Why Embedded Lending Will Dominate the FinTech Landscape in 2021

Hailed as “one of the most transformative trends in fintech,” embedded lending is on the threshold of a surge in uptake this year as more consumers and businesses embrace non-traditional financial providers.

Embedded lending integrates with the systems software that most companies already use to synchronize and track their operations. In a more holistic sense, it’s part of a tech-enabled revolution that enables virtually any kind of business to provide a game-changing financial service, quickly and relatively cheaply. 

The best-of-breed embedded lending needed for this innovation is: 

1. Robust enough to process loans through their entire life cycles, from approval to settlement, and…
2. Flexible enough to initiate lending at any point of sale, from e-commerce portals and in-store registers in commercial settings as diverse as retail outlets, equipment showrooms, doctors’ offices, warehouses, and manufacturing plants. 

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The result is an approach to lending that’s stripped of its dependence on financial-service institutions, and able to deliver and maintain exceptional functionality. In addition, embedded lending is becoming widely available in 2021, as the world is expected to start mending from the economic impacts of the coronavirus.  

Embedded lending can make clients five times more valuable 

Providing affordable installment plans to your customers through embedded lending is even more urgent in light of venture firm Andreesen Horowitz’s estimate that it can quintuple a client’s lifetime value stemming from improved buyer engagement and more return business. In addition, embedded lending can help enterprises unlock “new verticals where previously the total addressable market for software was too small and/or the cost of acquiring customers was too high,” according to Andreesen Horowitz. 

Meanwhile, embedded lending is gaining traction for three reasons — two predicted by Andreesen Horowitz, and one the firm couldn’t have conceived before 2020. 

1. The rise of digitalization. Terms are important, so let’s define “digitalization” as opposed to “digitization.” Digitization refers to the process or result of converting data and documents into digital formats that can be shared, analyzed, and reformatted in aid of specific tasks or queries. Digitalization — our topic — is about converting business processes to digital technologies instead of paper and manual-input spreadsheets. Because digitalization enables businesses to extend credit to customers more efficiently without requiring financial-institution involvement, lending is both cheaper and easier to tailor to the needs of the business and its customers. 
2. Fintech as a means to new revenue streams. Online retailers like Amazon and Walmart have paved the way to more sales by offering embedded lending to fund purchases,  and other software-as-a-service players are similarly tapping into credit markets by offering consumers and businesses bite-size installment loans to help them get the equipment and services they need to thrive. 
3. Meanwhile, in a development that could not have been foreseen, Covid-19 took a wrecking ball to economies, healthcare systems, and interpersonal interactions — including those centered on commerce — around the world. In doing so, the pandemic fast-forwarded new-tech adoption by years, as businesses adopted cutting-edge technologies earlier than anticipated to make up for lockdowns and accommodate no-touch and physically-distanced transactions. 

One mid-2020 report predicts embedded lending will encompass a market opportunity worth about $2 trillion by 2030, compared to a $3.6 trillion addressable market for the top 30 biggest banks and insurance companies at present. Together with embedded payments and embedded insurance, the total embedded market is forecast to surpass $7.2 trillion in addressable market value before this decade is out, according to the same source.  

Embedded lending means making more of what you already have 

In this landscape, some experts say the time is near when the term “fintech” will be redundant. “Nearly every company will derive a significant portion of its revenue from financial services,” according to a 2019 take on the convergence of financial service and technology — a development likely to occur, the author emphasizes, “in the not-too-distant future.” 

Businesses with access to embedded lending can make existing customer engagement even deeper, adding cross-sell opportunities to revenue from finance charges. Customer relations can be further improved with permission-based behavioral-finance inputs that, with help from the embedded tech’s machine learning and artificial intelligence, reduce approval times to mere seconds sharply reduce risks inherent to lending. 

“In practical terms, the most impressive aspect of embedded lending is its ability to increase revenue at a customer-acquisition cost of zero, or close to it,” says Elena Ionenko, co-founder and business-development head of Turnkey Lender, a leading provider of embedded-lending technology to businesses of all sizes and kinds. “You’re leveraging existing customers in new and deeper ways.” 

Lending capabilities for every business, everywhere 

As a result, Ionenko adds, “It’s conceivable that system software will someday include lending and other financial-service technology as a standard feature — both where it’s now common, as in the capital-equipment space, and where it’s still novel, like in types of retail businesses and even healthcare.” 

For Alex Lazarow, fintech investor with Cathay Innovations, another advantage of embedded lending is its simplicity. “As a rule of thumb, the more distant the core offering is to financial services, the simpler the embedded finance product needs to be,” he writes in a piece for Forbes. So, where something like real-estate lending can afford to put consumers through some hoops, similar parameters around extending credit to facilitate the purchase of an armchair or a toolbox just won’t fly. 

In this view, “industries far and wide” are beginning to incorporate “financial products and services into their core offerings,” adds Lazarow.  

In other words, a shift in how and where lending is done that has been emerging organically since at least TurnKey Lender opened for business in 2014, is coming to fruition just in time for a post-Covid economic rebound. 

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