Embedded Lending
In the dynamic world of finance, embedded lending is a new concept that's gaining momentum
as banks embrace it as a creative solution to a conundrum: Their desire to upgrade and digitise
the lending process, while keeping existing systems secure, stable, and predictable. The success
of this innovative approach to lending is, in turn, transforming how small and medium
enterprises (SMEs) access capital.
What is Embedded Lending?
There are two types of embedded lending. In the first, embedded lending modules are often
found in just-in-time scenarios (like Buy Now Pay Later) where lending is offered through
companies offering non-financial products or services. By embedding lending into a non-
financial brand’s (say, a retail merchant) customer buying journey, customers can access finance
at the point of need from any non-financial brand they trust. A second implementation,
however, is the embedding of a lending workflow specifically into a bank’s existing app or
website, so that new, cutting-edge features are available, white-labelled, blending into the
bank's existing financial product offerings.
How Does It Work?
Embedded lending fintech platforms allow banks to implement AI-driven, fully-automated
algorithmic assessment tools, and carefully-created, intuitive onboarding workflows to optimise
their lending process. This completely reimagined technical approach leverages both the bank’s
in-house account data and external sources to empower them to run thorough credit checks.
The primary benefit of attaining these lending process services through a fintech company is
that it is their exclusive focus, and each step of the process is optimised to match the always-
rising expectations of today's business customers.
Because the solution is embedded, the core technology remains the responsibility of the
outside company, and therefore does not require extensive bank IT department distractions—
or the risk of changing stable systems inside of the bank’s infrastructure. Despite the fact that
the heavy lifting is done by the fintech company, the process is completely transparent to the
end user — it simply represents a delightful customer journey that the bank can take credit for.
Advantages for Borrowers and Lenders
Embedded lending presents several advantages for both borrowers and lenders. For borrowers,
particularly SMEs, they can remain borrowers of their trusted bank, without having to worry
about the risk of engaging with a young, standalone lending-based startup or other less
appealing source of funds. They can also benefit from the latest credit/risk assessment
technologies that can authorise unsecured loans by accessing data on revenue patterns that can
provide the bank with a clear picture.
For lenders, embedded banking provides a low-risk solution for both attaining new customers
and keeping existing ones, while projecting an image of modern, user-centric, paperless
solutions in an industry that traditionally requires extensive time and paperwork for the loan
application, assessment, and onboarding processes. In competitive times, it’s the quickest way
to gain these benefits and accelerate time to market.
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The Role of Fintech Companies
Banks are not in any way to blame for needing a partner to get past this hurdle; especially in a
closely regulated industry, they are inherently conservative and dedicate most efforts to stable,
profitable, and consistent revenue centers. Traditional banking institutions also frequently
grapple with the complexities of offering products like revenue-dependent lending solutions
due to their dependence on complex existing systems and procedures.
Enter fintech enterprises, poised to revolutionise the landscape. Leveraging cutting-edge
technologies like artificial intelligence and robust data analytics — and controlling risk by
embedding a stand-alone “bulletproof” package inside a bank’s customer-facing applications —
these fintech innovators can help the bank algorithmically scrutinise an array of financial
behavioral indicators, enabling them to make swift, well-informed lending determinations. The
best solutions still offer the bank full control for customising and optimising rules and building
customer-specific tests to align with marketing campaigns.
Conclusion
Embedded financing marks a powerful transformation in the landscape of small and medium-
sized enterprise (SME) financing. It introduces a versatile, low-risk, and streamlined approach
that empowers banks to assist SME clients in raising capital, a concept that was nearly
unimaginable just a few years ago. In many cases, it wasn't even a consideration for
conventional banking teams. Banks grow revenues with fewer hands-on resources required, and
SMEs get the funds they need immediately. With such a win-win dynamic, it’s no reason that
the industry has moved so rapidly in this direction.