There’s a revolution underway in how consumers and businesses pay for goods and services. The catalyst for this change is embedded finance, an innovation that makes lending a versatile and secure part of everyday commerce. This means financial services — including lending — can be offered to consumers as a routine part of making purchases.
Organizations whose embedded finance of choice is lending can expect to add incremental value from new accounts — especially in a service-as-a-software approach where the modular technology is paid for via subscription, and lending fees don’t have to be shared with third parties.
In addition, leading-edge financial-service automation includes artificial intelligence. “Besides making digital lending decisions faster and more reliably than manual processes, artificial intelligence allows companies to analyze the arrays of behavioral data their embedded-lending activities generate, giving them insights on marketing campaigns, seasonal trends — even staffing and scheduling considerations,” says Dmitry Voronenko, co-founder and CEO of TurnKey Lender, a lending SaaS provider with enterprise clients in more than 50 countries worldwide.
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Saas lending and the internet of everything
Whether the transaction involves a family paying for its winter heating fuel in monthly installments year-round, an earth-moving business spreading equipment payments out over time, or a furniture retailer working to overcome medium-sticker hesitancy, embedded lending is a fundamental game-changer.
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Non-financial organizations aren’t the only entities looking to SaaS lending to smooth the way to increased business activity, either. In fact, credit unions and community banks are among the most enthusiastic adopters of SaaS-borne lending, viewing it as a way to improve legacy lending platforms and take part in the ongoing digital transformation that’s altering how business is conducted.
If you think that’s an exaggeration, just consider the numbers. “The embedded finance industry is expected to grow steadily over the forecast period, recording a compound annual growth rate of 23.9% during 2022-2029,” according to industry-report publisher Research and Markets. Meanwhile, embedded finance revenues are slated to increase from $242 billion in 2022 to $777 billion by 2029.
This explosion is the result of an innovation around service delivery — the SaaS model, an extension of the “internet of everything” that has transformed telephones into interconnected libraries, and time pieces into dynamic healthcare “wearables” that can monitor vital signs 24/7. For businesses, this process of making familiar objects “smarter” — the concept at the heart of the internet of everything — has made points of sale essentially ubiquitous, while software integrations and artificial intelligence equip organizations of every kind to extend credit with confidence and security.
The modularity of TurnKey Lender shows another facet of the savings potential of embedded lending. Simply, with TurnKey Lender, companies take only the parts of the solution they need — and they pay less for it, with full confidence in the interoperability of their lending automation with pre-installed systems software such as GNU/Linux, Microsoft Windows, MacOS, and other SaaS applications including Salesforce.
Credit cards and credit scorers are taking note
Return on investment for a state-of-the-art “buy now, pay later” lending can come in many forms, including:
- 40% higher profitability
- 10% to 25% higher lending-approval rates
- 35% decrease in “bad debt rate decrease”
- 44%+ growth in sales conversion
- 280%+ boost in operational efficiency
- 25% improvement in decision accuracy
- 460+ applications a second in an environment that scales seamlessly
- 67% increase in average customer lifetime value
This view is supported by a recent JD Power report that suggests consumers favor retailers and banks that provide digital-powered payment. Another report, this one by William Mills Agency, says 73% of US adults have begun using digital-banking services in light of the coronavirus pandemic.
Embedded lending is also in the vanguard of a trend that’s seeing credit cards — a consumer staple in the US since the early 1970s — lose ground to digital financing. According to the Balance, consumers who prefer BNPL to cards do so for the following reasons.
- 45% say it’s easier to make payments
- 44% say BNPL is more flexible
- 36% praise BNPL’s lower interest rates
- 33% say approvals are faster and easier
- 22% have low credit limits on their cards
And the credit bureaus are following this consumer trend in a bid to stay relevant. In recent months, the “big three” consumer-credit raters — Experian, EquiFax, and TransUnion — have started tracking embedded-lending data in their credit reports, creating opportunities for more consumers to establish or extend credit scores that reflect their success in meeting financial commitments, not just a shrinking portion of them. And it’s unlikely these colossal companies would take this kind of trouble if BNPL wasn’t already making their snapshots of creditworthiness less pertinent to would-be lenders.
A deeper understanding of these trends — and a good way to understand ROI on digital-finance capabilities — comes from the realization that technology is making lending less of a product and more of service — hence the term “banking as a service,” or BaaS.
An air of inevitability
BNPL is coming into its own as a core financial enabler for e-commerce, as giants like Amazon and Shopify demonstrate. Those e-retailers offer financing for most if not all purchases.
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Soon, say experts like Matthew Harris of Bain Capital Ventures, it will be hard to find online sellers that lack installment options. When this saturation is achieved, “there won’t be ‘fintech’ companies as such,” Harris writes in Forbes. “Over time, many or even most technology companies will need to incorporate embedded financial services in order to win in their segments” — an observation that applies as readily to Main Street businesses as multinationals.
“One reason ‘fear of missing out’ has become a popular phrase in business circles is that there’s a lot of upheaval around innovation these days as developments — like the internet in the 1990s, mobile devices and big data in the 2000s, and artificial intelligence and machine learning in the 2010s — coalesce around marketing, distribution, and payments — much of it centered on embedded finance,” says TurnKey Lender’s Voronenko. “When something like the digital revolution permeates work-based productivity, considerations of ROI — already in evidence — begins to look more like an obvious cost of doing business, as elemental as the need for a roof and a fire in the dead of winter.”