Ep. 151 - Build or Partner? The Real Economics of Embedded Finance, with YouLend

Jasmine Chana (0:05)

Welcome, I'm Jasmine Chana from The Payments Shed, live from Fintech Meetup Europe. Today, I'm joined by Luke Trayfoot, Head of Partnerships at YouLend. Luke, welcome to the podcast. If you could start by telling us a bit about yourself and about YouLend.

Luke Trayfoot (0:17)

Yeah, thank you very much for having me today. So Luke Trayfoot, Global Head of Strategic Partnerships at YouLend. YouLend is an embedded finance provider. We solely go to market through partnerships. So we partner with PSPs, marketplaces, software platforms, banks to provide them and their merchants with access to capital. We're live in 10 markets today.

Fundamentally, I think we're solving quite a big problem, which is how do we get capital in the hands of merchants that want to grow?

Jasmine Chana (0:45)

And every platform seems to be adding financing today, but fewer actually building it themselves. What's the single biggest driver behind platforms choosing to embed finance right now?

Luke Trayfoot (0:55)

Yeah, so a lot of these customers, so some data points for us, 44% of customers were previously rejected, whether that's by their bank for access to capital, so access to capital for those underlying SMEs is really important. If you trace where those SMEs are working, operating, they have a payment provider, they might be selling online, an e-commerce store, they're using software to run their business, or they choose to go to their bank, but they're ineligible with their bank.

That means, for us, we can get access to that, and that platform can then provide a service without having to take on the balance sheet risk, the underwriting engines, managing the operations. There's a lot of things under the hood to lending, so we fill that gap really nicely through a partnership, notwithstanding once you get to a certain scale, there are a lot of businesses that have gone and done this themselves as well. So there is quite a good positioning with partnering as well as potentially building.

Jasmine Chana (1:49)

And building it yourself sounds kind of appealing, right? What is some of the biggest underestimations that platforms might make?

Luke Trayfoot (1:56)

Yeah. I think a big thing we do is by going through partnerships, we allow that platform to maintain the merchant relationship. So I think that's a critical thing and a lot of people want to build themselves to maintain that relationship. They also want to go downstream, so typically you get more of the economic stat by doing so. But that comes with a lot of pitfalls potentially, right? And so it's quite a big thing, you got to know your underwriting models, you got to get access to capital as I said, operationally to make that scale, multiple markets, you've got regulatory environments to navigate. And so depending on what that business does, and the size of that business, it's quite a challenge for some.

It's also a position where a lot of businesses are looking to put their cash into R&D or product growth. Now part of that might well be lending, but there's plenty of other things happening, and AI and so on, that they might want to put that cash in. It's quite a big decision to build it yourself, and so we play a great role in that ecosystem without having to dislodge that platform from that customer relationship.

Jasmine Chana (2:58)

Yeah, and in your experience, what types of platforms are moving first?

Luke Trayfoot (3:03)

Yeah, I mean, YouLend in particular, we were really a frontier with a lot of the payment service providers that were servicing these SMEs because they, A, sat on the payment data, but B, they had a trusted relationship, right? A financial relationship with that business. So, there's some really great case studies we've seen in market with super penetration rates, lots of repeat usage of the product.

Marketplace is another one, mostly because e-commerce sellers, they're relatively asset light, they don't have, they could be quite a new business, they don't have much to underwrite on, in terms of the traditional sense, whereas we can see daily sales data and be able to lend against that. So, that's been a really good frontier for us. Software as well, so as we expanded the business, as I say, we have 10 markets today. You look at different markets such as the US, where software is quite well penetrated, embedded payments followed that, which then follows the data. So, we're seeing some great growth there, and actually banks is another area that we're working with, because quite often their credit box might not actually meet the needs of these types of SMEs, so we can fill quite a nice gap there for those businesses and those banks. So, the customer still gets served without the bank having to change its credit profile, credit box eligibility scoring or increasing its risk.