A few years ago, trends like embedded finance platforms and banking-as-a-service (BaaS) were all over the financial news. Now, these services are no longer just trends. They’re here to stay. And they’re quickly changing how banks, consumers, and businesses use financial services.
These platforms embed financial services on non-financial platforms where consumers spend their time. Many embedded finance companies offer these services via SaaS platforms and automated software solutions.
The most popular use cases of embedded financial services include:
- Embedded banking
- Embedded lending
- Buy Now, Pay Later (BNPL)
- Embedded payments or payment processing
- Insurance
As an example, an embedded finance platform might add functionality for payment solutions, such as paying bills with an ACH transfer or other payment options. It can also allow a small business owner to apply for financing or meet other customer needs.
With more people and businesses using embedded finance, banks wonder what’s behind its popularity.
The answer is data.
How Embedded Finance Platforms Work
Have you ever purchased something on an e-commerce site like Shopify and were then offered another product that matched your interests, such as a credit card offer? That’s an example of how embedded finance works. It offers customers what they’re looking for at the right time when purchase intent is high.
It does this by analyzing data like browsing behavior, interests, purchasing history, and more. Embedded finance integrates data from multiple sources to provide a deeper look at a consumer or borrower.
In the case of embedded lending, this data is merged into an automated loan application process. This helps lenders assess applications with more accuracy. This data-driven approach reduces risk for lenders and offers borrowers quicker access to funds.
Why Embedded Finance is Relevant for Banks
As embedded finance gains more popularity, some banks are understandably concerned what that means for their future. And rightly so.
Consider these statistics:
- McKinsey notes that leads from embedded financial services cost up to 20% less than traditional SMB leads.
- More than 72% of businesses that use embedded lending are happy with it, compared to 57% of those who borrow money through banks and traditional lenders.
- Sponsor banks that already use embedded finance say more than 51% of their earnings and deposits come from it.
- The embedded finance market is set to exceed $7 trillion by 2026.
It’s clear that embedded finance is a major player in the industry. Many banks are migrating towards embedded finance solutions to stay in the game.
The Rise of Embedded Lending For Small Businesses
Embedded finance platforms are seeing a new trend. More small business owners are seeking finance on the platforms.
Traditional small business lending models rarely provide a full view of a business’s ability to repay a loan. This is especially true for new or small companies without established credit histories. As a result, many small business owners can’t access the capital they need, and just over one-third of businesses fail because of it.
Slow processes and long wait times at banks have opened the door for embedded finance, which makes getting funding easier.
Through application programming interfaces (APIs), embedded finance platforms collect vast amounts of data about a business’s transactions, operations, and finances. This offers lenders a more extensive and up-to-date picture of a business’s performance.
As embedded finance continues to gain momentum, it presents an opportunity for banks to grow and gain new revenue streams. One Accenture report shows that up to $32 billion in traditional banking revenue will likely transfer to embedded financing. The earlier the adoption, the greater the advantage for banks that become embedded finance lenders.
The Value of Data in Embedded Lending
Embedded lending platforms tap into data from multiple sources. These include:
- Sales statistics
- Payment histories
- Business bank account transaction histories
- Inventory
- Business cash flow
- Customer experience
- Online reputation
This information is collected into embedded finance software and automates calculations to aid decision-making. The process streamlines underwriting and reduces the time to receive funding.
Benefits of Embedded Lending
Embedded lending offers several benefits for lenders and small business owners.
Smarter and Faster Decisions
Financial statements can be incorrect or outdated. Data-driven insights almost instantly determine loan eligibility and provide faster funding. This is essential for today’s small businesses competing in a fast market. AI can also help create more customized repayment plans to reduce the risks of default.
Additionally, AI and machine learning technologies empower embedded finance platforms by using historical data to predict future behaviors and trends. With this, lenders can anticipate any challenges or opportunities a business might experience.
Enhanced Risk Assessment
Having extensive data on a borrower from multiple sources helps lenders better assess the risks of issuing a loan. For example, a lender can use alternative metrics such as customer retention or payment patterns to more accurately determine how likely a borrower is to repay the loan.
Automated Regulatory Compliance
Following regulations is a common challenge for fintechs and financial institutions. But an embedded platform like Biz2X has regulatory reporting built into the system. It documents everything and simplifies the auditing process if it’s ever necessary. This helps avoid the risk of non-compliance and fees.
Higher Conversion Rates
Embedded finance enhances engagement with your targets throughout the customer journey. This leads to more leads converting into clients, ultimately increasing your financial institution’s ROI. Dollar for dollar, embedded finance offers a higher return on investment than the traditional lending business model.
Expanded Reach and Cross-selling Opportunities
With all the data available in embedded finance platforms, your bank can extend more of its services to more borrowers. Data helps identify cross-selling or upselling opportunities for other financial products. Ultimately, this can increase your financial institution’s bottom line.
Benefits of Embedded Finance for Small Businesses
Embedded finance platforms don’t just benefit financial institutions. There are advantages for businesses, too:
Better User Experience
Embedded finance offers great convenience for small business owners because the financial services are offered where they spend their time online. The application process is also easier, leading to an enhanced user experience.
Faster Funding
Embedded lending can shorten the funding time for business loans from weeks or months to a day. This allows small business owners to quickly meet operational needs.
Personalized Financial Solutions
Embedded finance software offers flexible, data-driven lending solutions tailored to a company’s needs and cash flows. With an easy way to get the financing solutions it needs, a business can scale its operations more effectively. This can help it maintain a competitive edge and position it for sustainable success.
Challenges of Embedded Finance for Lenders
The advantages of embedded lending far outweigh the challenges. But disadvantages do exist.
Insufficient Credit Risk Assessments
While embedded lending should enhance risk assessment, partnering with the wrong Fintech provider can do the opposite. There’s a potential for revenue loss if a loan isn’t paid off. So it’s essential to partner with providers that use effective risk assessment tools to lower the risk of loan defaults.
Data Privacy Concerns
The use of data on embedded finance platforms comes with some risk, particularly with the privacy and security of sensitive data. The best embedded finance solutions have safeguards built into the system. Partnering with a reputable embedded lending provider is essential to ensuring that data won’t get into the wrong hands.
Identity Theft and Fraud
Embedded lending platforms use large amounts of financial and personal data. Unfortunately, identity theft and fraud are all too common. According to Plaid, identity theft attempts increased 40% in 2024. It’s essential to have robust fraud prevention and identity verification measures to protect both lending platforms and SMBs. There are AI solutions to enhance protection in these areas.
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Regulatory Challenges
While the right embedded finance platform will have strong measures in place to minimize the risks of non-compliance, regulatory issues are always a concern for lenders. Sponsor banks don’t have control over their fintech partners' regulatory policy controls. It’s essential to be proactive and choose a provider with a strong record in meeting these challenges to avoid penalties and fines.
Conclusion
Embedded finance platforms offer an immense opportunity for banks and financial institutions to better serve today’s small business owners. By leveraging real-time data and advanced analytics, these platforms transform how lenders assess creditworthiness, manage risk, deliver capital, and ensure compliance.
Embedded lending streamlines the financing process with faster, personalized decisions. This enhances the borrower experience and boosts lender efficiency, conversion rates, and ROI.
As technology evolves, embedded finance will continue to change lending practices for banks and businesses. Selecting the right partner is critical to managing risks like fraud, data privacy, and regulatory compliance.
Biz2X is a leading embedded finance provider with scalable, innovative solutions that empower financial institutions and small businesses. With vast industry expertise, Biz2X helps its partners stay competitive and ready for the future.
FAQs About Embedded Finance Platforms
1. Why are more startups turning to embedded financing platforms instead of banks?
Embedded finance companies have a simpler applicant onboarding process, particularly for lending. They also offer faster access to funding and provide tailored financial products to more specifically meet business needs.
2. Is embedded lending more scalable for financial institutions than traditional lending?
With the right platform, it is. Embedded financing platforms use technology that automates almost the entire loan application process, from underwriting to regulatory compliance to loan servicing. With reduced manual workflows, embedded finance companies can serve more borrowers more efficiently.
3. Are embedded finance solutions compliant with financial regulations?
Yes, reputable embedded finance platforms build regulatory compliance into their platforms and stay up-to-date with Know Your Customer (KYC) and Anti Money Laundering (AML) regulations. Solutions like Biz2X, for example, automate reporting and documentation processes, helping financial institutions stay compliant while reducing the risk of penalties or audits.
4. What types of data are most valuable in embedded lending?
The best data for embedded lending platforms are sales trends, cash flow metrics, payment history, bank account activity, and even online reviews. Embedded lenders use this data to automate underwriting processes, assess creditworthiness, and forecast financial trends.
5. How can our financial institution benefit from partnering with an embedded finance platform?
Banks and other financial institutions can generate new revenue streams, serve more customers, and improve customer engagement with an embedded finance platform. These partnerships offer seamless integration with existing banking systems and provide unparalleled access to high-quality data, which drives better lending decisions and boosts ROI.
Learn more about the award-winning Biz2X platform and the experts behind it. Then request a demo to find out what we can do for your financial institution.
