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Embedded Finance Is Back and It’s Taking Over the Lending Space

Providing buy now pay later options, extending lines of credit or using other models of in-house customer finance has been an effective sales and retention tool for various types of SMEs for centuries. Then markets started to become global which led to credit scoring and lending processes getting more complex. So traditional lenders received an overwhelming monopoly over credit as the only market players capable of handling the management overhead and credit risks.  

This meant that banks and other traditional lenders were reaping the rewards of the efforts local and international businesses put in to find the clients, convert them, and build relations with them. But as soon as the deal is signed, they had to redirect the client to the lender and lose control over the customer journey. And while on one hand, they got the money and could move on, it doesn’t feel right that from then on, the bank would have, build and foster the relations with the client instead of the business that is providing the product or service. Where in the old days a business owner was able to use in-house customer finance to tie the client to them and build customer loyalty, for a while that privilege was out of reach.  

Well, the good thing about capitalism is that when there’s an unmet demand for something, chances are it’s going to be addressed. And in the case of embedded finance, the technology has caught up with the requirements of a business allowing for a new generation of buy now pay later credit products to be embedded into the business’ operations to benefit both the client who gets better terms and the business which gets to keep the control over the customer journey instead of outsourcing profits.  

The size of the pie 

For a glimpse into the non-bank embedded finance market size, it is expected to command about $7.2 trillion by 2030, according to a report by Informa. That’s twice as big as the combined mid-2020 credit ledgers of the world’s 30 biggest banks and insurers.  

The reason for such an enormous size is the universal appeal embedding finance has for different businesses. Not to mention, the technological ease that intelligent in-house credit automation has achieved. Entering 2022, embedded finance extends into more industries than it ever has in the past, including retail, medical, auto, renovation, or one of the many other verticals where a client might want to pay for a product or service over time rather than in a one-time transfer.  

The process stays the same - you give the potential buyers, who are undecided, an argument that is likely to tilt them in favor of choosing you even if they can’t afford to pay for the purchase upfront. And given that you automate consumer finance in-house, you keep the control over the client data and retain the fees third-party lenders or BNPL providers like Affirm or Klarna would otherwise charge.  

According to a research by OpenPayd published in September 2021, 92% of the surveyed business owners are exploring the embedded finance space and work on implementing one or another form of in-house credit into their operations.  

In that light there’s no denying that the time when every company will be a fintech company is getting closer by the day. And while it’s not a given that all of the embedded finance operations will be run in-house, the flexibility and freedom to control every aspect of the provided financing while at the same time maintaining the relations with the client are a decisive factor for many businesses choosing to automate lending in-house instead of turning to BNPL and traditional lenders for help.  

What businesses are implementing in-house finance 

While embedded finance applies to dozens upon dozens of specific verticals, here are just a few examples of the industries that see high growth in terms of in-house customer finance right as we speak. 

  • High value retail 

No matter what you sell (jewelry, hardware, smartphones, clothes – you name it), and no matter the country you operate in – if you’re selling retail products which are more expensive than the average receipt from the groceries, you should consider having a point-of-sale crediting option. This makes buying decision a lot easier and allows for increased customer loyalty, especially if you view embedded finance as a way to meet your clients halfway and provide them with a truly good offer instead of using it solely as an additional monetization source.  

  • Medical services providers 

Medical businesses, especially those rarely covered by insurance (like dental, eyecare, cosmetic procedures, veterinary, etc) can benefit greatly from implementing an in-house financing option. And same as with retail, your benefits are two-fold. On one hand, you tie the clients to yourself as they do tend to come back to you for maintenance or new procedures and you get to convert more clients who don’t necessarily have enough money to afford the service they need. This opens the door for you to provide patients with the care they really need, not just that which they can afford at the time. 

  • Auto dealers, car parts and services 

Now, it’s entirely possible for auto dealers, car parts’ sellers and repair shops to take over the client’s relationships with banks and run a lending program from start to finish in-house without taking on additional overhead. This will even help with the income seasonality as the predictable sums of installments will be coming in throughout the year. 

  • Home improvement and renovations products 

Home renovation and furniture is another big expense where people often don’t get the service/product they really need and are forced to leave with consequent half-measures for years, losing in the quality of life. And again, if given a point-of-sale choice to finance their purchase from the provider, many will be happy to say yes, at the same time allowing the business owner to do the best job they can with the materials and furniture that will serve families for decades.   

Final thoughts 

Hailed as “one of the most transformative trends in fintech,” embedded lending is on the threshold of a surge in adoption in 2022 as more consumers and businesses realize that using financing granted by the product or service provider is in many ways better than turning to traditional lenders. In the words of Dmitry Voronenko, of TurnKey Lender -“We’re seeing a shift in behavior that’s affecting not only how individuals and organizations interact with vendors, but how everyone involved is embracing embedded financial services. Why? Because these underlying services are delivering on a promise of a fairer and less stressful customer experience that also benefits the companies that provide them. Embedded lending means any company that can connect to the cloud can get access to a vast and secure infrastructure for lending, and immediately start financing its customers. It’s literally a matter of turning a key, and you’re a lender.” 

 

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Vit Arnautov

Vit Arnautov

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08 Oct 2021

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