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Embedded Lending: A $2.1 trillion gold mine or a risky gamble?

Lending has huge potential to transition into an embedded future, but only if providers truly understand the advantages that embedded lending could offer.

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This is an excerpt from AltFi Research's Embedded Finance: The New Frontier Of Lending report, which is available for free here.

Embedded lending is on a tear and is predicted to snap up a significant chunk of the lending market as disruptor fintechs shake up how established lending decisions are made. 

The myriad fintechs offering buy now, pay later (BNPL) at checkouts, coupled with tailored lending offerings by powerhouses like Shopify and Amazon, highlight the possibilities that embedded lending can offer. Bain & Company forecasts that by 2030, 20 per cent of all lending will be embedded, while industry figures predict that retail embedded lending alone represents a $2.1 trillion opportunity by 2030.

Advocates for the technology argue that consumers and businesses are yearning for fast, seamless lending from brands they trust, making the rise of embedded lending a no-brainer and that banks which ignore the trend face the prospect of losing primacy. 

“Payments and lending will continue to be the largest embedded financial services,” says Adam Davis, associate partner at Bain & Company. “End users increasingly prefer the convenience of using lending and other financial services embedded in their day-to-day software, rather than accessing standalone services from traditional financial institutions.”

The Opportunity Is Huge

Experts say that embedded lending will soon disrupt major economic sectors like healthcare, construction and gaming, as fintechs team up with brands to proactively offer bespoke loans. Lending is a difficult service to offer, requiring a sophisticated tech stack, processes and lending capacity, but teaming up with fintechs to offer lending services is an enticing prospect for brands. 

Banks’ antiquated measures of creditworthiness, like capital worth and inventory, will be replaced by measures like payment flows and frequency, as embedded lending becomes more commonplace, according to experts. Payments aside, while there has traditionally been a boundary between what consumers do on their banking app and the rest of their online presence, the lines are becoming increasingly blurred. 

The likes of Amazon, Shopify, eBay, PayPal and Block are cashing in on the trend of embedded lending, while nifty fintechs such as YouLend, Lendflow, Capify and Banxware are partnering with big brands to disrupt the lending market.

“The opportunity is huge,” Davis said. “If the financial service is provided contextually within a customer journey that the customer trusts, then they will take it.” 

BNPL has ballooned in popularity in recent years and is seen to signify the possibilities of embedded lending. Millions in the UK now use it to manage their shopping, either by postponing their bill for a short while or splitting the bill into more manageable chunks over time, at little to no interest. Powered by the likes of Klarna,Afterpay and Affirm, which now sit on top of practically every eCommerce website in the UK, the BNPL market now accounts for around five per cent of UK online sales, and between three to four per cent globally.

Heightening Consumer Expectations

David Barton-Grimley, global strategy director at fintech consultancy 11:FS, says the popularity of BNPL means consumers now expect free credit on any purchases they make. However, Barton-Grimley questions whether BNPL is truly a form of embedded finance.

“BNPL’s ‘embeddedness’ stretches as far as being an option on a checkout screen, and in Klarna’s case a shopping app you can purchase from,” Barton-Grimley said. “But to be truly embedded, we need to see solutions which leverage behavioural data from people and businesses to derive a more targeted, and therefore fairer, lending product which goes deeper than financing lifestyle purchases and into solving real customer needs…”

Want to keep going? Read the full feature in AltFi Research's Embedded Finance: The New Frontier Of Lending report, out now!

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Adam Davis

Associate Partner

Bain & Company

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