You can access a world of financial services from hundreds of companies if you have a working smartphone and access to applications. For example, continuing with well-known brands, you can receive a point-of-sale loan from Amazon, a checking account from Google, and a credit card from Apple.
That’s only the tip of the iceberg. Payments, insurance, investment, and even wealth-management services are now available for download and use on your phone. Buy-now-pay-later (BNPL) and e-commerce services, also known as embedded lending, Buy Now Pay Later finance, or POS financing, are offered not only to consumers at big-name retailers but also to shoppers at mom-and-pop stores and in a variety of B2B contexts.
What makes embedded finance possible in the first place?
The future of finance appears to be in our hands, literally. For example, venture capital firm Lightyear Capital predicts that BNPL activity will skyrocket in the first half of this decade, with gross revenue rising from around $1.4 billion in 2020 to $15.7 billion in 2025.
While the coronavirus pandemic has been a catalyst, it has also helped that the technology it depends on was getting traction before Covid-19 came into view. To be sure, media mentions of “embedded finance” increased more than one hundred times between early January and November 2020, according to CBInsights, but little of this vogue for embedded finance could have occurred without viable technology — much of it linked to the power of “application-programming interfaces,” or APIs.
APIs are software interfaces that allow different apps to communicate with one another. If you own a smartphone, you’ll understand how important they are: they’re the reason you can quickly check the weather, order pizza, hail a cab, or text your mother. APIs add functionality to business operations by allowing a software suite grouped around coordinated functions to work with an organization’s core or “systems” software.
APIs are also a component of “open banking.” Open banking is a financial-information-exchange mechanism that grants permission-based access to consumers’ financial data from financial institutions via APIs to third-party financial-service developers and suppliers. From who gets to be a customer to who delivers the underlying services, open banking has the potential to alter everything about banking.
In the marketplace, open banking has also proven to be an organic equalizer. According to the Brookings Institute, non-banks originated 53% of US mortgages using new labor-saving technology, but 64% of these home loans were provided to black and Hispanic homeowners.
Factors contributing to the rise of embedded finance
Besides leveling the playing field, APIs are synonymous with “the agility you need to compete as a lending-tech provider these days,” says Elena Ionenko, co-founder and head of operations for embedded-finance pacesetter TurnKey Lender. “This comes down to how configurable you are, how ready you are to support any lender anywhere in the world at any moment.”
In addition to the increasing use availability of APIs, the market was primed by six other forces for the rise of embedded finance — among them:
- Trust in embedded finance exhibited by consumers and businesses alike gives meaning to the trends and developments described in this post. In fact, they trust it as much or more than bank services, with 42% of US household decision-makers claiming to use at least one non-bank fintech app — and that was before Covid. As consumers’ trust in embedded technology increases over time, purchasers have come to expect it.
- Disruption, especially by non-banks that offer credit directly to consumers and businesses on the back of ever-improving technology. As hinted above, a slew of non-banks with big brands — like Google, Apple, Amazon, and Meta — are seizing market share that once belonged exclusively to banks by facilitating the underwriting and issuance of credit.
- Digitalization converts manual business processes to digital business processes — in lending as well as in other processes. What once required manual inputs and (literal) carbon copies (shared via interoffice envelopes), now require a single e-notation that can be shared instantly across all related applications within and outside the BaaS — “banking as a service” — suite.
- Declining revenue from traditional banking services has put financial companies on notice. In response, they are ferreting out new ways to make money. Hopping on the embedded-finance train saves traditional institutions time and money on manual grunt work, and opens the door to nimble new business lines.
- Buzz around the BNPL concept is getting traction. When you make life easier for people by embedding “instant credit” options across e-commerce platforms, they notice.
- Artificial intelligence allows creditors and other BaaS users to incorporate behavioral markers derived from permission-based inputs such as spending habits and the ability to meet other financial obligations. That’s in addition to old-school (and still valid) inputs loan applications and credit-bureau scores. This makes a company’s lending operations simultaneously more inclusive and less risky because it gives lenders the clearest view of would-be borrowers possible.
Along with payment advances (such as entering a store, taking what you want, and having the cost instantly taken from your account), integrated finance enables an increasing number of non-financial organizations to provide credit and other banking services in ways that improve consumer experiences.
Keeping track of embedded-finance outcomes
And while the customer’s experience is paramount, new and traditional BaaS providers should keep tally of other key performance indicators such as:
- Onboarding rates
Where compliance allows, all-digital account sign-ups that are encrypted, secure, and feature ID verification and e-signing capabilities can do a lot to boost onboarding rates
- Time to funding
With consumers used to fast turnarounds for everything from app-summoned ride-shares to online food orders, this one can be a real competitive differentiator
- Application-completion rates
The longer it takes to get an approved loan funded, the more likely a would-be borrower is to abandon the application altogether. That means no sale
- Access point preferences
Understanding how your clients apply for credit — company website? smartphone app? chatbot? — can help you standardize input and processing requirements for a more uniform customer experience, even when channel hopping
- Net-promotion rates
The surest way to inspire customer referrals? Provide them with solid, full-spectrum digital banking services. One bank found that, while digital customers cost 1.5 times more than non-digital customers, the digital crowd generates twice as much income as the non-digital bunch
“Organizations can use these KPIs to understand their real needs, setting goals, and as a basis for choosing an embedded-finance-technology partner,” TurnKey Lender’s Ionenko explains. “These considerations are stepping stones to a future where offering banking services in non-bank settings is as normal as asking ‘credit or debit’ is now.”
