are to go through a panel of lenders where you're looking at lots of different offers and different pricing structures, different repayment terms. so lots of businesses have effectively the eyeballs of these customers and they're looking to utilize those in order to, yes, generate revenue, but also generate all the other net benefits that you can get from a lending program, such as higher NPS scores, longer...
a lifetime value, an increase in average revenue per user, lower churn. So when you look at the opportunity, there's a big need. There isn't necessarily enough supply from the open market. And lastly, if you can go to market through a partnership, it is not.
There's no requirement for capital, there's no requirement for much tech work depending on how embedded you want to go, but there's flexibility in that go to market which many other products and value added services require businesses, especially payments businesses, to have to go quite deep and own the value chain. With this you don't really need to and it's relatively revenue rich but also all those other benefits I mentioned.
Charlotte Al Usta (06:34)
Yeah, absolutely. And I think that's even more so, right? The smaller the average merchant is effectively on your platform or I mean, we had looked at a couple of numbers in terms of, you know, what is demand by SMB segments. And it's obviously very high. So for example, in the US, you know, 50 % in average SMBs are looking for financing. If you look at micro businesses, effectively only 30 %
effectively get a credit, which, ultimately really shows that, the smaller you are, the harder it is to effectively get access to financing. And another point that, you know, we had done lots of research around comparing effectively what it would take to get a credit from a bank as a small business owner across geos. And it's incredibly hard, right? It's a lot of paperwork. You need to provide lots of history in terms of trading history to the bank, until you get the approval, it's very, very painful for an SMB and really hard to get. So do you think, so two questions So who are the ecosystem providers and enablers that will benefit from embedded lending? And do you think banks still have a right to win?
Luke Trayfoot (07:43)
Yeah, so we look at it in effectively an eight box quadrant and so we look at four different verticals. They're very broad but first is payments and originally that that sort of industry was pioneering this space because they had the card data, they had the user base and to some extent under some pressure for their price points and their net revenue and their margin. And so they looked at these options which they can go through. We then go down and look at software platforms. That's sort of a very large frontier of this right now. Marketplaces, we work with of global household brands in that space, which see ultimately the sellers get a lot of net uplift from getting easy access to capital. Classically a business would be in that bucket that you just mentioned, which, and all that stuff, couldn't go to a bank necessarily and get lending. And then lastly, we're seeing a lot of traction in fintechs, money movement, neo banks and banks and we bucket those together and we look at them in two lenses we've got for intents of purposes, specialist partners, these think of these as verticalised businesses or platforms that are looking at a very specific set of merchants serving them for their needs, be in the likes of hospitality, could be in the likes of… car parts, whatever it may be, there's a vertical approach to it. And then we also have a horizontal lens, which is more like a diversified pool of businesses that they serve. And so those platforms are serving everything from a mom and pops, single owner, single operator type business, all the way through to more established, even up to enterprise businesses. So all of those have a very good context today to be looking at lending if they're not already.
But also looking perhaps they have a lending program and they're at new geographies, they're looking at wider eligibility, those are key things that these platforms are looking at. On your second question, yeah I totally think banks have a right to play and to some extent they still have very much a right to win. The rationale behind that is ultimately trust, security and there are many businesses that you know still feel relatively comfortable with their bank and they trust their bank and so it's different for the banks because it's actually about two things risk and operational execution, so we look at those two areas for banks and that's really the point in which we see a need for uplift, especially on the micro end of those businesses, they're effectively smaller ticket sizes, they're still relatively the same amount of operational uplift with paperwork and those sorts of things and in fact we're partnering and continuing to partner with lots of banks in the space that helps the banks serve those micro SMEs.
SMEs and even slightly larger SMEs which are asset-like, the banks don't traditionally have a risk appetite to lend to nor do they see the value on a revenue basis for the operational uplift that it takes to serve them and so we can slot in really nicely there and help those banks serve those customers until they become their corporate, mid and enterprise customers.
Charlotte Al Usta (10:47)
Yeah, I mean, I do agree. think banks have this massive right to win as it comes to access of cost of capital rights in addition as well, in addition to trust. So these two levers really make sense. You mentioned a couple of things ⁓ in the beginning where you said, platforms, marketplaces, as well as, fintechs or PSPs that are starting to offer embedded lending to the end customer, really offer a better product, which ultimately comes with a higher NPS score, LTV, higher revenue, lower churn. What else is in there for them? How would you define that in terms of the key advantages for the end customer, but as well for the provider of embedded lending itself?
Luke Trayfoot (11:27)
Yeah, I think it's the compound parts of those that are really special. So we see a lot of platforms that are looking to increase revenue, which granted very important and it's not to be ignored. But ultimately, if you could find that right, what I call the sweet spot where the merchant gets a great price point.
With a very good experience to be able to get access to that capital instantly or within the same day. Then you have a great experience, which means you are effectively building more of a motor and your core product set. And so there are many examples we can go into, but it's when you get the compound, sum of those parts that becomes really, really important.
I do think it's in the detail. It's how do those customers view you, value you. Lending is slightly different in the sense that in payments, there's somewhat of the lifeblood of the system. And in many cases, I'm sure you've seen on platforms, make that mandatory, which could be a friction at entry point, but over time that really improves.
That platforms economics but also the experience for the customer and many other platforms make it optional. With lending it's always going to be optional, it's an opt-in type product. And so you have to sort get that sweet spot of the widest eligibility for the best penetration regardless of how small those businesses are, supply them with capital, they can then utilize that capital to open a new office or a new location, hire staff, do better marketing. There's so many benefits that that business gets which then you as the platform get as a follow-on effect.
Charlotte Al Usta (13:01)
Yeah, no, absolutely. That makes sense. I think it applies also to a lot of different verticals and horizontals, right? You mentioned that at the beginning and I think that's super interesting. It can really be applied to e-com centric businesses, to point of sales centric businesses, to office of the CFO. And so ultimately I think solving just access to finance has been such a pain point
not well served by banks in the past. And I think the demand is just very high for that. And it's been proven by a lot of the numbers, right, that we see in the markets. And I think that also comes to my second point. You know, increasingly we see financial services becoming equally an important customer segment for providers such as YouLend as the likes of marketplaces and software platforms. And we'd love to get your perspective why that is.
Luke Trayfoot (13:49)
I think a lot of these businesses are managing their day-to-days very differently to 5, 10, 15, 20 years ago. And so I would argue that many of these businesses may not even log into their bank more frequently than once a month, maybe once a week if we're being generous. so you look at the software platforms, whether that's an accounting platform that might be a day-to-day.
entry point for a business which then is connected up with their POS system or their marketplace sales and it's generating the financial output in order to make a decision as a business owner. So for those platforms embedding financial services makes a lot of sense because the customer wants to ideally have as much as possible in one place. As long as it's the majority of either where they're selling or what they're doing, or it provides a service that allows them to aggregate all this information for them to make a decision rather than having to log into five separate systems, look at five separate sets of numbers they may not reconcile and then make a decision where you don't feel informed. A trust element is very important, but then that user experience and journey that these new digital platforms, whether they're software platforms, financial technology providers, PSPs, marketplaces, are, you know, they're second to none, they're digital first businesses and that's what, as every consumer you'll see today, expects the level of service that you'll get when you order something, it gets delivered next day, you can return it for free. Businesses are humans at the other end as well and they're looking for a similar experience.
Charlotte Al Usta (15:21)
Absolutely. That makes sense. I think another point that you already touched on that at the beginning, our survey also showed that the partnership route specifically on embedded lending is a preferred one. We'd love to get your perspective around why do you think partnership is so much more important within embedded lending versus other use cases within embedded finance?
Luke Trayfoot (15:49)
Coming from payments and moving into lending it's been quite high in terms of it just totally different ways of operating a business and I think when any platform is looking to go out there's the typical build, buy, partner type go to market. So perhaps we can look at it in that lens where if you're looking to build yourself firstly it's not always a core competency. Secondly it's quite capital intense so you've got to find that money to go out of the door and ultimately get the money back in the door.
And so that takes people time. There's also a lot of data and underwriting that only comes with time and experience and number of merchants served. And so we see a lot of businesses and platforms that come to us looking to leverage that because that is something that builds organically over time through experience.
So yeah, it's quite a large uplift and of course if you've got a big base of customers to serve that's the first thing that you need but there are still many other things under the hood that you need to go and be prepared to achieve. Having said that there are a number of successful platforms that have executed on the build model, probably three come to mind globally. So your next option is to buy and we see that quite often but that will typically mean that M&A is quite tricky to go and execute correctly especially if it's not a core competency of the business that's the acquirer of the business being bought. But also it's quite geographically restrained.
And so lot of those businesses and payments can go international relatively quickly and lending is a bit different. So there's a different landscape of regulation, currencies, credit bureaus, many different things. And so I think coming to partner is a route that many platforms take to go to market because it reduces all of the nuances of that heavy lift in the build column.
It removes the risk if you pick the right partner of the buy column where you can go into many more markets quite quickly. But ultimately you're leveraging someone else's expertise. You're testing and learning and piloting and launching. So through that process you can learn a lot. In which case in the future if the desire is to go to build it yourself, you're doing that with a lot more experience and lot more facts and intelligence and data models that you can then apply yourself. So as a route to market I think that's why it's fundamentally so much more popular. I think some of the stats we've seen is over 80 % of those platforms are looking to partner, which is quite different to say payments or issuing or accounts or insurance.
Charlotte Al Usta (18:22)
No, I agree. And I think you just mentioned a really good point around, access to data, which is just so fundamental within embedded lending, right. And that's particularly even more important as you think about, you know, Europe, which is very fragmented, where access to data, the more you go into continental Europe is very restricted, I would say, compared to more mature geos. And ultimately, that coupled with the cost of capital just makes it indeed very logical to go first down the partner route and also in the longer term to still just leverage the partner for that.
Luke Trayfoot (18:55)
Yeah, I think it comes with scale, right? And if you have some context for YouLend we've funded over 350,000 businesses, put offers out to millions of businesses, have our own UX UI that we A/B test on a daily basis, but we have a whole host of partners in that quadrant I mentioned. And so you can, if you're a partner, platform slotting into one of those you have a pre-baked ready-to-go set of data pricing and knowing what you want to get out of the program do you want to get you know as much penetration as possible to as wider cohort of merchants as possible or are you looking to you know just make make money effectively right and then there's somewhere in the middle I always argue you know depends on the strategy for that platform but that comes pre-built pre-boxed up so yeah, a lot of value from going to market through partnerships, of course.
Charlotte Al Usta (19:50)
And out of curiosity, have you ever had the case where, you know, PSP or FinTech started building that in-house and then went to YouLend to go down the partner route?
Luke Trayfoot (20:00)
Yeah we did, and actually several of our largest partners actually started to build themselves and typically would pick a market to do that and the interesting facts here were the eligibility was, on a few of these, average around 20 to 30 % of that addressable book of business that they could lend to. And so you create a dynamic where that 70, 80 % who weren't getting served with capital were getting actually quite negatively impacted, or as we call it internally, as some FOMO around not having access to capital. And so that's the first entry point for us where we allow for those businesses to be served and we allow for the platforms to do both.
They can serve the cohorts that they're, they have a risk appetite too and they know really well, but widen the eligibility. The other use case is geographical expansion and you mentioned Europe earlier and we're live in eight different markets across Europe and it's a different landscape, both on regulation, datasets, credit bureaus and access and also scale. If you were to compare a single European market to the US, it's fundamentally very different in scale and so there's always these questions for these platforms of well we've done it here but if we do it again here is the juice worth the squeeze and so that's where we can slot in really nicely and service them in different languages, different cultural nuances, banks actually have a different approach to lending in some European markets than others and so having that local expertise and knowledge is really important and especially for these large global platforms that are quite distributed across the world taking that micro lens on a small country in Europe sometimes isn't something that happens quite easily, come into there and give that expertise we talked about but also help them launch quickly.
Charlotte Al Usta (21:46)
Yeah. And I think that, another point that is also worth mentioning, it's very similar for payments, right? A software platform that is embedding payments first actually needs to learn the product. How does it work? How I can cross sell and upsell that into my front book and my existing merchant base. And it's a real learning curve and learning journey. And so that's very similar with embedded lending as well. Right. Even if you launch that in your core geo in the U S right.
I think it always comes with learning how to position the product, how does my customer behave? And obviously like your customer in the US is going to be completely different. Somewhat we have like, you know, a different behavior than in the UK or like in Germany or in France. So yeah, fully agree on that.
Luke Trayfoot (22:25)
One added thing on Europe, you mentioned Germany there, it fascinates me in that market because for the payments folks out there, they would know 50 %-ish, I know it's increasing slightly, but 50%, sometimes less, is card-based.
And so what's the other 50 % of it? It's LPMs, APMs, cash, invoice. And so when you're looking at lending off the back of embedding payments, quite a lot of providers may not be able to lend against or have the ability to underwrite and consume the data outside of card payments, which is something that YouLend has achieved in Germany, which we've seen sort of great results from that. And I think that's one example of a very important nuance. If you're coming, say, from the US and going to France or Germany in this instance, not only is there regulation, then there's the, how do you provide a really strong offer to that merchant? On all of their revenue sources, consistent revenue sources, not just one payment method.
Charlotte Al Usta (23:23)
Yeah, I think it's a fair point, especially whenever we talk about merchant cash advance, we think about that as like an advance on your card receivables. But ultimately in some markets, if you're not going beyond cards, you're just missing out on a big pool. Right. And Germany is probably one of the best examples here.
Luke Trayfoot (23:40)
As I say, we've seen that in Germany, but also in every market because we have a solution which is total revenue that consumes all that data. so platforms in the accounting space, in money movement.
NeoBanks as an example, there might be a business, a solo sort of entrepreneur owner operator business that might do half of their business from cash and invoice and or card. We also saw an interesting use case of this with the food delivery companies whereby there might be one food delivery company that applies for capital with you from a single partner, but then when you look at their revenue, it might only be 10 % of their revenue because they're going to have three other platforms that they're payments from or revenue from. They've also then got their walk-ins, they've got their dine-ins, they've got their cash, and so when you look at a business, you've got to look at all of those points of revenue sources and find a way in order to lend the right offer size for that business's needs.
Charlotte Al Usta (24:39)
I agree. And so we oftentimes would love to spend a little bit of time around the use cases within embedded lending. Merchant Cash Advance is one of the most advanced use case today. Where do you see the market going and what do you see as kind of the next large use case?
Luke Trayfoot (24:57)
Yeah, I think Merchant Cash Advance serves a great purpose. I think there's an element here of revenue-based finance. There's lots of different terms, but I think for clarity, it's really about a flexible repayment lending product because for businesses that are quite cash-constrained or cash-flow-constrained and have a very much look at their businesses on a day-to-day basis. The amount they have to repay is really important because if their business is doing well, they'll happily pay more of that in load back. And if they're not doing so well, if they're having to pay back a certain amount on a fixed element, that could be where they get into a bit of trouble. So I see this as a very sustainable product set for those types of businesses. Having said that, we have three other products alongside MCA, or revenue-based financing, and so a fixed repayment product might suit a business that is a little bit more consistent in terms of their cash flow, and they're looking at a position to pay back on a weekly basis, or in some cases, monthly basis. And so that leans towards the larger businesses who are in different types of industries. And then there's also a little line of credit, right? And so that can be framed in many different ways and lots of people have looked at that in different ways and you can even have a card attached to that whereby in theory a platform might say we offer payroll services and those payroll services, that business that's needed to make payroll at that point in time, instead of taking out a long-term fixed or flexible repayment loan can just draw down for the amount they need to make payroll happen. And that's one use case. There are many others. We're seeing quite a few emerge in the B2B buying space where you might be a small business buying on a large marketplace, a platform, and you're looking to actually utilize whether it be a line of credit or some type of lending in order to fulfill that purchase because you've got a very finite point in time to purchase those items, right, that good. Which is an offer that's time limited. So we see that is very popular in marketplaces and many others.
Charlotte Al Usta (27:05)
Yeah, I think probably that's like one of the area that I find the most interesting is I think about embedded lending is we only scratch the surface, right? So you have revenue based financing, made a head start. But then there's a broad opportunity of pretty much like anything around on security, I would say, right, whether it's term loans or working capital loans, credit cards in some specific markets or ⁓ overdrafts specifically relevant in Germany, example, instant settlement, buy now pay later. Factoring is actually one of the other use cases that has been around for quite some time obviously, but this is also being innovated again with FinTech enablers to make that way more agile, more relevant to B2B verticals and office of the CFO. But in most financing I think the kind of range of use cases and possibilities is just so vast. It makes it just super interesting, I think, and really excited to see what is going to come next.
Luke Trayfoot (28:01)
Yeah, it is really interesting and I think sometimes the privilege of this challenge is picking which ones are most important for A, the platform and the platform's constituents, so many of these things come to the fore and I think that's again the route to partnering and finding someone who really understands this space can really help because we see a lot of businesses in platforms where that may have an angle of something that they see as being a benefit off of a few businesses or merchants in their cohort that they want to serve, but actually you've got to take a bit of a step back and have a look at the different ways. And fundamentally it's about framing. If you look at it, all of this is a lending product. It's just how you frame it and what am I actually taking, if you're a business you're thinking, what am I taking here, right? What am I getting into?
So it's fascinating how UX, UI can actually play into some of this, but also the underlying unit economics and the repayments.
Charlotte Al Usta (28:56)
When we look at, so at the very beginning I mentioned that, you know, when we look at embedded payments, obviously the US is a couple of years ahead of the UK and Europe. How do you see the state of maturity of embedded lending specifically if you were to compare both regions?
Luke Trayfoot (29:12)
Yeah, I think in the US it's fundamentally a larger TAM ⁓ serviceable addressable market as well so that helps with regards to the go-to-market motion. There's also a fragmentation of the bank industry for lending and so that helps for the thesis of what we talked about earlier of getting the right offer of the right size at the right time in front of those customers through this technology. It's also a single market the majority unregulated, at least from a revenue-based financing standpoint. So that helps with access and fintechs to come in and actually drive change. I when you look at the lens of the UK and Europe, I'd actually see UK and Europe relatively different in the sense that the UK is more similar to the US. It's a single currency, a pretty good regulatory framework. Revenue-based financing is fundamentally unregulated.
In the UK outside of consumer and so that helps but there's a very large difference in the size of the addressable market in those two. When you look at Europe that's where it is fragmented it's different regulatory landscape and when you look at the approach to market it's cultural differences.
We typically see in say Germany, they quite often want to speak to someone on the phone. They quite often want to speak their language and understand what they are signing up to, which would be say different to a market, another market in Europe. And then on top of that, you look at markets in, Italy's a really interesting case on sort of how the economics can work or can't work, depending on where you come from. And then markets like Spain, which are slightly different on repayments, and markets like Poland, where there's no national direct debit scheme, and so you have to have different methods for repayments. And the list goes on. France, where it's a nationally owned credit bureau, and so that makes it difficult to go and get third party public accessible data on those businesses. So yeah, you can continue on that journey and those are conversations you don't need to have about the UK or the US.
Charlotte Al Usta (31:20)
Absolutely. The kind of biggest differences between those countries, first probably like access to data. You mentioned France is one example, right? And I think these official bureaus are also not updating the data on a regular basis, right? So you have a completely different profile there. And then indeed, like, you know, Italy is heavily government subsidized, which just makes it really hard to actually make a proper case out of embedded lending specifically, although it's again, like not, not a closed market either, but yeah, I think you need to navigate through some of those differences there. When we look at difference in maturities between verticals and horizontals, which verticals or horizontals do you think are most advanced as it comes to embedded lending today?
Luke Trayfoot (32:04)
So I do think the payment space we talked about that and I think in terms of being most advantageous, if you look at the vertical payments businesses, I think they're typically getting the most penetration and the widest adoption because of the focus that they have on the types of businesses that they're working with today. So it might be a smaller pool of businesses or a smaller set of customers, but ultimately, the customers are all looking for the same thing so it makes the ability to go live with lending to those customers through that platform slightly less complicated and you can be more direct. At the same time we've seen a huge amount of success in the horizontal payments businesses whereby typically larger more global brands that are looking to keep up with market trend, market positioning, reducing churn, all those net benefits I talked about earlier and so there's an very interesting race to be watching on who's doing what and where.
But we come back to the argument about eyeballs and so a lot of these vertical businesses, if you wanted to cut it, have typically higher engagement from their merchant base than the horizontal businesses. There are obviously some outliers in both, but that's the trend. And I think software is now becoming that frontier. The addressable market in the US for vertical software is extremely large, and that's where in Europe it's slightly less and interestingly we were pondering on this a bit around sort of embedded banking as a service, embedded payments in Europe and I think that's some of this is a follow-on where it's quite difficult for those platforms to go and find a really strong provider for every market in Europe, everything that they need and so that fragmentation is actually multi-layered. But on the horizontal side we do see some success in software so the likes of accounting platforms and others where they have a sway of businesses that need access to capital. But they need these other components in order to have a successful program. So it can't just be card-based, can't just be single market. They're very global, they have different payment needs, slightly lower penetration in terms of embedded payments. So then you have to pick up and look at that whole cohort.
And then you come to the banks as well, which is really interesting. We're seeing a lot of success in the neo bank space across the UK and Europe and in the US, whereby it's relatively similar to these horizontal software platforms because the money is coming from many different sources. The one added thing to this is that a lot of these banks, neo banks, they could be secondary account holders. So they have a primary bank, traditional bank that they hold that account with and they're utilizing these neo banks or digital first banks because they find it sort of more flexible to use, easier to use, and so they're looking to get service through that. So, yeah, on that race, it's going to be really interesting where the horizontal businesses have a very large cohort of customers that they can work with, but it's harder to penetrate, whereas on the vertical side, you've got perhaps a slightly smaller cohort of customers, but they're getting higher penetration. So we're somewhat watching this happen in real time, which is fascinating.
Charlotte Al Usta (35:11)
I think probably the more KPIs that will be published in the public domain going forward will also help accelerate the shift, right? So the likes of Toast, Lightspeed, Shopify are also starting to publish a lot of KPIs in the markets. So for example, Toast published that they originated over a billion in 2024. And, that's very similar to Stripe Capital now starting to publish KPI, so like Mollie, Adyen. And so that is also going to give confidence and is somewhat shaping the way of others also following, their way into embedded lending. Do you have a couple of best practices for marketplaces, for platforms, but also for fintechs or PSP that are looking to embed lending?
Luke Trayfoot (35:59)
Yeah, I'd be remiss to say not to go to market through partnership, of course. I think when you're looking at setting up an embedded lending or capital programme, it's really important to take that step back, look at the wide lens, but also have your business, whether it's a two-year, three, five-year strategy, in mind. And I mean that in the sense of, you going to different segments of businesses, different sizes of businesses, how will that change? But also the geographical footprint.
And the capital intensity of the balance sheet if you were going to build, that was a really important construct. And that's where lending is somewhat different to payments. In payments, you want to believe to get as much volume as possible to scale with the take rate. In lending, if you effectively go a lot higher on the amount that you originate, but the program isn't set up to scale, that's where it can be really difficult and you have to shut it off or really sort pare it back. So take that wide lens. I think the second thing is when you're going through looking at a partner or a vendor to look at, get a panel, understand what they
lift the bonnet, really understand how do their models work, what's their underwriting processes, what's their servicing like, who are their current use cases in your same peer set and how have they served them with one of the success stories. That will bring a lot to life than just a percentage you can get as a commission, pricing that they apply because those two things are actually outputs rather than the inputs so you have to look at those those pieces and then lastly business, like where are they on a health, financial health, are they sustainable, can they be a long term partner for you, will they be around in five years, these are all really important things because once you go live with a partnership you really want a partner to scale with that you can spar with through this and not someone that's having to focus on detractor elements of staying alive or raising capital, those are all great things but...
Raising capital is very important, but ultimately what is their capital market mandates? How satisfied are they? How successful have they been in adding more mandates or keeping those existing mandates from the capital market providers? So many, many things to unpack there. Take a broad view, find a long-term strategy, the bonnet to understand what are the inputs going into that business, not just the outputs of what you're going to get from a revenue share or a price mechanic.
Charlotte Al Usta (38:26)
The way that we think about it is effectively, find a strong enabler, right? A strong partner that can help you. You just mentioned my data model servicing, et cetera. And then I think in addition, it really comes down to the go to markets, how you define what is eligible, how you market into your merchant base. Is it directly on the merchant dashboard where the merchant gets notified, that it's eligible, can sign up here. Then a lot also comes down to the sign up flow, etc. whereby comes again back to, you know, the quality of the underlying partner that you're working with, etc.
Luke Trayfoot (38:58)
Yeah, that's a fascinating point, Charlotte. I think you touched on this in payments and how you do that. And I think in lending it's even more fascinating because you can have a really well-built integration, fully embedded, fully customized, pre-qualified or pre-approved offers, which are effectively serving a soft or a firm offer to those merchants to accept capital. And you can get access to that money. The merchant can get access to that money within one click and instantly, in some cases.
That route to market is where we see a lot of platforms coming to us to really understand, well I've got it embedded into my dashboard and I send a regular email to let the merchants know that those funds are accessible but we seem to be struggling and so we look at all sorts of go-to-market motions around direct mail campaigns in some markets across Europe and especially in the horizontal space, how do we get access because they may not actually look at the emails and they may not log into the dashboard. Sales let go to market is a really large part of this too where if there are sales heavy, sales let growth organisation that have...inside sales, field sales, they want to have more in their bag to go and sell in which case lending can actually be a great thing to offer to those businesses. It's also an entry point for those platforms to be able to say, if you join us, you can get capital, which is maybe something they don't get with their provider today. So sales is really important. And then also there's a lot of other things around.
You've seen the emergence of terminal messaging for the POS providers. How do you display that? So the route to market is really how you can drive penetration and drive that adoption and get the attachment rates high.
Charlotte Al Usta (40:41)
Yeah, no, absolutely. think like go to markets again, like once you have a good product, obviously, highly embedded, the more embedded, obviously the better it is. I think then it really comes down to go to markets and how do you drive the penetration? How do you think about the end target states as it comes to embedded finance and also embedded lending specifically?
Luke Trayfoot (40:59)
Yeah, think when you take the, who knows, I guess would be my first answer to that because there's so much that could happen. When you look at all of these embedded components or embedded financial products.
They are starting to actually converge to some extent, where payments is leading to lending, but then you've also got accounts, and so you want to have a stored value component where that money can hold. and now I want a card attached to that, and, you know, and I need to ensure for this over here. So I think they're all starting to converge, but each one of those component parts is a business in itself and an industry in itself, and so bringing those together is a very fun and exciting challenge for many platforms. I think, you as you look at it in the end state, will be somewhat, you who can nail that? But I don't think it's a one-winner space. I don't think it's a one-size-fits-all because each of the businesses such as YouLend I mean, we're very much an inch wide and a mile deep on lending. And that's a really important part of what we do because we want to be the best in that space.
I think with the emergence of AI of course, that's helping on the data models, the underwriting, the pricing, testing things. So that's really helping. The digital experiences are becoming easier to integrate. think access to partnering quickly with whether it's APIs, SDKs and embedded components really helps platforms especially in that vertical space to integrate and go heavier and go deeper. And then lastly it's the servicing element.
This is somewhat the yin and the yang to the AI where we're still very strong in human servicing. We have a large proportion of our employee bases there to pick up the phone so that when a business needs to call us because they're about to take an offer but they've got a question, they don't really feel comfortable just reading about that online and they want to speak to someone, we're there to pick that up. so I think that's where we perform very well on conversion metrics for a lot of our partners because that's the point in which the human touch is needed and so that's servicing an operational element and having strong KPIs. I think a lot of businesses will be trying to build all of those areas up and across all of that you've got geographical expansion so there's a few players in South America that are doing exceptionally well and seeing a lot of demand there. There's obviously Asia so looking at this from a global lens it will really start to grow wider as well through many different markets where there's a need for lending.
Charlotte Al Usta (43:38)
I think we are only scratching the surface. So there's still lots ahead. And Luke, perhaps my last question for today's podcast would be, how do you see the next five years?
Luke Trayfoot (43:48)
Yeah, I think when you look at embedded lending in particular there seems to be more appetite by the day and the week that we see here at YouLend so it's a very exciting space to be in.
More businesses are coming around to the idea that they need to incorporate merchant services, value added services for their customers, putting their customers first and so I see that just continuing to grow. I don't see that flatlining or doing anything other than just an exponential growth. When you look at the emergence of some technology in the market, making access to market expansion and speed of payments because ultimately embedded lending has a proponent where the expectations are for it to be quick and frictionless and so those technologies allowing money to move quicker allowing for checks whether that be fraud or KYC to all happen seamlessly in the background. Those things will just keep adding to the value of this growth journey that's happening. So I would make a call, I think, with that plus AI in five years. We're looking at a very different space that businesses will get the vast majority of their capital requirements from those platforms that they utilize today, or the providers that they have for payments and banking and software.
Charlotte Al Usta (45:00)
I think the AI point is also an interesting one and an important one to mention, particularly in embedded lending. I think probably to close off this podcast, what really gets us excited is that, you know, the majority of the TAM today is still owned by banks. However, fintechs are coming in huge disruption coming, and you will also see an expansion of the total addressable market, right? Because the value proposition is stronger than a bank effectively going to market that you will also be able to charge more for that. And then lastly, access to financing is a pain point for SMBs today. And there's a lot of demand that is not being served, which is why embedded lending is only at the beginning. And we'll see very strong acceleration happening over the next couple of years.
Luke Trayfoot (45:48)
Fully agree. This access is going to continue. it's some of ourselves and our peers in this space are continuing to see that growth. So very exciting times.
Charlotte Al Usta (46:00)
No, absolutely. Thank you so much, Luke, for joining today's podcast. It has been an honor having you here today. thanks a lot and have a good day.
Luke Trayfoot (46:08)
Excellent, thanks Charlotte, it's been great speaking with you today and we hope you and the audience find it very useful.
Charlotte Al Usta (46:14)
Thanks Luke.