Embedded lending allows non-financial businesses to team up with banks to offer lending products to customers. We look at how the process works, key players in the space, and what's next for the tech.
As the pandemic has pushed more financial transactions online, embedded lending — which lets retailers and other non-financial businesses offer lending products to customers — is gaining traction.
Today, businesses seeking loans typically go through traditional banks or lenders, which require lengthy processes to determine creditworthiness. These loans also often come with expensive fees or high interest rates.
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But non-financial companies can have access to data that banks don’t have, such as purchase categories, purchase frequency, and top-selling merchants. This data allows them to offer lending services through their platforms that are more accessible, customizable, and cheaper for borrowers.
Individual consumers can also take advantage of embedded lending with services such as “buy now, pay later.” These services, which give users the option to pay for purchases in installments, can generate more revenue for brands by making their products accessible to more customers.
Embedded lending is positioned to have a profound impact on the future of borrowing. Below, we address the following questions:
- What is embedded lending?
- How is embedded lending growing? Who are the key players?
- What do financial services companies need to consider for adoption? How do they benefit?
- What’s next?
What is embedded lending?
Embedded lending is the integration of end-to-end credit products within a broader technology ecosystem or e-commerce platform. In other words, embedded lending allows a non-financial company to offer lending products directly through its platform.
Embedded lenders partner with debt providers or banks and provide infrastructure for KYC (know your customer) and AML (anti-money laundering) processes, credit underwriting and decision management, loan servicing operations, and risk management.
Typically, embedded lending is offered by non-bank businesses like large brands, SaaS companies, and digital marketplaces. Embedded lending solutions tend to use the non-financial service provider’s existing transaction data to make better lending decisions.
Below, we look at 3 approaches to embedded lending targeting various stages of the customer life cycle.