Unlocking Value in Bank Partnerships: A Roadmap for Success

The banking industry is changing to keep up with the ongoing digital transformation all over the world. Traditional banks look for new ways to increase their customer engagement and provide a smooth user experience. One big change is the rise of embedded lending platforms. These let banks offer lending services directly inside non-financial apps and online marketplaces, making lending faster and more convenient for users while providing different financing options.

The global embedded finance market size is projected to reach USD 588.49 billion by 2030, growing at a CAGR of 32.8% from 2024 to 2030. Customers have discovered easy functions like buy now, pay later (BNPL), and the ability to provide credit right at the time of purchase is now a powerful differentiator for many retailers. These modern payment options and finance products have changed business models across industries.

An embedded lending platform is part of the larger embedded finance ecosystem. It lets non-financial institutions offer loans directly to customers without needing expensive third-party services. This means businesses can provide financing directly at the point of sale or during a transaction without loan applications or long onboarding processes.

The rising use of embedded lending platforms is an indicator of broader shifts in digital finance. What defines a financial service provider is also changing, and the ripple effects are felt by traditional lenders, businesses, and customers across various industries. Below, we have covered how embedded lending platforms work and explained their wide-ranging benefits.

What is embedded lending?

Embedded lending is the direct integration of lending services into non-financial platforms or applications. Instead of exiting the platform to access credit offerings, customers can use these services within the platform for a smooth lending experience.

This approach relies on the data and customer engagement within the host platform, and it often employs application programming interfaces (APIs) for quick data interchange and service delivery. The embedded lending platform workflows are designed to be scalable and can handle multiple financial products simultaneously. This integrated style of offering loans or credit has gained traction across various verticals, such as e-commerce, ride-sharing, and software-as-a-service (SaaS), among others. The goal is to offer immediate, contextualized financing solutions without sending customers elsewhere.

Key players in the Embedded Finance Ecosystem

An embedded lending platform consists of three key institutions that work together to provide financial solutions to users.

Non-FinTech companies or businesses that own a customer-facing digital platform such as a mobile app, a website, or a desktop application. With their deep understanding of target audience segments, they can offer customized financial products to customers, embedded within their platform.

For banks, NBFCs, and small finance banks, the function is two-fold. They provide financial services and are best positioned to manage regulatory, compliance, and credit risk. Also, they use their network and manpower to manage and service loan requests from the embedded lending platform.

FinTech company that creates end-to-end software tools (APIs and SDKs), and connects financial institutions with the digital platform. An SDK (Software Development Kit) enables easy integrations to import functionalities quickly with a mobile or web app. In the case of embedded finance, the entire loan journey is embedded within the platform or app. It also provides important value-added services like alternative data underwriting engines, customer servicing, and dashboard interfaces for monitoring performance metrics.

How does an Embedded Lending Platform work?

An embedded lending platform works by integrating lending features directly into existing non-financial platforms via APIs. Once a customer opts for a loan, the system assesses their creditworthiness almost instantaneously. Algorithms pull data from multiple sources, including credit scores and customer behavior within the platform, to make a quick lending decision.

Following approval, funds are transferred to the customer or allocated for a specific use within the platform, such as purchasing goods or services. The platform offers convenient repayment methods, often debiting directly from linked accounts. This immediacy and contextual relevance make financial solutions readily available when and where the customer needs them.

Benefits of an Embedded Finance Platform

Besides making it easier to add financial services to regular, non-financial platforms, embedded finance platforms also offer several other benefits for the lending industry.

• Increases in CLTV and other key business metrics: Platforms see a boost in their revenues through a boost in their Average Order Value (AOV), customer retention, and CLTV (Customer Lifetime Value).
• Unlocks an alternate source of revenue: Platforms benefit from a revenue share while taking on none of the financial liability. 
• Increase in customer activation: Typically, merchant-oriented businesses face very high acquisition costs. They provide expensive offers/incentives for the activation of the merchant on the platform. Adding credit is known to increase the activation of merchants on a platform in multiple ways.
• Stand out from competitors: Offering financial services improves the product offering, vertically scales the platform, and helps it stand out from competitors.
• Get valuable data to help understand customers better: Offering financial services unlocks valuable data about customers and their behavior, which can be leveraged in interesting ways.

• Access to large pools of customers: Financial institutions can access diverse borrower pools that have specific characteristics. They do so by leveraging the distribution capabilities of platforms or businesses that provide embedded finance solutions. Example: A B2B E-Commerce platform, like Amazon, is connected with thousands of small businesses. Financial institutions can tap into this network by offering financial solutions to vendors on Amazon.
• Build a more profitable business: Enhanced underwriting and efficient loan lifecycle management enable financial institutions to increase their margins and reduce costs for end customers.

• Increased access to affordable financial services: Users get access to an array of flexible, easy, and cheaper financial services. They are approved for more financial services and on user-friendly terms. 
• Receive customized offerings: Users can avail tailored financial solutions that perfectly fit their requirements.
• Improved customer experience: In-context financial service offerings improve users’ experience on the platform.

Thus, an embedded lending platform brings together several parties and helps them to play to their strengths.

What are the Implications of Embedded Lending?

Embedded lending platforms are transforming how financial services overlap with non-financial sectors, such as e-commerce and SaaS, creating a more integrated experience for customers. But while this model increases convenience and efficiency, there are considerations related to data privacy, security, and financial responsibility.

Here's a brief overview of the key implications for all parties involved in embedded lending, including non-financial businesses, lenders, and customers.

Non-financial businesses

• Increased customer engagement
  Offering lending services within the platform can boost customer activity. Customers are likely to use the platform more often with multiple features in one place.
• Revenue diversification
  Introducing financial services, such as loans, adds another income stream. Fees from loan origination or revenue sharing with lenders can increase the overall financial health of the business.
• Data utilisation
  Lending partners can use the platform's existing data to inform lending decisions. This reciprocal relationship benefits both the platform and the lending partner, optimizing the lending process for better outcomes.
• New business avenues
  Adding lending services might lead a non-financial business into new sectors and offer increasingly varied services.

Lenders

• Expanded customer base
  Lenders gain access to a pool of potential borrowers who are already using the non-financial platform. This is a less risky prospect for lending, as these customers are known entities.
• Data-driven decisions
  Lenders can benefit from rich data sets that are available through the non-financial platform, increasing the accuracy of credit assessments and potentially reducing default rates.
• Privacy and security concerns
  Lenders need to consider the implications of handling sensitive financial data within a third-party environment. Data breaches or misuse are constant threats that must be managed.

Customers

• Convenience
  The option to access credit without leaving the familiar environment of an existing platform simplifies the lending process. Customers can get what they need with fewer steps required.
• Overborrowing risk
  The ease of borrowing may lead some customers to take out more loans than they can comfortably repay. Customer education and transparent terms can help to mitigate this issue.
• Data privacy
  Customers should be aware that their behavior within the platform could influence their creditworthiness. Knowledge of how personal data informs loan decisions can be key for customers to understand.

Conclusion

Embedded lending platforms offer benefits to everyone involved. For non-financial businesses, it creates new ways to earn money and connect with customers. For traditional lenders, it provides access to more borrower data and potential new clients, but also brings risks from sharing data through third-party platforms. Customers get easier access to loans, but they should be careful not to borrow too much or fall into debt. As embedded lending platforms grow, all sides need to think carefully about these connected risks and rewards.

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FAQs about Embedded Lending Platforms

1. How can I incorporate an embedded lending platform in my business?

You could use your company’s talent and resources to build an embedded lending platform in-house. Also, you could buy the entire solution or parts of it from a third party. This includes licensing technology and services. However, it is recommended to partner with an embedded finance company to leverage their expertise, cut down time to market, and save money. 

2. What can derail an AI lending program?

Five hazards loom: messy data, model drift, hidden bias, cyber threats, and staff gaps. Fight them with quarterly data audits, regular model retraining, fairness checks, end-to-end encryption, and “model councils” that blend lenders with data scientists.

3. Is there proof that embedded lending boosts results?

Yes. Shopify Capital has advanced more than $5 billion using 70 million data points. Stripe trims fraud by routing each payment down the cheapest, safest path. Amazon Lending feeds real-time, working-capital offers to marketplace sellers.

4. What are the risks of embedded finance?

While the potential rewards of embedded finance are significant, there are risks. In addition to the obvious fraud and credit risks, reputational damage, regulatory compliance challenges, and liquidity issues pose additional threats.

5. How will Gen AI affect banking?

Generative AI models can help banks identify possible risk areas and stay profitable by analyzing past data patterns and market trends. It can simulate different economic scenarios to help banks assess and mitigate risks, such as credit risk, market risk, and operational risk.