How Can Embedded Lenders Stay Competitive? Here are Some Steps

Key Takeaways

• Market data has shown that the market for embedded small business lending platforms has grown exponentially in the now digital first economy, and the landscape for embedded lenders has become more competitive. Embedded small business lenders must offer certain key features to be considered for partnership with brick-and-mortar banks.

• Embedded lenders need to leverage alternative data and AI for faster and better underwriting, as traditional credit scores are no longer enough. Top-tier embedded lending platforms also now utilize AI-driven risk assessment and alternative data - such as utility payments, banking habits, and real-time cash flow. This allows for near-instant loan decisions, more accurate risk evaluation, and early default detection.

• Embedded lenders are winning bank partnerships by offering flexible repayment structures, such as revenue-based financing integrated directly into POS systems. Automating regulatory compliance (specifically CFPB Section 1071 standards) is essential for providing the scalable, secure environment that traditional financial institutions require.

Embedded lending platforms are no longer novelty features for traditional banks - they are now a necessity in the digital-first economy. In the modern environment, traditional banks may be seen as slow and cumbersome when it comes to small business lending. According to Empower, 37% of small- to medium-sized businesses are highly interested in switching to providers that offer embedded lending options.

A study by private equity giant Bain & Co. found that lending will continue to be the largest embedded financial service. PYMNTs estimates that 90% of small- to mid-size businesses (SMBs) view embedded financial platforms as essential for operations, and 37% are likely to switch financial institutions that provide access to them. It’s clear that brick-and-mortar banks and embedded small business lending platforms have become one of the most important fintech partnerships in the market.

How Competitive is the Embedded Lending Market? 

Embedded lending platforms are typically offered by online lenders and established, alternative lending institutions, and the competition among them has heated up in the past decade, according to FinTech Takes. That's because banks today aren’t just seeking lending platforms - they are seeking strategic partners that are scalable; that can navigate the increasingly complex compliance landscape and offer sophisticated API infrastructures. 

In short, banks are no longer asking whether they need an embedded small business lending platform, rather, they’re seeking user-friendly platforms that offer value and convenience to small business owners seeking financing. 

What are the ‘Must Have’ Features? 

There are several features that embedded lending platforms must have to be considered by banks for partnership. To be competitive, an embedded lender needs to offer multiple financing products and enable dynamic repayment structures for complex financing tools such as revenue-based financing. Additionally, they need to be scalable while offering robust, user-friendly features. 

Those features include:

Strong API Infrastructure 

Application programming interface (API) is a system that allows the embedded lending platform to communicate with the bank’s systems. This is one of the most important aspects of an embedded lender. Strong infrastructure enables seamless communication between the bank and the lending platform. 

It also needs to enable small business borrowers to conveniently apply for, receive and repay funds without having to turn to multiple platforms to fill out paperwork for a loan. 

Good API infrastructure should include:

1. Real-time data exchange between the bank and the platform that enables instant loan decisions by pulling data about the loan applicant from multiple sources.

2. Automated security and compliance. The infrastructure must ensure strict data security for sensitive financial information and make ensure that transactions are compliant, especially within the Consumer Financial Protection Bureau’s (CFPB) section 1071 (Small Business Lending Rule) standards.   

3. Robust Functionality: API infrastructure should enable the bank to service every stage of the loan, including the application phase, underwriting, funding, repayment, and servicing.

4. AI-Driven Risk Assessment: Utilizes alternative data rather than just traditional credit scores, allowing for faster, more accurate risk evaluation of small businesses.

‘Platform Stickiness’

Platform stickiness is one of the most important aspects of an embedded lending platform. It refers to the embedded lenders ability to seamlessly integrate the financing products into the non-financial software platforms that small businesses already use, such as SaaS, accounting or eCommerce platforms. 

By providing financing products into the platforms that small business customers already use, this makes it likely that the small businesses will switch to competing lending platforms for financing services, hence the term ‘platform stickiness.”

For the partnering bank, platform stickiness should cut down on customer acquisition cost, client churn and increase customer lifetime value (CLV), since integrating the lending products into existing platforms makes it likely that existing lending customers will stick to the embedded lending platform for their borrowing needs. 

Alternative Data

Embedded lending platforms must offer robust underwriting systems that evaluates loan applicants using information that goes well beyond mere credit scores. Standard underwriting evaluates transaction and cash flow histories and the behavioral data of loan applicants. To stay competitive, embedded lenders must provide more than just standard credit metrics. They need to provide alternative data on prospective borrowers that includes: 

• Banking habits of the prospective borrower. The platform should provide cash flow data on the loan applicant that goes beyond mere checking and savings account information. If the small business owner keeps separate personal checking and savings accounts, the embedded lender should provide (with permission from the potential borrower) information on personal account transactions, deposits and account balances over time. This helps provide real-time insight into the financial health of the loan applicant.

• Rental and utility payment history. Information on whether the loan applicant regularly pays rent/mortgage, utilities and other common bills on time.

• Employment and income verification. Employment data doesn’t just mean verifying the potential borrower’s small business income, but also any side gigs the potential borrower has such as freelance jobs, delivery driving jobs. This information could enhance the applicant’s personal income consistency.

• Alternative financial services. Embedded lenders can also mine data on any personal loans or micro-loans that the potential borrower has. 

Flexible Repayment Structures

When choosing an embedded lending partner, banks look for platforms that can integrate repayment structures into the point of sales platforms that small businesses already use. Lending platforms use this connection with POS systems to enable automated payments for borrowing small businesses for different types of financing products such as revenue-based financing and business lines of credit, that don’t have static repayment structures. 

The ability to integrate with the borrower’s sales systems will give the embedded lender a competitive edge since this integration reduces default risk and eliminates the need for small businesses to make manual repayments on complex financing products such as revenue-based financing.  

By tapping into a small business’ payment processing systems, embedded lenders can gain:

• Historical sales, transaction volume, and operational data to evaluate the creditworthiness of the small business seeking a loan or revenue-based financing in real-time.
• The ability to automate repayments as a percentage of daily, weekly or monhtly sales (the typical repayment structures of evenue-based financing arrangements). This can ensure that repayments are lower during slow sales periods and higher during strong sales periods, which improves cash flow management and borrower trust.
• A better understanding of the borrower’s current and historical liquidity levels, thus giving the partner bank a better understanding of the risk.

Robust AI Incorporation

It’s no secret that AI is no longer an emerging concept; it’s now embedded in every aspect of business today, including small business lending. Banks expect embedded small business lending partners to use AI in several key areas, and the embedded lenders that can incorporate AI in its platforms in the most robust ways may hold the strongest competitive advantages.

Today, embedded lenders may use AI for:

1. Faster application reviews. Embedded lenders should use AI to speed up loan application reviews to a nearly instantaneous process, thus increasing user satisfaction. AI can quickly analyze traditional and alternative applicant data to help speed up the underwriting process.

2. Improved scalability. Banks want embedded lenders to be scalable, and AI can help with that. AI can quickly handle routine document verification to speed up the underwriting process, which can help the embedded lender take on greater numbers of loan applicants. 

3. Early default detection. AI can help banks and embedded lenders identify signals that borrowers may be having repayment issues early in the lending process, thus giving the lender a chance to intervene early to offer borrowers modified repayment plans to avoid defaults. 

4. More efficient compliance monitoring. Embedded lenders can use AI to provide real time monitoring of KYC and anti-money laundering requirements, as well as making sure that each lending account is compliant with CFPB section 1071 standards to avoid compliance issues before they arise.

Stay Competitive

As the digital transformation of financial services accelerates, the gap between traditional banking and agile fintech solutions continues to close. For banks, adopting a robust embedded lending platform is now a requirement. An embedded lending platform should add AI-enhanced underwriting, seamless POS integration, and automated compliance with standards like CFPB Section 1071. 

By leveraging alternative data and flexible repayment structures, financial institutions can significantly increase customer lifetime value (CLV) and reduce default risks. Ultimately, the winners in the embedded finance market will be those who move beyond basic transactions to provide the "sticky," integrated experiences that modern small businesses demand.

Frequently Asked Questions

1. What is "platform stickiness" in embedded lending?

Platform stickiness refers to a lender’s ability to integrate financing products directly into the software small businesses already use, such as eCommerce or accounting platforms. This seamless integration creates a better user experience, making it less likely for customers to switch to competitors and increasing Customer Lifetime Value (CLV).

2. Why is alternative data important for small business lending?

Alternative data allows embedded lenders to evaluate creditworthiness beyond traditional credit scores. By analyzing real-time cash flow, utility payments, and even side-gig income, lenders can offer faster, more accurate risk assessments for small businesses that might be overlooked by traditional banks.

3. How does AI improve the embedded lending process?

AI accelerates the lending lifecycle by providing instant application reviews, automated document verification, and more efficient compliance monitoring. It also helps lenders identify early warning signs of potential defaults, allowing for proactive intervention and modified repayment plans.

4. What are the benefits of revenue-based financing for SMBs?

Unlike traditional term loans with static payments, revenue-based financing offers a flexible repayment structure. Payments are a percentage of estimated future receivables, ensuring that repayments stay proportional to the business's actual cash flow.

5. Why do embedded lenders need robust API infrastructure?

A strong API infrastructure is the backbone of embedded lending, enabling real-time data exchange between the bank and the lending platform. This ensures a seamless "one-stop" experience where borrowers can apply for, receive, and repay funds without ever leaving their primary business software.